Analysis of Potential Risks of Crypto Assets as Consideration for Equity Transactions

Recently, some investors have expressed their intention to use mainstream Crypto Assets or stablecoins as consideration for equity transactions in domestic companies. This approach indeed has its advantages, such as reducing transaction costs for large amounts and facilitating cross-border capital flow. However, using Crypto Assets for complex business transactions may involve multiple legal and commercial risks. This article will briefly analyze the potential legal risks of using Crypto Assets as consideration for equity transactions based on practical experience, for reference.

I. Risk of Contract Validity

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

Therefore, if equity transactions are conducted under the legal framework of China, using Crypto Assets as consideration may result in the contract being partially or wholly invalid. Once a dispute arises, the court is likely to deem such contracts as invalid contracts that "violate public order and good morals."

It is worth noting that in civil and commercial cases involving Crypto Assets, the liability assumption model after the contract is deemed invalid is not the conventional "restoration to the original state," but rather a general ruling of "risk borne by oneself." This poses a significant risk for large equity transactions.

2. Crypto Assets Price Volatility Risk

The prices of Crypto Assets such as Bitcoin and Ethereum are influenced by multiple factors and are highly volatile. There have been numerous instances in history where there were drastic price swings in a short period. For example:

• In 2011, Bitcoin fell to $2 within six months.
• In 2017, Bitcoin fell from $700 to $340 in 7 weeks.
• In September 2017, Bitcoin fell from $5000 to $2900 within a few days.
• In November 2018, Bitcoin plummeted by 10% in just a few days.

If trading with Crypto Assets that are not stablecoins, there may be significant price fluctuations during the trading cycle, increasing the uncertainty and risk of disputes in transactions.

3. Special Risks of Stablecoins

Using algorithmic stablecoins like USDT and USDC as trading pair prices also carries special risks:

1. Compliance issues: Taking USDT as an example, according to the upcoming EU MiCA regulation, USDT may not be usable in EU countries, which could affect its exchange or use with fiat currency.

2. Asset freeze risk: Since stablecoins are often used for illegal activities, if the transaction involves accounts marked as risky, the stablecoin issuer may directly freeze the funds in the user's wallet. The process of unfreezing is costly, lengthy, and has a low success rate.

IV. Conclusion

Although the use of Crypto Assets for transactions is not strictly prohibited by law in our country, the risks cannot be ignored. If the trust level between both parties is high and the transaction cycle is short, the possibility of disputes is low and can be considered theoretically. However, it is recommended to consult a professional legal team before engaging in such transactions, ensure compliance in transaction documents, and design targeted dispute resolution plans to prevent transactions from becoming stalled or resulting in significant losses.