Can you protect your rights when you suffer losses from Filecoin virtual currency mining?

In the field of crypto assets, "mining" activities have always been an indispensable part. People who participate in currency projects will more or less understand or even participate in mining. As early as 2017-2018, Fil (Filecoin) mining became famous, but at that time it was more about hype and harvesting; in 2020, after HashKey Capital, Distributed Capital, Imer Capital and other capitals deployed Fil mining, people seemed to have regained their confidence in Filecoin, but after three years, everything returned to silence, and it seemed that only the vast majority of retail investors were hurt the most. For investors who invest in FiL mining, the most concern is whether they can protect their rights after losses? Before giving an answer, Lawyer Liu needs to conduct a simple sorting and analysis from the following aspects:

Why is Fil mining so popular?

The birth of Filecoin can be traced back to 2014, when Juan Benet, who graduated from Stanford University, founded a new protocol to replace HTTP - IPFS. The main feature of this new protocol is that file data can be fragmented and encrypted, and uploaded to distributed nodes for storage; data is read by retrieving from distributed nodes - synthesizing - decrypting to the required node. Its biggest highlights can be summarized as: distributed, secure, and open. Isn't it similar to blockchain?

In June 2017, Protocol Labs (Juan Benet's team) officially released the distributed storage protocol Filecoin, and planned to accelerate the application of Filecoin through an economic incentive system. The project attracted the favor of many investment institutions as soon as it was launched, and of course it raised a lot of funds; even many institutions, especially retail investors, wanted to invest but had no way to do so (because Filecoin's financing threshold is relatively high, such as only raising funds on the Coinlist platform, and investors' annual income must be above 200,000 US dollars, etc.). Therefore, investment through Fil futures and mining machines appeared in the market. As a result, the popularity of Fil mining began to rise continuously.

(Filecoin price trend in 2023, source: binance official website)

China’s regulatory policies and legal practices on mining

Regardless of the type of mining, the Chinese government's attitude towards mining is unclear. Until September 3, 2021, the Ministry of Industry and Information Technology, the Ministry of Public Security, the Ministry of Finance, the National Development and Reform Commission and other 11 ministries and commissions jointly issued the "Notice on the Rectification of Virtual Currency "Mining" Activities" (hereinafter referred to as the "Rectification Notice"), which clearly stipulates that new virtual currency mining projects are strictly prohibited at the regulatory level, and existing mining projects are accelerated to exit in an orderly manner. Since then, mainland China has entered an era of strict supervision of virtual currency mining projects.

In judicial practice, how do courts hear disputes related to virtual currency mining? So far, the most direct basis is the "Minutes of the National Court Financial Trial Work Conference (Draft for Comments)" (hereinafter referred to as the "Trial Minutes") issued by the Supreme People's Court on April 13, 2023. Article 85 stipulates the trial caliber related to virtual currency mining:

1. Mining disputes before the issuance of the “Notice on Rectification”

Before the release of the "Notice on Rectification", national supervision did not explicitly prohibit mining activities, so the civil behavior principles involved in the sale, lease, custody, operation and management, trusteeship, and technology development of mining machines conducted by the parties before September 3, 2021 are valid; if the part that has not been performed cannot be performed due to the introduction of regulatory policies, the parties can terminate the contract. At this time, the part that has not been performed will be terminated; for the part that has been performed, the parties can request the counterparty to restore the original state, compensate for losses, or take other remedial measures based on factors such as performance and the nature of the contract.

(II) Mining disputes after the release of the “Notice on Rectification”

After September 3, 2021, civil contracts for the sale, lease, storage, operation and management, trusteeship, and technology development of mining machines agreed upon by the parties shall be invalid contracts. The parties to the contract shall terminate performance, return property, and compensate for losses, etc. according to the actual circumstances.

Can I protect my rights if I lose money from Fil mining?

As early as 2018, there were hundreds of Filecoin mining machines on the market, some of which were advertised and sold in public channels, and some were sold secretly in private communities. For most retail investors, they have no technical knowledge and are daunted by the strict requirements of Fil mining machines, such as constant temperature, uninterrupted power supply, and good technical maintenance. Therefore, few people will buy a mining machine to operate mining at home. The common model is that users directly purchase mining machines from sellers and then directly entrust the sellers to host them; some sellers even directly sell the so-called "cloud computing power" to help customers Fil mining. However, most of these mining machines and "cloud computing power" have been proven to be unable to carry out real Fil mining. The launch of the Filecoin mainnet in 2020 has led to another wave of Fil mining market, but retail investors who invested in mining did not make much money, while mining machine sellers made a lot of money. In the face of losses, can investors protect their rights?

This brings us back to the second point above, which Lawyer Liu analyzed about the current judicial review of mining in my country: First, for investment mining that occurred before September 3, 2021, in principle, the courts recognize its legal effect. If the parties have agreements such as the purchase of mining machines, technical service agreements, and mining machine hosting agreements, it depends on whether the seller has strictly fulfilled the agreement. If the parties suffer losses due to the seller's breach of contract, the parties are of course entitled to ask the seller for compensation; if the seller has no breach of contract, and the parties' losses are entirely due to the fluctuation of Filecoin's market value, then the parties' losses belong to market investment risks and can only be borne by themselves; second, if Fil mining investment occurs after September 3, 2021 (including that day), then in principle, such investment behavior has no legal effect, and the parties can choose to terminate the mining machine purchase and sale agreement, technical service agreement, mining machine hosting agreement, etc. and return the mining machine, and the mining machine seller needs to return the corresponding price.

Of course, the above rights protection plan is only a principled analysis. In specific cases, lawyers still need to formulate legal service plans based on different circumstances.

Final Thoughts

The world is bustling with people, all for profit. When the enthusiasm for speculation cools down, we don’t want to be left with only a mess. At least there should be some people who really want to do practical things for this industry. Whether it is Fil mining or other virtual currency mining, it seems that as long as the blockchain continues to exist, there needs to be an incentive mechanism to play a role, and virtual currency is undoubtedly the most commonly used and effective means of incentive. Although my country’s current regulatory policies on the mining industry have almost reached the ceiling, it is undeniable that from a global perspective, there is still a lot of computing power contributed by users in mainland China. Both practical people and investors need to understand my country’s relevant regulations on the mining industry. Only in this way can they better safeguard their legitimate rights and interests.