Analysis of Potential Risks of Using Encryption Assets as Consideration in Equity Transactions

Recently, many enterprises and individuals are considering using cryptocurrencies such as Bitcoin, Ethereum, or stablecoins like USDT and USDC as consideration for equity transactions of domestic companies. This method can indeed reduce costs in large transactions and even facilitate capital outflow. However, using encryption assets for complex business transactions may involve multiple legal and commercial risks. This article will briefly analyze the potential legal risks of using encryption assets as consideration for equity transactions based on practical experience, for reference.

1. Legal Risks of Invalid Trading Contracts

In September 2021, a notice jointly issued by multiple national departments explicitly stated that virtual currencies do not have the same legal status as legal tender and should not circulate or be used in the market. Participating in virtual currency investment and trading activities carries legal risks, and relevant civil legal actions may be deemed invalid.

Therefore, if cryptocurrency is used as the consideration for equity transactions within the framework of Chinese law, once a dispute arises, the court is likely to deem the relevant transaction contract as an "invalid contract violating public order and good morals." In this case, the contract may be partially or completely invalid.

It is worth noting that in civil and commercial cases involving cryptocurrency, the responsibility after a contract is deemed invalid is often not the conventional "restoration to the original state", but rather a judgment of "risk borne by oneself". This poses a significant risk for large equity transactions.

2. Cryptocurrency Price Volatility Risk

The prices of cryptocurrencies such as Bitcoin and Ethereum are highly volatile, significantly influenced by market sentiment, political events, and economic conditions. Historically, there have been numerous instances of dramatic price surges and drops. For example, Bitcoin fell to $2 within six months in 2011, dropped from $700 to $340 in just seven weeks in 2017, and decreased from $5000 to $2900 within a few days in September 2017.

If you trade using such non-stablecoins, there may be significant price fluctuations during the trading cycle, increasing the uncertainty and risk of disputes.

3. Special Risks of Stablecoins

Using algorithmic stablecoins such as USDT and USDC as trading pairs also carries special risks:

1. Compliance risk: Taking USDT as an example, due to its issuer's failure to meet regulatory requirements in certain regions, it may face restrictions on use.

2. Asset freezing risk: Stablecoin issuers have the right to freeze funds marked as risky accounts. Once the funds are frozen, the thawing process may take a long time and be costly.

IV. Conclusion

If both parties in the transaction have a high level of mutual trust and the transaction cycle is short, theoretically, using encryption currency for transactions is not absolutely prohibited. However, considering the potential risks, it is advisable to consult a professional legal team before conducting such transactions, to ensure compliance of the transaction documents, and to design a targeted dispute resolution mechanism to prevent the transaction from falling into a deadlock or causing significant losses.