To serve and safeguard high-level financial opening-up, the Shanghai Financial Court (SFC or the Court) pioneered China’s financial market test case scheme. Through legal risk stress tests on potential disputes that have a material impact on financial business and urgently require legal clarification, the Court provides Shanghai’s financial innovation with clearer rule expectations of a demonstrative nature, more forward-looking risk prevention, and more professional dispute resolution at source.
As a highly internationalized financial instrument, China’s offshore bonds have long relied on international market practice without a uniform issuance standard; nor is there, globally, any judicial precedent on the legal characterization of digital bonds. To coordinate development and security and to meet the practical needs of Shanghai as an international financial center for deeper and broader high-level financial opening-up, the SFC, upon the joint application of the Shanghai Branch of China Central Depository & Clearing Co., Ltd. (“CCDC”), the Shanghai Branch of Bank of Communications Co., Ltd., and Bank of Communications Trustee Limited, initiated the FTZ offshore bond case test and conducted a public trial on 26 November 2025. This is the SFC’s second financial market test case.
Today (24 July), the SFC publicly pronounced the judicial opinion in this test case. It conducted a legal risk stress test across the full process of Shanghai FTZ offshore bonds—from issuance and custody through to redemption—examining, among other issues, the legal validity of blockchain-based issuance of FTZ offshore bonds, the legal nature of on-chain tokens representing the bonds, and the compatibility of the FTZ offshore bond custody structure with international issuance practice. From a legal perspective, it further clarified the functional positioning of financial market infrastructures in the issuance, custody, and default disposal of FTZ offshore bonds, thereby providing judicial guidance on rules for the standardized and international development of the FTZ offshore bond market, and strongly supporting Shanghai’s high-level opening-up as an international financial center and the development of its offshore financial system.
Opening Focus: Full-Process Legal Stress Testing of FTZ Offshore Bonds
The basic facts of the test case are as follows: Overseas issuer Company A issued FTZ offshore digital bonds (the “SHA Bonds”) in the Shanghai Pilot Free Trade Zone through CCDC’s blockchain book-entry issuance system. Company C acted as trustee; Affiliated companies B1 and B2 of Company A provided the relevant guarantees. Overseas investor Company I was one of the end holders of the SHA Bonds. The bond issuance documents provided that disputes arising from bond default shall be governed by the law of the Hong Kong Special Administrative Region. Following a default on the SHA Bonds, Company C applied to CCDC to commence onshore pledged bond disposal procedures. Company C then sued Company A and guarantor Company B1, seeking payment of the outstanding principal and interest. Investor Company I brought a separate action, alleging that the SHA Bonds were invalid because they were issued via blockchain and seeking return of its investment principal from Company A. CCDC’s Shanghai Branch participated in the proceedings as a third party. The two cases were heard jointly.
After the trial, the judicial panel deliberated in accordance with the procedures set out in the Rules of the Shanghai Financial Court on Financial Market Test Case Scheme (for Trial Implementation) and publicly pronounced the outcome. Grounded in Chinese practice and informed by global standards, the judicial opinion conducted a comprehensive legal review of Shanghai’s FTZ offshore bond rules framework from four perspectives: determination of the validity of blockchain-based digital bond issuance; effective coordination between the centralized single-tier custody (direct holding) system and the bond trust structure; application of foreign law in determining FTZ offshore bond defaults; and the validity of the business rules of financial market infrastructures.
Targeted Response: Comprehensive Legal Review of the FTZ Offshore Bond Rules Framework
First, it affirmed the legal validity of blockchain-based bond issuance. Against China’s financial regulatory legal framework and digital bond issuance practice, the test comprehensively analyzed the lawfulness and validity of blockchain issuance of FTZ offshore bonds, and explained the legal significance of smart contracts as contracts in the legal sense in the issuance process, as well as the legal effect of on-chain tokens which, where conditions are met, may have the same effect as traditional registration. Drawing on international standards such as the UNIDROIT Principles on Digital Assets and Private Law, it further clarified the legal nature of on-chain tokens of digital bonds, providing rule guidance for the next stage of China’s blockchain digital bond development and offering a Chinese sample for the deeper development of global digital finance.
Second, it achieved effective coordination between the centralized single-tier custody system and the bond trust structure. FTZ offshore bonds principally adopt a single-tier custody model. Addressing the potential tension, closely watched by the market, between the trustee’s collective action mechanism and individual investors’ rights of action, the test case, while confirming that end investors are bondholders under the centralized single-tier custody model, recognized, in light of the governing law stipulated in the trust deed and the bond trust issuance structure, the arrangements on litigation rights in the trust deed and clarified the legal status of the trustee’s collective exercise of rights. It further noted that China’s current registration and custody system for FTZ offshore bonds can accommodate diversified bond issuance structures. By comprehensively demonstrating the commonalities between FTZ offshore bond rules and international bond rules, it provides global issuers and investors with a stable and predictable rule-of-law environment.
Third, it accurately applied foreign law in determining bond-related disputes. Reflecting market practice, the test case stipulated in the issuance documents that the law of the Hong Kong Special Administrative Region applies. Through ways like party submissions and defenses, appearance of expert assistants, participation of financial and legal experts on the panel, third-party expert opinions, and the judges’ ex officio ascertainment, a multi-dimensional mechanism for ascertaining and applying foreign law was effectively established. The Court accurately determined the conditions for establishing cross-default and anticipatory breach in the test facts, their legal consequences, and the boundaries of bondholders’ exercise of rights, offering a judicial practice sample for high-quality and efficient resolution of complex cross-border financial disputes.
Fourth, it helped improve the regulatory governance of financial market infrastructures. FMIs are the hub for delivering financial services and a market core for preventing and controlling financial risks. By analyzing CCDC’s role and responsibilities in collateral management and disposal, the judicial opinion clarified the reasonable boundaries of FMI obligations; held that the relevant collateral default disposal rules and the parties’ contractual arrangements were lawful and reasonable; and found that an FMI, in performing collateral disposal functions upon a party’s application, does not contravene legal principles, is consistent with international standards, and may enjoy exemption from liability, further consolidating the robustness of the offshore financial market system.
Empowering the Broader Agenda: Consolidating the Legal Foundation of Shanghai’s Offshore Finance
Issuance of FTZ offshore bonds has become an important focus in improving the offshore financial system of Shanghai as an international financial center. This test case provides clear rule guidance for the high-quality development of Shanghai FTZ offshore bonds and strong judicial support for Shanghai’s alignment with internationally accepted rules and for building and improving its offshore financial system. Anchored in judicial evaluation standards that seek to lead global digital bond issuance, the case test consolidates the legal-institutional foundation of Shanghai’s offshore financial system, shapes a market rule-of-law environment for stable and secure financial development, and highlights capacity-building in cross-border financial dispute resolution mechanisms. It has given full play to the distinctive role of the financial market test case scheme in serving Shanghai’s high-level financial reform and opening-up, supporting upright financial innovation, and coordinating the prevention and control of financial risks, thereby playing a positive role in improving China’s offshore finance legal framework and advancing Shanghai’s development as an international financial center.
The full text of the judicial opinion will subsequently be published on the official website of the SFC for reference by market participants.
More than 40 persons, including representatives of the case-testing applicants (CCDC’s Shanghai Branch and Bank of Communications), financial regulatory authorities such as the Shanghai Municipal Financial Office, and news media reporters, attended the pronouncement session.
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