According to the "Notice on Further Preventing and Dealing with the Risks of Virtual Currency Trading Speculation" issued by the Central Bank and other departments, and the "Notice on Rectifying Virtual Currency Mining Activities" issued by the National Development and Reform Commission and other departments, engaging in virtual currency "mining" activities within the territory of the People's Republic of China is an illegal and irregular activity, and virtual currency "mining" projects are strictly prohibited from being carried out within the country. The industry and regulatory research in this article is an industry article written by the author from a global perspective. Readers are requested to strictly abide by the laws and regulations of their region and not to participate in any illegal financial activities.
The Bitcoin mining industry has made great progress in the past decade. Many mining companies have been favored by the capital market and listed, and the cost of miners has become one of the important value support factors of Bitcoin. According to a report by Allied Market Research, the global cryptocurrency mining hardware market is expected to reach US$5.02035 billion by 2032, with a compound annual growth rate of 11.4% from 2023 to 2032. Although the proof-of-work mechanism (POW) used by Bitcoin has been widely questioned due to energy consumption and inefficiency, it has gradually been replaced by the proof-of-stake mechanism (POS) (even Solana has introduced the proof-of-history mechanism (POH) to improve efficiency). However, it is undeniable that Bitcoin, as the cryptocurrency with the largest market value, Bitcoin mining is still a profitable business, and the Bitcoin mining industry will continue to develop for a long time in the future.
This series of articles hopes to provide practical legal advice to entrepreneurs and investors in related fields by combing through the entire upstream and downstream chain of Bitcoin mining and based on Mankiwâs observations on supervision.
Industry review and legal risk overview
Next, Attorney Mankiw will use mining operators, or âminersâ in a narrow sense, as the âaxisâ of the midstream of the industrial chain, and sort out the important upstream and downstream participants in the Bitcoin mining industry, as well as the main legal risks that these entities may encounter during their operations.
Upstream
Energy Suppliers
In the process of Bitcoin mining, the operation of mining machines and cooling systems requires huge amounts of electricity, and electricity costs are key to operations. Generally speaking, mining farms tend to be built in areas with abundant fossil fuel resources, where energy suppliers can provide cheaper energy. Attorney Mankiw observed that the high energy consumption of Bitcoin mining has gradually attracted attention in recent years. The "2024 Digital Economy Report" released by the United Nations Conference on Trade and Development (UNCTAD) specifically mentioned that from 2015 to 2023, global energy consumption caused by Bitcoin "mining" increased by about 20 to 34 times. Some countries have taken measures to restrict or ban Bitcoin mining to reduce energy consumption and environmental pressure. In response to this situation, many mines have begun to choose suppliers that can provide clean energy, or invest in the construction of their own renewable energy facilities to reduce their own carbon emissions in response to regulatory needs.
Attorney Mankiw believes that energy suppliers face a variety of legal risks when providing electricity for crypto mining. These risks include ensuring the legality and transparency of energy supply contracts, complying with environmental protection regulations, and conducting necessary environmental impact assessments to reduce the negative impact of electricity production and use on the environment. In addition, suppliers need to ensure compliance with the renewable energy incentives provided by the government to reduce operating costs. Transnational energy supply must also comply with the energy regulatory policies of various countries to avoid legal disputes and potential legal liabilities.
Mining machine manufacturers
Bitcoin miners are specialized hardware devices used to mine Bitcoin. Mining with a miner requires powerful computing power and is usually driven by specially designed ASIC (Application Specific Integrated Circuit) chips that are optimized for specific cryptographic algorithms. Miner manufacturers are companies that specialize in designing and producing equipment for cryptocurrency mining. The equipment produced by these companies, such as ASIC miners, is optimized for specific cryptographic algorithms and provides efficient computing power to verify blockchain transactions. Major manufacturers include Bitmain, Canaan, MicroBT, Innosilicon, Ebang International, etc., which occupy an important position in the global market.
Today, mining machine manufacturing has formed considerable industry barriers, and several mainstream mining machine manufacturers occupy the vast majority of the market share. It is worth noting that among these multinational companies, many of the best are born in China. The mining machine manufacturing industry is a relatively mature entity in the entire mining industry chain. As a chip manufacturer, the compliance points in the business are the same as other chip manufacturers, such as ensuring that the design and technology are not infringed and protecting its own intellectual property rights; mining machine products need to meet technical standards; the import and export of mining machines must comply with the regulations and tariff policies of various countries to avoid legal disputes and economic losses. In addition, mining machine manufacturers need to take into account the attitudes of different jurisdictions towards mining machine sales contracts in the process of commodity sales. For example, in mainland China, mining machine sales contracts are likely to be deemed invalid contracts due to violations of relevant legal provisions. The above legal risks need to be effectively managed to ensure the compliance and stability of the company's operations.
Mine site design, construction and maintenance service provider
The efficient operation of mining facilities is inseparable from professional technical support services. Companies that provide these services play an important role in ensuring the stability of mining. Mine design companies are responsible for planning and building Bitcoin mines to ensure that the mines have an efficient and safe operating environment. Their designs must comply with building codes and safety standards, including key facilities such as power supply, cooling systems and network connections. Construction companies are responsible for the actual construction work to ensure project quality and compliance. By providing professional design and construction services, these companies help mining companies achieve scale and efficiency, reduce operating costs, and improve the overall efficiency and safety of the mines.
In terms of legal compliance, the designer must ensure compliance with building codes and safety standards to avoid legal liability due to design defects. The builder must comply with the laws and regulations on engineering construction, including environmental protection and labor laws, to ensure compliance during the construction process. During the construction process, the contract must stipulate the rights and obligations of both parties, and the construction of facilities must meet the standards and effects agreed upon by both parties to avoid legal disputes caused by contractual issues. In addition, intellectual property and contract compliance issues also need to be paid attention to to ensure that the technology and contract content do not infringe on the rights of others.
Software Service Developer
Software service providers are manufacturers that develop dedicated software platforms to help miners and mining farms manage mining equipment, monitor working status, and optimize mining performance. These software can monitor the operating status of mining machines in real time, adjust mining parameters, and improve overall mining efficiency. The main developers of such software include Minerstart and Hive OS. Although most ASIC mining machines on the market are pre-installed with mining software specially designed for them by mining machine manufacturers, the professional software provided by developers can help miners more easily complete tasks such as equipment monitoring, workload management, and performance optimization, thereby improving mining efficiency and revenue.
Midstream
Mine operators
Bitcoin mining farms are places dedicated to large-scale Bitcoin mining. Through the centralized operation of a large number of mining machines, economies of scale are achieved, thereby reducing the cost of unit computing power. The construction of mining farms needs to consider factors such as power supply, cooling system and network connection to ensure the efficient operation and stability of mining machines. Mining farms are usually located in areas with low electricity costs and suitable environment to reduce operating costs.
Some well-known mining farm operators include Riot Platforms, Marathon Digital Holdings, Bitfarms, etc. These companies set up and operate large-scale Bitcoin mining farms around the world, usually in areas with abundant and low-cost electricity resources to optimize operating costs and mining efficiency.
However, the cost of operating a mining farm includes not only electricity costs, but also opportunity costs, including political factors. In 2021, my country issued relevant policies (Notice of the National Development and Reform Commission and other departments on the rectification of virtual currency "mining" activities) to crack down on virtual currency mining activities. The axis of the mining industry has shifted from the East to the West, and it is easier than ever for North American investors to enter this industry. In the past two years, new attention and capital have poured into this field at an unprecedented rate. As more and more jurisdictions gradually establish regulatory frameworks and even introduce relevant policies to protect the business environment for investors, Bitcoin's computing power has never had such a wide global footprint, and it is expected that Bitcoin's computing power will continue to spread around the world. Now, miners around the world are well aware that they not only have to compete with their neighbors, but also face miners in the Middle East, Russia, Latin America and other regions where the crypto mining industry is booming. Each region and background has its advantages and disadvantages, and some miners spread their computing power by spreading it across different jurisdictions. The global location of the mine has also become the biggest risk factor for opening a mine. Conducting mining business in countries and regions with unstable policies requires a huge risk cost. If the regulatory policy of the mine location suddenly changes, the huge relocation fee is enough to destroy a small mine. In addition, legal risks such as environmental protection laws and electricity use compliance also need to be fully managed to ensure the legal and sustainable operation of the mine.
Downstream
Mining pool service provider
When a single miner mines independently, the time and computing power required to find a block are very high. Connecting computing power to a mining pool has become the choice of many single miners. In this way, miners with lower computing power can also regularly obtain part of the mining rewards instead of waiting for a long time for independent mining results. The top three mining pool operators in terms of computing power in the entire network are Foundry USA, F2Pool, and Antpool. These three mining pool operators contribute more than half of the computing power of the entire Bitcoin network.
Mining pool service providers face a variety of legal risks. Anti-money laundering (AML) and know your customer (KYC) regulations require ensuring participant identity verification and transaction transparency. Data privacy and security regulations must also be followed, and necessary measures should be taken to prevent and control hacker attacks, and legal risk control plans should be designed to protect user data from unauthorized access and use.
Mining machine hosting service provider
Mining machine hosting services provide convenience for users who own mining machines but lack operating facilities. Hosting service providers have professional mining farms, professional technical maintenance personnel, stable and low-cost electricity supply and other conditions. Users pay hosting fees to host mining machines in professional mining farms. Hosting service providers are responsible for the power supply, cooling and maintenance of mining machines to ensure that mining machines operate efficiently and obtain stable mining income. Many well-known mining farms have launched mining machine hosting services, such as Riot Platform and Bitmain. The advantage of hosting services is that they reduce users' operating costs and management complexity, and lower the user's entry threshold. Of course, there are several different operating modes involved in specific mining machine hosting, such as general hosting, cloud hosting, member hosting, etc. Due to space limitations, this article will not expand on this.
In addition to the legal risks of operating a mining farm, mining machine hosting operators may face more legal issues: the legality of the hosting contract, the sharing of responsibilities and rights of all parties; when equipment failure or damage occurs, the service provider must provide timely and effective technical support and maintenance; equipment insurance issues, and the handling of accidents involving customer mining machines; local laws and regulatory requirements for hosting services, etc., are all legal risk points that mining machine hosting service providers need to pay attention to.
Cloud computing power rental service provider
Since Bitcoin mining requires considerable construction and electricity costs, and also needs to consider the impact of legal and regulatory policies, many individual investors will turn to leasing cloud computing power to participate in mining. Cloud computing service providers build their own mining farms or deploy mining machines in other data centers, and users can lease the computing power of these mining machines for mining. In other words, users obtain a certain share of computing power by paying rent, and obtain mining income based on the proportion of computing power contribution. The advantages of these services are flexibility and low cost. Under this model, the entry threshold for individual users is lowered, while the efficiency of computing power utilization is improved.
Mainstream BTC cloud computing service providers include Bitdeer and NiceHash. The operating model on the demand side usually involves users renting a certain amount of computing power and distributing it according to the mining income during the lease period. On the supply side, it can be subdivided into self-owned computing power leasing and third-party computing power market. The so-called self-owned computing power leasing means that the service provider uses the computing power generated by its own mining machines as a commodity for leasing, while the third-party computing power market is a service that the service provider connects the excess computing power of third-party miners with the computing power needs of tenants.
For cloud computing power leasing service providers, there are three main compliance points: the legality of computing power, the legality of funds, and the legality of cryptocurrency. The AI ââcraze has driven the popularity of cloud computing power leasing services in a broad sense. The United States has introduced several policies to restrict the flow of computing power to Chinese companies. Many foreign manufacturers choose to provide computing power leasing services to Chinese companies on the high seas to circumvent the export restrictions or technical blockade measures of the United States. The issue of cross-border computing power requires consideration of the legal provisions of different countries or regions on computing power. Specifically, although mining computing power does not involve the ban on AI computing chips, it is still worthy of the focus of cloud computing power leasing service providers. In terms of the legality of funds, when providing customers with computing power "mining", the company should ensure that it is aware that the funds used by the other party to purchase computing power are legal income to ensure that the company does not have the potential risk of money laundering for them. Of course, whether this knowledge is a legally mandatory obligation is still a matter of discussion in law. In terms of the legality of cryptocurrency, conducting business in countries and regions where the circulation of cryptocurrency is prohibited may face more legal risks. For example, if related business is conducted in my country, it is very likely that the contract will be deemed invalid due to violation of laws and regulations.
Crypto Mining Ecosystem Fund
As the Bitcoin mining industry matures, Bitcoin ETF funds have been approved in various jurisdictions to open up compliance channels, and more and more traditional financial institutions have begun to notice investment opportunities in Bitcoin mining. In May 2024, the Bitcoin Mining Ecosystem Investment SP Bitcoin Mining Ecosystem Fund, listed by a licensed institution in Hong Kong, was officially launched. The investment structure of the Bitcoin Mining Ecosystem Fund includes the purchase of mining machines, mine hosting, joint operation and maintenance, hedging, mining machine cashing out and other links. Investors participate in the Bitcoin mining business by subscribing to the fund. This diversified investment strategy not only reduces investment risks, but also provides a stable source of income. The successful launch of the Bitcoin Mining Ecosystem Fund marks the deep integration of traditional finance and the cryptocurrency mining industry. I believe that in the near future, as the Bitcoin mining industry receives more and more attention and Bitcoin gradually becomes compliant, more investment institutions will enter the market, and various investment products based on the Bitcoin mining industry will be launched one after another.
Industry regulatory trends
2024 is a significant year for Bitcoin. On January 10, with an announcement from the U.S. Securities and Exchange Commission (SEC), 11 Bitcoin spot ETFs were officially approved for listing on U.S. stock exchanges, marking the further acceptance of Bitcoin by the traditional financial world. On April 20, 2024, the Bitcoin blockchain ushered in its fourth halving. Looking back at history, halving events often bring about a wave of closures, bankruptcies, and restructuring of crypto companies. Companies that have completed debt restructuring survive the cold winter and become stronger when the next spring arrives. But there is no doubt that after more than a decade of development, the internal operations of the Bitcoin mining industry have become more transparent and mature than before.
Especially in the past few years, new mining machines and mining technologies have continued to emerge, immersion cooling technology and the use of high-efficiency mining machines have gradually become popular in the industry, and Bitcoin mining companies have made great progress in mining efficiency and safety. As the world pays more attention to environmental protection, the mining industry is also exploring more environmentally friendly and sustainable development models, such as increasing the proportion of renewable energy use and reducing carbon footprint. Many mining companies have begun to expand their business scope and integrate the development of the industrial chain. It is not uncommon for listed mining companies to play several different roles in the above industrial chain. The maturity of the entire industry has gradually attracted the attention of financial institutions, exploring opportunities such as crypto mining ecological funds.
At the same time, regulatory policies on cryptocurrency mining around the world are still in flux. The author once saw a report in 2021 that described crypto miners as "nomadic people". Faced with fierce competition, they are looking for "low-lying areas" of electricity prices with stable political environments around the world, so that their computing power can be more competitive in the crypto market. Observing the global computing power distribution, after 2021, the global computing power center will shift from China to North America and Europe. In addition, Kazakhstan, Russia, Latin America, and the Middle East are also catching up, and their computing power is constantly improving.
Attorney Mankiw believes that the crypto mining industry plays an indispensable role in the blockchain ecosystem. By analyzing the main participants, Attorney Mankiw can better understand the operation mode and future development direction of this industry. Looking to the future, with the advancement of technology and changes in the regulatory environment, the mining industry will usher in more opportunities and challenges. Compliance operations will become the key to the success of enterprises and provide guarantees for the long-term development of enterprises. Next, Attorney Mankiw will start writing special legal analysis of the crypto mining industry, deeply analyze the legal risks faced by the main participants, and provide compliance advice for practitioners and investors in combination with the development trends of the industry and supervision.
