Abstract : On December 10, 2018, the final verdict was returned for the first national case brought up by an investor against an exchange platform due to Bitcoin hard fork. The claimant got reimbursed the bitcoin cash previously “invalidated” by the exchange. However, the claim that the “the claimant should be compensated for the loss with the current value of the bitcoin cash” was rejected.
New value has been attached to the word “fork” in the world of blockchain.
In 2017, out of Bitcoin (BTC) fork, Bitcoin Cash (BCH) emerged, meaning that on every BTC investor's account, a number of BCH, the quantity of which equaled that of the investor's BTC would appear.
Riding on the raging bull market of the crytocurrency market, the prices of these two mainstream coins enjoyed great hikes. Those investors holding both coins made great fortunes.
However, one investor named Li Jun (pseudonym) made a blunder. In early 2017, Li Jun purchased 38.748 bitcoins through the exchange OKCoin and put them away ever since. In August 2017, BCH forked out of the BTC network and Li Jun should have been awarded equal number of BCH, rightfully. However, since he didn't claim his BCH in time on the exchange, his BCH was invalidated。
Li Jun, feeling blameless, filed a law suit against OKCoin. One year later, after filing the suit, first-instance trial, appeal and final adjudication, Li Jun won the case but lost money. The court ordered OKCoin to compensate Li Jun 38.748 Bitcoin cash. However, Li Jun's claim that the “the claimant should be compensated for the loss with the current value of the bitcoin cash” was rejected.
Why didn't the court back the claim for the loss incurred by the depreciation of BCH? Why did the defendant OKCoin claim that “Li Jun was not entitled to the BCH in question”? What's the reasoning behind the judge's final adjudication? Is it appropriate?
This contractual dispute has been called the “first case over bitcoin fork” and the basis on which the judgment was made reflects the attitude of the judicial organ on bitcoins on certain level. However, disputes around the case are not over yet.
The Complete Story
On January 12, 2017, Li Jun (pseudonym) purchased 38.748 bitcoins on the digital currency exchange platform OKCoin.
On July 18, 2017, OKCoin released the Public Announcement regarding OKCoin's Plan for Bitcoin Fork to remind investors that they would carry out bitcoin fork to “generate” bitcoin cash (BCH).
On July 25, 2017, OKCoin promised that bitcoin cash would be awarded to account holders, the quantities of which would match the quantities of the account holders' bitcoins if the account holders held bitcoins in their accounts before August 1, 2017.
On August 1, 2017, OKCoin promised that it would carry out bitcoin equity settlement and asked investors to claim their bitcoin cash using their OKCoin accounts and further promised that claimed bitcoin cash would be directly transferred to account holders' OKEx spot accounts.
However, when Li Jun was trying to claim his bitcoin cash, the “Claim” button on the website had already disappeared and he was not able to claim his bitcoin cash. He was informed by OKCoin's customer service that the channel to claim bitcoin cash by then had already been closed. Since he had not claimed his bitcoin cash by then, he would not be able to do so later.
The day Li Jun wanted to claim his bitcoin cash (November 25, 2017), 1BCH equaled approximately 9,017.78 RMB. However, on July 12, 2018, BCH dropped to 4,631.25 RMB Yuan per BCH.
After suffering a huge loss, Li Jun filed a law suit against OKCoin.
Li Jun requested the legal person of OKCoin to honor the contract and transfer 38.748 bitcoin cash (BCH) into his personal account. He also requested OKCoin to compensate him his loss due to price change of 38.748 bitcoin cash with a proximate value of 170,000 RMB.
On August 10, 2018, the judge reached the verdict. Beijing Haidian People's Court made the first-instance ruling, ordering OKCoin to compensate Li Jun 38.748 bitcoin cash. However, Li Jun's claim that the “the claimant should be compensated for the loss with the current value of the bitcoin cash” was not supported by the court.
The price of bitcoin cash has dropped to be “worth nothing”. Why doesn't this part of the loss warrant compensation? Li Jun who didn't accept the ruling, decided to appeal. However, on December 10, 2018, Beijing First Intermediate People's Court made its final adjudication decision: dismissing Li Jun's appeal and upholding the original ruling.
Focal issue one of the dispute: Should bitcoins really be the subject of protection?
In this case, it is vital to clarify what is the legal basis for Li Jun's claims. In the civil written judgment, Beijing Haidian People's Court wrote that the fundamental question to answer in this case is on what rights the claimant's request for the payment of bitcoin cash was based.
Although bitcoins themselves have no intrinsic value, bitcoin holders exercise power through information recorded in the database on a distributed storage system and confirmed by the whole network. However, since our existing laws don't define network virtual properties such as bitcoins as “properties” as defined by the Property Law, therefore according to the principle that real rights are stipulated by law, the claimant was not able to request the defendant to pay bitcoin cash generated by bitcoin “fork” according to the property law.
Note: The so-called principle of real rights stipulation by law refers to the principle that the varieties and contents of real rights shall be stipulated only by law but shall not be left to the discretion of the litigants.
However, trading of bitcoins exists in reality and in the process of commodity exchange in the network environment, the value of bitcoins is determined by the market's confidence on bitcoins as a medium of transaction. Therefore, bitcoins are an object of trading as defined in the contract law, with “civil interests” that should be protected by law.
Furthermore, in the Public Announcement regarding OKCoin's Plan for Bitcoin Fork published on July 25, 2017, OKCoin made the promise for the distribution of bitcoin cash.
In other words, Li Jun was entitled to equal quantity of bitcoin cash generated by bitcoin fork because virtual currencies are objects of trading as defined by the contract law, with “civil interests” that should be protected by law. OKCoin's promise-making public announcement was presented as an evidence.
Attorney Pang Lipeng, team leader of Blockchain Law told ChainDD App that the above judgment made by the court effectually disagreed with the opinion that “bitcoins are properties or objects of property rights”.
He said that the appropriate statement should be “due to the existence of the principle of legal stipulation of property rights by law, virtual currencies cannot be regarded as objects of property rights. Under this premise, the litigant in question was not able to claim that BCH is the fructus of BTC based on the definition of original and fructus in the property law and thus was not able to claim rights legally.”
Under the premise that protection of the claimant's rights using the property law was not feasible, the court could only seek protection of the claimant's legal rights through the law of obligations.
Pang Lipeng pointed out that there are two pairs of fundamental obligatory relationships in this case:
First: Based on the consensus of all the people in the blockchain system to which bitcoin cash belongs, a bitcoin holder has the right to request other blockchain users to recognize his or her rights over bitcoin cash;
Second: Since the OKCoin platform promised to users that it would “distribute” (actually aid the account holders to acquire) bitcoin cash, account holders who satisfied the requirements had the right to ask it to fulfill its promise.
In other words, after the bitcoin fork, former bitcoin holders should automatically acquire bitcoin cash, which is the inevitable outcome on the technical level, backed by the consensus among all blockchain users. In addition, OKCoin subsequently made the promise of “distributing bitcoin cash” in the form of a public announcement.
Therefore, these two pints became the important basis for Li Jun to be rewarded bitcoin cash. For Pang Lipeng, the so-called distribution by OKCoin to its users was actually assisting users to acquire bitcoin cash.
Focal issue two of the dispute: Why was claim that the “the claimant should be compensated for the loss with the current value of the bitcoin cash” rejected?
When Li Jun was going to withdraw bitcoin cash on November 25, 2017, the price of BCH was 1BCH equaled approximately 9,017.78 RMB.
The first-instance trial was on July 12, 2018, when 1BCH equaled approximately 4,631.25 RMB.
Li Jun believed that calculated with the price difference, the loss that he suffered was close to 170,000 RMB.
The first-instance trial court believed that first of all, the right of Li Jun to withdraw bitcoin cash was not based on transactions, but on the promise made by OKCoin when it executed the bitcoin fork. Therefore, there was no consideration based on which “losses” could be incurred. Second, it is a widely known fact that prices of virtual commodities such as bitcoins fluctuate wildly in international markets and price fluctuations within a specific range do not constitute the “interests receivable after the performance of the contract” as defined in the contract law.
Therefor, the first-instance trial court did not support Li Jun's claim for compensation. Also because of this reason, Li Jun appealed.
From the judgment made by the court of second instance, we can see that two decisions have been made:
First, since the price fluctuation of bitcoin cash can be sharp, and the claimant was not certain of the opportunity for trading, the loss due to price difference claimed by the claimant was uncertain and non-deterministic.
Second, the fact that OKCoin didn't provide a timely withdrawal and settlement service was not a certain and deterministic factor for the ultimate trading price of bitcoin cash, not satisfying the “reasonably foreseeable principle” as defined in the contract law.
Pang Lipeng pointed out that the first decision in fact claims that the causal relationship between OKCoin's not fulfilling its promise and the claimant's suffering a loss is uncertain.
The simplest and most direct way to establish a causal relationship between two facts is “if without A, there is no B, then A is the cause of B.”
In this case, if OKCoin had fulfilled its corresponding obligations according to the principle of good faith, then Li Jun would have had a chance to avoid his loss. Therefore, we believe that OKCoin's not providing a timely withdrawal and settlement service was the reason that Li Jun was not able to sell bitcoin cash in time to avoid the damage.
The purpose of compensation for breach of contract is to restore the interest state between the parties and the breach of contract compensation needs to “level” the loss and is calculated as the difference between the interest states before and after the breach of contract.
In other words, what the parties need to consider is the price difference between the two time points. No matter how the BCH price had fluctuated between the above two time points, the final outcome of the case would have been certain, which is the price of BCH at the time when the judgment took effect is far lower than the price of BCH at the time when the defendant OKCoin distributed BCH at the originally planned time. The loss caused by price depreciation of BCH during this period of time should be born by the defendant.
For the second decision, the Contract Law stipulates, “Where a party fails to perform its obligations under the contract or its performance fails to conform to the agreement and cause losses to the other party, the amount of compensation for losses shall be equal to the losses caused by the breach of contract, including the interests receivable after the performance of the contract, provided not exceeding the probable losses caused by the breach of contract which has been foreseen or ought to be foreseen when the party in breach concludes the contract..”
The application of the “reasonably foreseeable principle” in the above provision is based on the premise that the parties did not agree on breach of contract.
There are different views on what constitutes reasonably foreseeability. Some people believe only the variety and nature of the damage need to be foreseeable. Others believe the principle requires the defaulting party to foresee the amount of damage. Since there is no explicit provision for this issue legally, how to apply the principle is at the judge's discretion. However, it is undeniable that OKCoin, as a professional virtual currency trading platform, should have performed due diligence better.
Pang Lipeng stated that “In conclusion, from the existing documents, we believe that the second-instance court's decision to dismiss the claimant's request for OKCoin to compensate him the loss due to bitcoin price depreciation is debatable.”
Focal issue three of the dispute: When the nature of bitcoins cannot be determined, how are individual rights protected?
In retrospection of this case, the nature of bitcoins was not clear. At the same time, our laws do not define bitcoins as “properties” as defined by the property law. Therefore, according to the principle of legal stipulation of real rights by law, Li Jun's case was lost before it even started.
However, based on the consensus of “fork” on blockchain networks and also the “withdrawal” promise made by OKCoin in the public announcement, the court believes that bitcoins belong to objects of trading as defined in the contract law and should be protected.
When Li Jun requested that the “the claimant should be compensated for the loss with the current value of the bitcoin cash” , the court rejected Li Jun's request, citing that the principle of “foreseeability” of the contract law was not satisfied.
Pang Lipeng, team leader of the team of lawyers at Blockchain Law told ChainDD App that for virtual currency owners, the case provides a reference for them to draw on when they need to protect their own legal rights. Even though virtual currencies are not considered things by the law, the parties involved can still protect their legal rights using the law of obligation as defined in the contract law and the tort law.
At the same time, an agreement is an important reason for claims and obligations to occur and the parties involved should attach great importance to agreements, safeguarding their legal rights with stronger protection.
He pointed out that form a legal practitioner's perspective, it is necessary to place great importance to the research of basic questions. Since virtual currencies based on blockchain are just emerging and their legal nature is uncertain, the basis for relevant dispute claims is yet clarified. These issues need to be solved by the joint effort of all legal professionals.