An article analyzing the legal risks of virtual currency "overseas mining"

summary:

The domestic virtual currency "mining" activities took the turning point of the "Notice on the Rectification of Virtual Currency "Mining" Activities (Development and Reform Operation [2021] No. 1283)" (hereinafter referred to as the "924 Notice") jointly issued by the National Development and Reform Commission and other ministries on September 24, 2021. The "924 Notice" made a framework provision for the investigation and clearance of virtual currency "mining" projects. Since then, new virtual currency "mining" projects in China have been deemed to be violations of policies , and regulatory authorities may impose administrative penalties in accordance with the law. Against this background, domestic virtual currency "mining" projects mainly exit or remain in five ways:

(1) Selling off the mining machines, exiting the mining circle, and no longer engaging in virtual currency mining activities;

(2) Actively shut down mining farms, suspend mining, and take a wait-and-see attitude towards the policy, waiting for the implementation of the policy to become clearer before deciding whether to continue mining in the country;

(3) Existing in the form of a virtual currency "mining" stock project, and continuing to operate the original "mining" project in the country after paying the additional electricity price;

(4) Switching to “underground hidden mining” to avoid investigation, clearance and punishment by law enforcement agencies, and continue to operate “mines” in the country;

(5) Go overseas and choose to establish "mines" in countries where virtual currency "mining" is legal, such as Iran, Ukraine, Kazakhstan, the United States, and Canada, to continue "mining".

In the article “What are the legal consequences of virtual currency mining in China?”, we analyzed the law enforcement consequences of the first four behaviors. This article will discuss the legal risks that may exist in the fifth type of “overseas mining” activity.

1. Current status of overseas mining activities

The domestic "mining" ban has caused a large number of mining machines to be sold off, and the price of mining machines has plummeted in the short term, but some "miners" have smelled a "business opportunity" in it, that is, to purchase mining machines at low prices and then transfer them to overseas "mining" or to host mining machines. There are two common investment models for "overseas mining": one is the individual model (generally refers to domestic natural persons directly investing in "mines" overseas in their personal name or first registering a company overseas in accordance with the law and investing in "mines" in the name of the company); the other is the company model (generally refers to domestic natural persons registering companies in China in accordance with the law to raise funds and investing in "mines" overseas in the name of domestic companies, including corporate systems and partnerships). No matter which of the two models is used, there may be legal risks, such as being investigated or punished for overseas investment in "mining" that does not comply with the laws and policies of the country where it is located; under the company investment model, overseas "mining" exceeds the registered business scope of the company and may result in legal risks such as invalidity of the contract.

2. Whether “overseas mining” violates the laws and policies of the country to which it belongs

Although Iran, Ukraine, Kazakhstan, and some state governments in the United States have legalized virtual currency "mining" through laws and regulations, it generally requires permission from the competent authorities, that is, "licensed mining". In these countries, the construction of virtual currency "mining farms" first requires a "mining license" issued by the government department. "Mining" without permission or "mining" in violation of the electricity and energy consumption conditions stipulated in the license will also face investigation or punishment by the country's regulatory authorities. For example, according to Tasmin News Agency, in January 2021, Iranian authorities closed down 1,620 cryptocurrency "mining farms" and seized 45,000 Bitcoin "mining machines" because these "mining farms" illegally occupied the subsidized electricity (i.e. electricity that enjoys financial subsidies) of the state-owned energy supplier Tavanir during the "mining" process.

According to Tencent News on April 16, 2022, the Iranian government will pass new regulations to increase penalties for illegal cryptocurrency mining using subsidized electricity. According to the new regulations, the increased penalties include increasing fines by at least three times to a maximum of five times, imprisoning violators, and revoking business licenses in the case of repeated violations; and according to Reuters, in June 2021, Iranian police seized and confiscated 7,000 cryptocurrency "mining machines" at an abandoned factory in the capital Tehran on the grounds of illegal "mining" without permission.

In addition, due to the shortage of energy supply, some governments will control virtual currency "mining" activities through temporary bans. For example, on December 28, 2021, the Iranian government issued a ban on Bitcoin mining and ordered the closure of authorized Bitcoin mining centers to avoid power outages. The ban will last until March 6, 2022. Therefore, "overseas mining" or "overseas hosting of mining machines" should first consult the laws of their respective countries on cryptocurrency "mining" activities, otherwise they may be fined heavily or have their mining machines confiscated for violating relevant laws or temporary bans.

In addition to the above-mentioned "mining" risks, for some countries subject to international sanctions or foreign exchange controls (recognizing the legalization of Bitcoin), the sale of cryptocurrencies obtained from "mining" in the country or the remittance of foreign exchange may need to comply with relevant laws and regulations, otherwise there may be legal risks such as account freezing. For example, according to the Islamic Republic News Agency, in January 2021, the Iranian Cabinet has revised the relevant legislation on digital assets to allow cryptocurrencies to be used for import funds of the Central Bank of Iran (CBI). "Miners" can sell cryptocurrencies directly to the CBI after authorization (that is, CBI purchases cryptocurrencies in a unified manner).

This means that Iran has officially legalized cryptocurrency "mining" and recognized that cryptocurrency and legal tender Toman can be conditionally exchanged for value. In this case, the Bitcoin obtained from "mining" is equivalent to a legal new currency. Imports and exports need to follow Iran's foreign exchange regulatory policies. The Bitcoin obtained by "miners" through "mining" should be converted into Iranian legal tender first. If the mined Bitcoin is sold or the foreign exchange obtained is remitted across borders, cross-border transactions, etc., attention should be paid to the country's foreign exchange supervision and other regulations to avoid being identified as evading foreign exchange, illegal transactions, money laundering and other illegal and criminal acts and being punished.

(III) Whether “overseas mining” by domestic entities violates domestic law

Under the premise that the funds or mining machines are legally exported, the individual model is generally not suspected of illegal activities. Although my country has issued a "mining" ban policy, individual overseas "mining" does not violate domestic policies or harm public interests because the behavior occurs abroad. As for the company model, according to my country's current laws and policies, the business scope of the company (partnership) registered in accordance with the law cannot include the "virtual currency 'mining'" business. Therefore, if the company engages in virtual currency "mining" activities in the actual operation process, it will inevitably exceed the company's legally registered business scope. In this case, does the domestic company's overseas investment in virtual currency "mining" business violate domestic law? Are "overseas mining" investment contracts, "overseas mining" mining machine hosting contracts and other similar contracts signed with such companies legal and valid?

1. Does the “overseas mining” business of domestic entities violate the provisions of the Company Law?

Does a company violate general legal provisions by engaging in overseas virtual currency "mining" business beyond the business scope registered in accordance with the law, and what are the legal consequences? According to Article 5 and Article 12 of the Company Law of the People's Republic of China, a company must comply with laws and administrative regulations when engaging in business activities. The company's business scope is stipulated in the company's articles of association and registered in accordance with the law. Changes to the business scope must be registered for change. However, the Company Law does not provide for administrative penalties for engaging in business activities beyond the registered business scope. Similarly, the Regulations of the People's Republic of China on the Registration and Administration of Market Entities (State Council Order (No. 746)) and the Implementation Rules of the Regulations of the People's Republic of China on the Registration and Administration of Market Entities (State Administration for Market Regulation Order No. 52) do not provide for administrative penalties for engaging in business activities beyond the registered business scope.

In addition, according to the Decision of the National Development and Reform Commission on Amending the Guiding Catalogue for Industrial Structure Adjustment (2019 Edition) (Order No. 49 of 2021) and Article 19 of the Administrative Regulations of the State Council on Promoting Industrial Structure Adjustment (Guofa [2005] No. 40), virtual currency "mining" belongs to the eliminated industry and enterprises are prohibited from investing in it domestically. So does it violate the provisions of domestic laws and regulations for domestic companies to invest in virtual currency "mining" business overseas?

According to Article 2, Article 5, Article 13, and Article 14 of the Measures for the Administration of Overseas Investment by Enterprises (Order No. 11 of the National Development and Reform Commission), as well as the Notice on Further Guiding and Regulating the Direction of Overseas Investment (Guobanfa [2017] No. 74), and the Notice of the National Development and Reform Commission on the Release of the Catalogue of Sensitive Industries for Overseas Investment (2018 Edition) (NDRC [2018] No. 251), virtual currency "mining" business does not belong to the overseas investment business prohibited or restricted by current laws and regulations for domestic enterprises. Therefore, according to the current laws and regulations of China, domestic enterprises investing in virtual currency "mining" business overseas does not violate relevant domestic laws and regulations .

2. How do mainland courts determine the validity of “overseas mining” contracts?

With the trend of going overseas for "mining", some investors choose to sign an "Overseas Mining Machine Custody Contract" with companies that invest in overseas "mines", and entrust their mining machines to overseas "mines" for "mining" and pay custody fees. So if a civil lawsuit is filed in a domestic court due to a dispute over the custody contract, how will the court determine the validity of the custody contract? First, if the court finds that the custody contract does not belong to a foreign-related contract after review, and directly applies Chinese laws and regulations to confirm the validity of the custody contract, after the issuance of the "924 Notice", the court may determine that the custody contract violates the mandatory provisions of administrative regulations, violates national policies, and damages public order based on the notice and the "Interim Provisions on Promoting Industrial Structure Adjustment", and determine that the custody contract is invalid.

For example, according to the China Court Network (https://www.chinacourt.org/index.shtml) on December 17, 2021, the Chaoyang District People's Court of Beijing heard and determined that the "mining" contract concluded between Fengfu Jiuxin Company and Zhongyan Zhichuang Company harmed the public interest, ruled that the contract was invalid, and the losses were borne by the parties themselves. The second-instance court upheld the original judgment; second, if the parties claim that the custody contract is a foreign-related contract because the subject matter of the "mining machine" and the place of performance of the contract are both located abroad, the validity of the custody contract should be confirmed in accordance with the relevant laws of the location of the "mine" or other countries/regions selected in advance by both parties, then can this claim be supported by the court?

According to Article 5 of the Law of the People's Republic of China on the Application of Law to Foreign-Related Civil Relations, if the application of foreign law will harm the public interest of our country, Chinese law shall apply. Combined with the provisions of Articles 8 and 9 of the Judicial Interpretation (I), if the court applies foreign law to confirm that the custodial "mining" contract is legal and valid in China, it violates the domestic "mining" ban and is contrary to the existing judgment results of some similar cases. Therefore, this claim may not be accepted by the court.

3. If disputes arise in the custody of “overseas mining”, what are the remedies?

According to the previous analysis, the overseas "mining" custody contract will be largely judged as invalid by domestic courts. So when a dispute occurs, is it necessary to sue? What is the court's ruling after the lawsuit? First of all, the custody contract is a commission contract or an unnamed contract as stipulated in Article 919 of the Civil Code of the People's Republic of China. The parties can sue the court based on the legal relationship of the commission contract or the legal relationship of the unnamed contract. If the court confirms that the contract is invalid, according to Article 157 of the Civil Code of the People's Republic of China, after the contract is confirmed to be invalid, the property obtained by the parties due to the act shall be returned. If it cannot be returned or there is no need to return it, it shall be compensated at a discount. However, it should also be noted that in practice, some courts have also ruled that after confirming that the contract is invalid, because mining activities are not protected by law, investors bear the risks and losses themselves, such as the first-instance judgment of the Chaoyang District Court of Beijing mentioned above.

Secondly, even if the court rules that the custodial mining contract is valid, the losses of virtual currencies such as Bitcoin claimed by the client are generally difficult to be supported by the court. For example, before the issuance of the "924 Notice", the Civil Judgment No. (2019) Jing 0114 Minchu 22088 issued by the Changping District People's Court of Beijing on October 29, 2020 determined that the custodial contract was the true intention of both parties and did not violate the mandatory provisions of laws and regulations. It confirmed that the contract was valid, but did not support the plaintiff's request for compensation for Bitcoin.

Therefore, when domestic entities engage in "overseas mining" activities, they must fully consider that since the mining machines are hosted in overseas mines, once the trustee breaches the contract, even if the case is brought to court, there will be problems such as difficulty in providing evidence and difficulty in enforcement. To avoid similar problems, the contract signing stage should fully review the contractual obligations of both parties, clearly disclose the mining machine prices, hosting fees, electricity charges, etc., and leave traces in the form of sending back videos and photos of overseas mining machines during the performance stage, and retain as many written materials related to the hosted mining contract as possible.