What are the legal consequences of virtual currency mining in China?

summary

This article discusses the different modes of "opening a virtual currency mine" and "home mining"; whether it is necessary to "consume electricity and energy" for mining; the "illegal business crime" in the "Energy Conservation Law" and the "Criminal Law"; and the "illegal financial activities" in the "Notice on Further Preventing and Dealing with the Risks of Virtual Currency Trading Speculation" issued by the People's Bank of China and ten ministries in September 2021. "What are the legal consequences of China's virtual currency mining?

As domestic regulatory policies are in place to regulate virtual currency “mining” activities, local government regulatory departments have taken swift action to investigate and clear virtual currency “mining” projects. Some “miners” have encountered administrative penalties such as “mines” being closed down, “mining machines” being confiscated, and even fines. Some “miners” who bought a few “mining machines” and placed them at home for “mining” were also investigated and punished, and required to sign a guarantee or commitment letter to guarantee/promise not to engage in virtual currency “mining” activities!

So is virtual currency "mining" an illegal act? What are the legal consequences? After sorting out, we found that the laws, administrative regulations, and regulatory documents that can be applied to virtual currency "mining" are mainly as follows:

1. Administrative Penalty Law of the People's Republic of China (2021) and Energy Conservation Law of the People's Republic of China (2018) (hereinafter referred to as the Administrative Penalty Law and the Energy Conservation Law);

2. "Decision of the State Council on Issuing and Implementing the Interim Provisions on Promoting Industrial Structure Adjustment (Guofa [2005] No. 40)" (hereinafter referred to as the "2005 Decision"), issued on December 2, 2005;

3. "Notice of the National Development and Reform Commission and other departments on the rectification of virtual currency "mining" activities (NDRC [2021] No. 1283)" (hereinafter referred to as the "924 Notice"), issued on September 24, 2021;

4. "Decision of the National Development and Reform Commission on Amending the "Guidelines for Industrial Structure Adjustment (2019 Edition)" (Order No. 49 of 2021)" (hereinafter referred to as the "2021 Decision"), issued on December 30, 2021.

How to correctly understand and apply the "924 Notice"?

Since the release of the "924 Notice", it has become an important basis for regulatory authorities to investigate and deal with virtual currency "mining" activities. So can all virtual currency "mining" activities, including "mining" projects or individual "mining" activities that existed before the release of the notice, be investigated and dealt with in accordance with the relevant provisions of the notice? We believe that we cannot use a "one-size-fits-all" approach to investigate and deal with all virtual currency "mining" activities. We should distinguish, treat them differently, and deal with them in accordance with the law. The reasons are as follows:

First, it points out that the fundamental reason for investigating and clearing virtual currency "mining" activities is " large energy consumption and carbon emissions , ..., coupled with the increasingly prominent risks derived from the production and trading of virtual currencies, blind and disorderly development has an adverse impact on promoting high-quality economic and social development and energy conservation and emission reduction." Then, if an individual buys a few "mining machines" or "graphics cards" to "mine" at home, it will obviously not cause a large amount of electricity energy consumption and carbon emissions. Combined with the provisions of the full text of the notice, it can be seen that the main targets of investigation and punishment should be large-scale "mining farms" or corporate "mining" .

Second, the second item clarifies the basic principles that should be adhered to in investigating and handling virtual currency "mining" activities: categorized handling , distinguishing between incremental and existing virtual currency "mining" projects, prohibiting new additions, and accelerating the orderly exit of existing projects. Therefore, when investigating and handling virtual currency "mining" activities, local regulatory authorities cannot adopt a "one-size-fits-all" approach and directly impose administrative penalties such as confiscation or fines.

Third, Article 3 of the Notice clarifies that in the rectification of virtual currency "mining" activities, the targets of the investigation of virtual currency "mining" stock projects are enterprises , and individual "mining" is not subject to investigation. However, this does not mean that individual "mining" is not subject to investigation and punishment regardless of the size of the "mine", nor is it an illegal act. We will analyze this at the end.

Fourth, how to "orderly exit" the existing virtual currency "mining" projects? Article 5, Items 17 and 13 of the Notice stipulate that according to the deadline for elimination stipulated in the "Guidelines for Industrial Structure Adjustment", differentiated electricity prices shall be implemented for existing projects within the prescribed "elimination period", and the "eliminated" enterprise electricity price shall be implemented. The price increase standard is 0.30 yuan per kilowatt-hour, and local governments may further increase the price increase standard according to actual conditions. Enterprises that are not eliminated on schedule shall be ordered to suspend production or be closed in accordance with relevant national laws and regulations. Therefore, for the existing "mining" projects of enterprises before September 24, 2021, the regulatory authorities may stipulate a reasonable withdrawal period, and within the prescribed period, the electricity price may be increased, but administrative penalties such as confiscation and fines shall not be imposed, otherwise it will constitute an administrative violation.

(Source: Baidu)

How to connect the "924 Notice" and the "2005 Decision" in terms of application

Article 4, Item 7 of the "924 Notice" stipulates that virtual currency "mining" activities are listed as obsolete industries. "Virtual currency 'mining' activities" are added to the "obsolete category" of the "Guidelines for Industrial Structure Adjustment (2019 Edition)". Before the addition, virtual currency "mining" projects were treated as obsolete industries, and investment was prohibited in accordance with the relevant provisions of the "Decision of the State Council on Issuing and Implementing the <Interim Provisions on Promoting Industrial Structure Adjustment>" (Guofa [2005] No. 40).

This article clarifies that before the National Development and Reform Commission issued the "2021 Decision" on December 30, 2021 to formally revise the "Guidelines for Industrial Structure Adjustment (2019 Edition)" to list virtual currency "mining" projects as eliminated industries, the relevant investment prohibition provisions of the "2005 Decision" shall apply to deal with virtual currency "mining" projects.

The "2005 Decision" ("Interim Provisions on Promoting Industrial Restructuring") is an administrative regulation in terms of effectiveness . Article 12, paragraph 2 of this law stipulates that "the "Guidelines for Industrial Restructuring" shall be formulated by the National Development and Reform Commission in conjunction with relevant departments of the State Council in accordance with relevant national laws and regulations, and shall be promulgated after approval by the State Council". Therefore, the "Guidelines for Industrial Restructuring (2019 Edition)" is a departmental regulation in terms of effectiveness and must be revised in accordance with legal procedures. Article 12, paragraph 3 stipulates that "the "Guidelines for Industrial Restructuring" shall, in principle, apply to all types of enterprises within the territory of China", so the main object of application is the "mining" behavior of enterprises.

Article 19 of the 2005 Decision stipulates that: Investment in obsolete projects is prohibited. ... All regions, departments and relevant enterprises must take effective measures to eliminate them within the prescribed time limit. During the elimination period, the national price authorities may increase the power supply price. ... For enterprises that fail to eliminate production technology, equipment and products within the prescribed time limit, local people's governments at all levels and relevant departments shall order them to suspend production or close them down in accordance with relevant national laws and regulations.

From the above analysis, it can be seen that the " Guide Catalogue for Industrial Structure Adjustment (2019 Edition)" applies to enterprises and regulates corporate behavior. Before the revision by the National Development and Reform Commission, Article 19 of the "2005 Decision" was applicable, prohibiting investment, and the "mining" projects that enterprises have invested in were eliminated within a time limit. Enterprises that fail to eliminate them on time will be ordered to suspend production or close down according to law; after the revision by the National Development and Reform Commission, the "mining" projects of enterprises are handled in accordance with the relevant laws and regulations of the industry to which the catalogue belongs; individual "mining" behavior is not subject to the provisions of the "Guide Catalogue for Industrial Structure Adjustment (2019 Edition)" on eliminated industries, nor is it subject to the provisions of relevant industry laws and regulations. If the "Guide Catalogue for Industrial Structure Adjustment (2019 Edition)" stipulates that virtual currency "mining" is an eliminated industry, "mining machines" are regarded as energy-consuming equipment that the state has explicitly eliminated, and Article 71 of the "Energy Conservation Law" is applied for punishment, then the objects of punishment are limited to enterprises, not individuals.

Is individual “mining” behavior illegal or criminal?

Is individual “mining” illegal?

In the above, we analyzed that according to the Guiding Catalogue for Industrial Structure Adjustment (2019 Edition), "mining" is an obsolete industry, and "mining machines" are energy-consuming equipment that are explicitly eliminated by the state. Article 71 of the Energy Conservation Law is applied for administrative penalties. The targets of the penalties are limited to enterprises, not individuals. So is individual "mining" illegal? What are the grounds for the penalties?

Administrative supervision policies such as the "924 Notice" clearly regulate virtual currency "mining" activities. Supervision policies belong to administrative management order. Individuals and enterprises that continue to carry out "mining" activities after the release of the "924 Notice" are considered to be intentional violations of administrative management order. According to the provisions of Article 4 of the Administrative Penalty Law, administrative organs shall impose penalties in accordance with the law. However, when imposing penalties, attention should be paid to the statute of limitations and the "principle of non-retroactive law" , that is, only the behaviors that continue to be implemented after the release of the notice can be punished, but not the behaviors before the release of the notice.

Therefore, when local regulatory authorities apply the "924 Notice" to investigate and clear virtual currency "mining" activities, they should distinguish whether it is an existing project or a new project? Is it corporate mining or individual mining? Is it a large-scale "mining farm" or just a few "mining machines" or computer graphics cards? Before making an administrative penalty decision, it should be strictly defined whether the punished object is a statutory accountability object and whether the punished behavior is a statutory violation.

Especially when investigating and punishing individual "mining" behaviors, it is necessary to accurately define whether it has reached the level of administrative punishment. Even if administrative punishment should be imposed according to law, Article 71 of the Energy Conservation Law should not be mechanically or even erroneously applied directly, without distinguishing the severity of the behavior, the consequences of the violation and the degree of damage, and whether the applicable object is correct, and the administrative punishment of confiscation should be imposed in a general manner. Instead, Article 9 of the Administrative Penalty Law should be applied first, and administrative penalties such as warnings, public criticism, and fines should be imposed. When the aforementioned penalties are not enough to punish the violation and its consequences, heavier confiscation penalties should be considered.

If the administrative penalty of confiscation is imposed regardless of whether it is individual or corporate "mining", regardless of the size of the "mine" or the number of "mining machines", and a "one-size-fits-all" approach is implemented, then the administrative penalty decision will not only violate the basic administrative principles such as the principle of proportionality and minimizing damage, but will also be suspected of administrative violations, and will fail to reflect the fairness, justice, legality and rationality of administrative law enforcement . The punished parties may, in accordance with the law, initiate administrative reconsideration or administrative litigation to seek redress for their rights.

Is individual “mining” behavior suspected of being a crime?

Article 5, Item 16 of the "924 Notice" stipulates that "all kinds of illegal fundraising and illegal securities issuance activities carried out in the name of virtual currency 'mining' will be severely cracked down." Using virtual currency "mining" to carry out various criminal activities will inevitably be subject to criminal sanctions. So, does simple individual "mining" behavior involve the crime of illegal business operation?

Article 225 of the Criminal Law provides for the crime of illegal business operations:

Whoever violates the State regulations and engages in any of the following illegal business activities, thereby disrupting the market order, shall, if the circumstances are serious, be sentenced to fixed-term imprisonment of not more than five years or criminal detention, and shall be fined not less than the amount but not more than five times the illegal gains; if the circumstances are especially serious, he shall be sentenced to fixed-term imprisonment of not less than five years, and shall be fined not less than the amount but not more than five times the illegal gains or have his property confiscated.

(1) Operating the monopoly or exclusive sale of goods or other restricted goods prescribed by laws and administrative regulations without permission; (2) Buying or selling import and export licenses, import and export certificates of origin, and other business licenses or approval documents prescribed by laws and administrative regulations; (3) Illegally operating securities, futures, or insurance businesses, or illegally engaging in fund payment and settlement businesses, without the approval of the relevant state authorities; (4) Other illegal business activities that seriously disrupt the market order.

According to the above-mentioned Criminal Law, the business activities that constitute the crime of illegal business operations are those that require special permission from government regulatory authorities as stipulated by laws and administrative regulations. If relevant business activities are carried out without special permission, it is suspected of illegal business operations. In addition, if the business activities are prohibited by laws and administrative regulations, they are also suspected of illegal business operations. So does an individual's "mining" behavior constitute "illegal business operations"?

The behavior of virtual currency "mining" belongs to the eliminated industries stipulated in the "Interim Provisions on Promoting Industrial Structure Adjustment" ("2005 Decision", administrative regulations) and the "Guidelines for Industrial Structure Adjustment (2019 Edition)" (which belongs to departmental regulations in nature), that is, industries prohibited from operation. Therefore, the behavior of virtual currency "mining" belongs to the behavior prohibited by administrative regulations . However, "mining" does not belong to "business behavior". At present, China's current effective laws, administrative regulations, etc. do not give a clear definition of "business behavior". We refer to the provisions of Article 3 of the "Consumer Rights Protection Law" to know that business behavior refers to the provision of goods or services, and the process of "mining" is the "production" of virtual currency, which is similar to the production of goods. In addition, China's current effective laws, regulations and regulatory policies do not clearly recognize virtual currency as a commodity or virtual commodity.

Therefore, "mining" activities, including individual "mining" and corporate "mining", do not constitute illegal business activities and do not constitute the crime of illegal business operations.

(Source: Baidu)

Regulations of some provincial government development and reform commissions on virtual currency "mining"

Inner Mongolia Autonomous Region

On May 18, 2021, the Office of the Emergency Command Center for Dual Control of Energy Consumption in the Inner Mongolia Autonomous Region issued the "Announcement on the Establishment of a Reporting Platform for Virtual Currency "Mining" Enterprises", which comprehensively accepts letters and reports on problems of virtual currency "mining" companies, and announces the reporting methods.

On May 26, 2021, the Development and Reform Commission of the Inner Mongolia Autonomous Region first issued the "Eight Measures to Resolutely Crack Down on and Punish Virtual Currency "Mining" Behavior (Draft for Comments)", and publicly solicited opinions on the basis for punishing various illegal activities involving virtual currency "mining" companies and individuals.

On January 20, 2022, the Development and Reform Commission and the Department of Industry and Information Technology of the Inner Mongolia Autonomous Region jointly issued the "Notice on the Implementation of Differential Electricity Pricing Policies for Virtual Currency "Mining" (Inner Mongolia Development and Reform Price and Fee No. [2022] 115)", which stipulates:

1. Include virtual currency "mining" projects in the scope of implementation of the differentiated electricity price policy, implement the "eliminated" enterprise electricity price, and increase the price by RMB 1 per kilowatt-hour;

2. Prohibit virtual currency "mining" projects from participating in electricity market transactions. Prohibit virtual currency "mining" projects from enjoying electricity market concessions in any way;

3. It is prohibited to access power lines with low electricity prices without authorization to engage in virtual currency "mining".

At present, the Inner Mongolia Autonomous Region Development and Reform Commission and other departments have not issued relevant normative documents on cracking down on virtual currency "mining". The investigation and clearance of "mines" within their jurisdiction are based on the "924 Notice" and other relevant regulations formulated by the National Development and Reform Commission.

Zhejiang Provincial Development and Reform Commission

On February 14, 2022, the Zhejiang Provincial Development and Reform Commission issued the "Notice on the Implementation of Differential Electricity Pricing Policies for Virtual Currency "Mining" (Zhejiang Development and Reform Price Letter [2022] No. 69)", which stipulates:

1. Differentiated electricity prices are applied to cryptocurrency mining, with a surcharge of 0.50 yuan per kilowatt-hour.

2. For the same electricity user, if electricity used for virtual currency "mining" is mixed with other electricity consumption, a differentiated electricity price policy will be implemented for all electricity consumption.

On March 29, 2022, the Zhejiang Provincial Development and Reform Commission and the Department of Justice jointly issued the "Notice on the Regulation of Virtual Currency "Mining" Equipment (Zhejiang Development and Reform Energy [2022] No. 77)", which stipulates:

1. "Mining" equipment includes electronic computing equipment (such as graphics cards, motherboards, etc.), "mining" software and mining pool access records, including but not limited to field programmable gate array (FPGA) mining machines, central processing unit (CPU) mining machines, graphics card (GPU) mining machines, application-specific integrated circuit (ASIC) mining machines, etc.;

2. According to the relevant provisions of the "Guidelines for Industrial Structure Adjustment (2019)" and the "Energy Conservation Law", the use of virtual currency "mining" equipment shall be stopped immediately and confiscated according to law. If an enterprise participates in virtual currency "mining" activities and the circumstances are serious, the people's government at the same level shall be requested to order it to suspend business for rectification or close down in accordance with the authority prescribed by the State Council.

The first article of the notice provides an enumerative definition of "mining" equipment, that is, a definition of "mining machine", which is different from the definition of "mining" activities in the "924 Notice" issued by the National Development and Reform Commission, the previous regulatory document. It is not yet clear whether its definition of "mining machine" exceeds the definition of "mining" activities in the "924 Notice";

Article 2 of the Notice stipulates that according to the relevant provisions of the "Guidelines for Industrial Structure Adjustment (2019 Edition)" and the "Energy Conservation Law", virtual currency "mining" equipment shall be immediately stopped from use and confiscated according to law. This article stipulates that the administrative penalty of directly confiscating "mining machines" for virtual currency "mining" activities is contrary to the principle of differentiated treatment stipulated in the "924 Notice" of the National Development and Reform Commission , and is inconsistent with the principle of administrative penalties that are appropriate according to the severity of the illegal acts in accordance with the law, and fails to reflect the rationality of the administrative penalty decision.

Hainan Provincial Development and Reform Commission

On December 3, 2021, the Hainan Provincial Development and Reform Commission issued the "Notice on Issues Concerning the Implementation of Differential Electricity Pricing Policies for Virtual Currency "Mining" Electricity", which stipulates:

1. List virtual currency "mining" activities as an eliminated industry, implement differentiated electricity prices, and increase the price by 0.80 yuan per kilowatt-hour;

2. Virtual currency "mining" users are not allowed to directly participate in electricity market transactions, and virtual currency "mining" users are not allowed to enjoy electricity market concessions in any way (they cannot enjoy electricity price subsidies).

In addition to the above-mentioned notice, the Hainan Provincial Development and Reform Commission and other departments have not issued any relevant normative documents on the investigation and clearance of virtual currency "mining" activities. The handling of virtual currency "mines" within their jurisdiction is based on the "924 Notice" and other relevant regulations formulated by the National Development and Reform Commission.

Sichuan Provincial Development and Reform Commission

On February 17, 2022, the Sichuan Provincial Development and Reform Commission issued the "Announcement on the Reporting Methods for Rectifying Virtual Currency "Mining" Activities" , encouraging the reporting of relevant clues of virtual currency "mining" activities and announcing the reporting methods.

On April 15, 2022, the Sichuan Provincial Development and Reform Commission issued the "Notice on Intensifying Rectification Efforts to Implement Differential Electricity Prices for the Practical Electricity of Shutdown Virtual Currency "Mining" Projects (Sichuan Development and Reform Price Regulation [2022] No. 186)" which stipulates:

1. Different electricity prices will be applied to various types of electricity consumption in virtual currency "mining" activities, with a surcharge of RMB 2 per kilowatt-hour. The measurement period will be from the date when the "mining" behavior begins (if the start date is determined before the date of issuance of this notice, the measurement period will be calculated from the date of issuance) to the date when the "mining" behavior ends;

2. This notice shall come into effect on the date of publication and shall be valid for 5 years.

In addition to the above-mentioned notices and announcements, the Sichuan Provincial Development and Reform Commission and other departments have not issued any relevant normative documents on the investigation and clearance of virtual currency "mining" activities. The handling of virtual currency "mines" within their jurisdiction is based on the "924 Notice" and other relevant regulations formulated by the National Development and Reform Commission.

Except for the above four provinces, the regulatory authorities in other provinces have not issued relevant normative documents specifically applicable to the rectification of virtual currency "mining" activities. The handling of virtual currency "mine" activities within their jurisdiction is mainly based on the "924 Notice" and other relevant regulations formulated by the National Development and Reform Commission.

Final Thoughts

In response to virtual currency "mining" activities, the National Development and Reform Commission and other departments and provincial government regulatory departments have issued a series of investigation and clearance policy documents. When investigating and clearing virtual currency "mining" projects, administrative agencies should accurately cite relevant laws and regulations, make legal and reasonable administrative penalty decisions in accordance with the law based on the nature of the behavior and the severity of the illegal consequences, avoid "campaign-style" law enforcement and "one-size-fits-all" law enforcement, and pay attention to protecting the legitimate rights and interests of the parties in the process of administrative law enforcement.

In combination with the "924 Notice" and other relevant laws and regulations, in this article we analyze the illegal entities and applicable administrative penalties for virtual currency "mining" , and that individual "mining" activities should generally not be directly subject to administrative penalties such as confiscation of equipment under Article 71 of the Energy Conservation Law.

We still strongly recommend that "mining friends" actively support and respond to the policies of government regulatory authorities at all levels to investigate and clear virtual currency "mining" activities in accordance with the law, and actively cooperate with regulatory authorities at all levels to clear "mining" equipment and "mines" as soon as possible. We must fully realize that the purpose of regulatory authorities' resolute investigation and clearing of virtual currency "mining" projects is to protect citizens' property rights and interests and the public interest, and be highly vigilant against illegal and criminal activities such as fraud and illegal fundraising that use virtual currency "mining" activities to avoid suffering property losses.

Author: Lawyer Liu Lei