Xiao Sa | Production and sales of mining machines, cloud computing power, legal risk analysis

It is generally believed that services directly related to virtual currencies are prone to suspected illegal or even criminal risks in China. As a type of computer, the legal risks of selling, hosting and using mining machines are relatively small. However, since the Financial Stability and Development Committee of the State Council clearly proposed "cracking down on mining", the mining industry has been included in the scope of crackdown and withdrawal in various places, and the legal risks of practitioners have changed. The Sister Sa team will sort out and discuss this from the perspective of various legal departments for the reference of readers.

Risk analysis of continued mining

The mining circle business model mainly covers the production of mining machines, sales of mining machines, sales of computing power, hosting of mining machines, etc. The Sister Sa team sorted out the legal risks of each participant in such business model from the three aspects of administrative law, criminal law, and civil law:

1. Administrative Violation Risk

On May 21, 2021, the Financial Stability and Development Committee of the State Council clearly stated that "we must crack down on Bitcoin mining and trading, and resolutely prevent individual risks from spreading to the social field." Inner Mongolia, Sichuan and other provinces where "mines" are concentrated have also begun to formulate local laws according to local conditions. In the future, if the spirit of the above-mentioned meeting is formed into laws and regulations, the regulatory authorities may crack down on both mining operations and purchasing behaviors, and include related behaviors in the category of administrative violations.

In addition, Article 22 of the "Law of the People's Republic of China on the People's Bank of China (Draft for Comments on the Amendment)" stipulates: "No unit or individual may produce or sell token tickets and digital tokens to replace the circulation of RMB in the market." Mining is essentially "the act of making digital tokens." If this clause is not changed, mining will constitute an administrative violation after the new law comes into effect.

Although the above legal provisions have not yet come into effect, it does not affect local governments from starting to clean up the mining industry in various places. According to the Sajie team, Inner Mongolia and other places have already started and basically completed the cleanup.

2. Criminal risk

Based on the different business and marketing models, the Sister Sa team has sorted out the criminal offenses that the mining circle may be involved in as follows:

(1) Illegal fund-raising crimes

① In some non-standard cloud mining models, operators abstract the computing power of mining machines for non-mainstream virtual currencies, publicize the rate of return to the public, and absorb their RMB. In practice, such behavior is identified as the crime of illegally absorbing public deposits.

If the country further introduces legal provisions (administrative regulations and above) to restrict virtual currencies, even the cloud mining model of mainstream virtual currencies may be subject to criminal prosecution.

② If the operator uses the purchase of mining machines as the entry threshold, the number of people developed as the standard for remuneration, and forms a three-level organization with more than 30 people, the operator may be guilty of organizing and leading pyramid selling activities.

(2) Fraud

If the so-called mining machine does not exist at all or is not operating, the operator may be guilty of fraud.

(3) Crime of establishing a financial institution without authorization

The cloud mining platform's behavior of absorbing funds and promising returns is essentially to provide financial management services to the general public. But it is obvious that the cloud mining platform has not obtained the administrative license to engage in financial activities. If the cloud mining platform is interpreted as a financial institution, the cloud mining platform may constitute the crime of establishing a financial institution without authorization.

(4) Illegal business operation

The People's Bank Law mentioned in the administrative supervision risk has a higher legal effect level than administrative regulations, and the spirit of the meeting of the Financial Committee of the State Council may also form regulations at the level of administrative regulations. Once implemented, it will meet the prerequisite of "violating national regulations" in Article 225 of the Criminal Law on the crime of illegal business operations. Mining machines and related business operations may be included in the fourth paragraph of the law "other illegal business operations that seriously disrupt market order" and be cracked down on.

3. Risks of civil law remedies

From the perspective of civil practice, since the subject matter involves virtual currency, some courts believe that the associated rights of illegal objects should not be protected (the currencies where this occurs are mostly certain non-mainstream currencies).

The Sajie team hereby reminds you that there is a possibility that the legal behavior of users purchasing mining machines will not be protected by the judiciary: users cannot protect their civil rights through litigation based on the contract.

Is it valuable to block domestic IP addresses?

Recently, in order to reduce public law risks, some mining companies have chosen to block domestic IP addresses and not open services to the Chinese people.

As mentioned above, the relevant business operations of mining machines, especially cloud mining machine platforms, have criminal law risks. We analyze them from the perspective of criminal law as follows:

The criminal law often adopts substantive standards for the determination of facts. That is, no matter what means are used, if Chinese users become users of cloud mining platforms and the actions of the cloud mining platforms are suspected of crimes, Chinese criminal law has jurisdiction over this based on the territorial jurisdiction principle of the place where the crime occurred or the protective jurisdiction principle where the victim is Chinese.

Of course, the subjective aspect is one of the important elements of the crime. The practice of blocking IP is at least an important subjective defense reason - the platform cannot actually determine the nationality of the user and has fulfilled the KYC obligation. Although Chinese people committing crimes abroad are also within the jurisdiction of my country's criminal law, the relevant services are limited to overseas activities and will not infringe on the Chinese market order, and there is no infringement of legal interests.

However, it should be noted that if a mining company suspected of committing a crime promotes its business within the country while blocking Chinese IP addresses, or even provides access ports, the aforementioned defense may become invalid due to the operator's obvious attitude of allowing domestic users to use the services.

Final Thoughts

In the context of virtual currency not being included in the regulatory classification system, the mining industry, which is highly correlated, cannot remain immune. When virtual currency is always associated with illegal crimes, the rise of legal risks in the mining industry has become inevitable. The Sajie team suggests that practitioners should more carefully compare the elements of the crime to regulate their own behavior and reduce risks.