A must-read for the cryptocurrency world | A lawyer explains in depth the legal issues of cloud computing contracts

        How much purchasing power does a Bitcoin have? 10 years ago, the price of a Bitcoin was about $1, which could buy a hamburger, but now it can buy a Tesla car. Indeed, the current price of a Bitcoin has reached as high as $58,000. The continued rise of Bitcoin has attracted a lot of attention. Faced with the warming Bitcoin market, many investors are gearing up and waiting for the opportunity to enter. Currently, there are two main ways to obtain Bitcoin: trading and mining. Trading acquisition is the relevant purchase behavior conducted through exchanges or offline with Bitcoin holders. The second is mining. The mining process is actually a problem-solving process. It is a process of solving the "hash value" using a mining machine according to the Bitcoin collection mechanism and using a "hash function" algorithm. Mining requires very high computer computing power. High computing power means more opportunities to obtain Bitcoin. Mining is ultimately a competition of computing power. However, the acquisition of computing power has a relatively complicated process, which requires buying mining machines, finding mining plants, connecting to power plants, hanging mining pools, hiring operation and maintenance, etc. Such a complicated process will be very expensive and time-consuming for retail investors. In order to solve the problem of retail investors' participation, miners have developed a product called "cloud computing power contract". Holding a contract means owning a portion of the cloud computing power share in the entire project, and can obtain corresponding mining income regularly based on this share.

Figure 1 Basic mining flow chart

        In August 2020, a penalty decision by the Shanghai Yangpu District Market Supervision Administration attracted the author's attention. The Shanghai Yangpu District Market Supervision Administration found that in January 2019, Shanghai Waiyi Network Technology Co., Ltd. launched the "cloud computing power" business through its own website "Waiyi.com", and at the same time promoted the content of "Waiyi Mining Pool: the most open and transparent high-yield mining pool on the entire network; top technical team, effectively reducing risk fluctuations, escorting the miners' income; come to Yichi to mine, enjoy stable high returns" on the website promotion page, implying that the "cloud computing power" business is risk-free or guaranteed. Subsequently, the Shanghai Yangpu District Market Supervision Administration believed that Shanghai Waiyi Network Technology Co., Ltd.'s promotion of services with expected investment returns violated Article 25 (1) of the "Advertising Law of the People's Republic of China" and decided to "order it to stop publishing advertisements, eliminate the impact within the corresponding scope, and impose a fine of RMB 50,000". So, how is the expected return on investment of cloud computing power generated, what is the business model of cloud computing power? What is the legal nature of cloud computing power contracts?

1. The historical evolution of cloud computing contracts

        In September 2014, Bitmain launched the "Hash Nest" product, and the cloud computing power contract was officially born that year. Subsequently, KnCCloud, Genesis-Mining, NiceHash, cex.io, and digcoin under Huobi.com in China were born. Due to the low price of Bitcoin, the cloud computing power business disappeared for a time. After the price of Bitcoin rebounded in 2017, platforms such as GRINOK, BitDeer, and Renren Mine emerged. Cloud computing power, with its low threshold and more flexible characteristics, opened the era of universal mining. At present, there are more than 50 cloud computing power platforms in the world, of which less than 10 are more mainstream platforms, such as GenesisMining, BitDeer, GRINOK, Niubit, RHY (Cloud Computing Power), Computing Cube, Nicehash, etc.

2. The concept of cloud computing power contract

        Cloud computing power contracts are computing power transactions. The platform divides the computing power of self-operated and external computing power vendors into several parts. Investors rent or purchase the corresponding share of computing power mining in proportion to their investment needs. After deducting electricity and computing power fees, investors obtain corresponding mining income. Taking BitDeer's Antminer mining package as an example, the mining machine model is Antminer S19, the contract period is 480 days, the computing power is 50T, the mining currency is BTC, the computing power fee is $3104.50, the electricity fee is $2.70/day, and the static output is $0.3215 /T/day .

Figure 2: Computing power contract diagram

3. Types of cloud computing contracts

        (1) Centralized type , which is the coin-to-platform model. The mining pool connects to the platform. After deducting relevant fees, the mining pool transfers the mined bitcoins to the platform's address. The platform then deducts relevant fees and transfers the bitcoins to the investor's address.

        (2) The decentralized type is the coin-to-investor model. The mining pool directly connects with the investor. After deducting relevant fees, the mining pool directly transfers the mined bitcoins to the investor's address. There is no platform as an intermediate link for transfer payments.

        (3) Ponzi scheme type , that is, Ponzi scheme model or pyramid scheme model. The platform itself has no computing power and no physical mining farm to support it. It has no blood-making function and can only use the Bitcoin of new investors to pay the profits of previous investors.

4. Business model of cloud computing power contracts

        The business model of cloud computing power contracts is that computing power providers divide the ability of a certain number of mining machines to earn digital currency within a certain period of time into several standard units for sale to the outside world. After investors purchase a certain amount of computing power, they can obtain corresponding mining income in proportion. The parties involved in the business model are: computing power providers, platforms, mining pools, investors, etc.

        (1) A computing power merchant refers to an institution or individual that owns a certain number of mining machines and can generate computing power within a certain period of time. They can also be called miners. The main profit model of a computing power merchant is that the computing power merchant transfers the computing power income rights for a certain period of time to investors through computing power transfer. This solves the cash flow problem of the computing power merchant, and at the same time, the computing power merchant can also earn the computing power price difference.

        (2) The platform is an intermediary institution that provides computing power transactions for computing power providers and investors, but the platform may also be a computing power provider. This is the problem with the JD model and the Taobao model. The main profit model of the platform is to earn the difference in computing power and charge channel fees or handling fees from computing power providers and mining pools.

        (3) Mining pools are a method of combining a small amount of computing power and operating them together. Websites established in this way can play a role in gathering computing power, stabilizing income, and representing voices. The main profit model of mining pools is to collect a certain percentage of handling fees from mining machines after mining is completed.

        (4) Investors : institutions or individuals who purchase computing power of a certain standard and proportion according to the platform's recommendation and then obtain corresponding mining income in proportion. The main profit model of investors is to obtain corresponding Bitcoins.

5. Expected return on investment for cloud computing power contracts

        The return on investment of cloud computing power contracts comes from the price difference between the Bitcoin trading market and the mining market. The current rate of return of computing power trading platforms is basically around 40%, and the standard for calculating the rate of return is usually a static rate of return. The rate of return calculated by the static analysis method needs to have an assumed unchanged condition, that is, assuming that the future mining output remains static, the computing power fee is used as the cost, and the mining output after deducting the electricity fee is used as the income. The author believes that the trading platform has exaggerated the return on investment and has not indicated the corresponding risks and prerequisites. The expected return on investment of cloud computing power contracts depends on the unchanged mining difficulty and the fact that the Bitcoin price has not plummeted. Without these two prerequisites, the so-called 40% rate of return cannot be achieved. The administrative penalty imposed by the Shanghai Yangpu District Market Supervision and Administration Bureau on the "Wayi Network Cloud Computing Power" business should also be based on this reason.

1. The relationship between computing power and Bitcoin

        Hash power refers to the unit of measurement of the computing and network processing capabilities of Bitcoin mining machines, that is, the ability of computer hash collisions per second, for example: 1 TH/s = 1,000,000,000,000 hashes per second. The author believes that hash power has scientific and technological attributes, and computing power comes from the processing power of computers and networks, that is, the chip advantages of computers and the size of network bandwidth. The hash power of Bitcoin mining machines refers to the ability of Bitcoin mining machines to produce Bitcoins. Different hash powers will produce different amounts of Bitcoin. Article 127 of the Civil Code stipulates that if the law has provisions on the protection of data and network virtual property, such provisions shall be followed. Judicial practice and the Civil Code have included data and network virtual property in the category of civil rights objects and have made open provisions for them. The fact that Bitcoin is a kind of network virtual property and a civil right or interest has been confirmed.

2. Cloud computing power contracts are transfers of income rights

        As mentioned before, cloud computing power contracts refer to the division of mining machine computing power into several parts. Investors rent or purchase corresponding shares of computing power for mining according to their investment needs. After deducting electricity and computing power fees, investors receive corresponding mining income. So what is the legal nature of cloud computing power contracts?

        (1) Can computing power be leased or transferred ? Legal leasing or transfer requires the effect of delivery or transfer of possession. Computing power itself is a unit of measurement for computing and network processing capabilities. As a unit of measurement or computer hash collision capability, it cannot achieve the effect of delivery or transfer of possession.

        (2) Whether the computing power can be divided . The main business model of cloud computing power contracts is to divide the computing power of mining machines into several parts. Although computing power division can be achieved technically, in reality, computing power division almost does not exist. Usually, the life of a mining machine is about 5 years, and computing power changes all the time. In order to solve the problem of luck value balance, miners will put mining machines into mining pools and adopt a method of merging a small amount of computing power for joint operation to avoid mining risks.

        Since computing power cannot achieve the effect of delivery or transfer of possession, and computing power division cannot be achieved, what is the nature of the cloud computing power contract? The author believes that this model has the characteristics of income right transfer and belongs to the income right transfer contract. The income right transfer is to transfer the future income of the underlying assets by publishing on a legal intermediary trading platform. The asset owner transfers this part of the future income to achieve the purpose of rapid financing and development, and the transferee obtains the income of the underlying assets through investment. In the cloud computing power contract, computing power is the ownership certificate or income right certificate, and Bitcoin is the income. The computing power business packages its computing power as an income right certificate, and the income corresponding to the income right certificate is transferred to the investor by division. The computing power business solves its own cash flow problem through the transfer of income rights, earns the difference in computing power, and also reduces its own risks.

1. Moral risks of platforms and mining farms

        The current Bitcoin market is extremely hot. The entry threshold for trading platforms and mining farms is low. The platforms and mining farms are highly concealed. The relevant regulatory laws and policies are backward. The qualifications and capabilities of platforms and mining farms are uneven. The phenomenon of platforms and mining farms running away occurs from time to time. Since cloud computing power contracts are virtual products, investors can only rely on the platform's promotional materials to make judgments when purchasing. It is difficult for investors to know whether there is a physical mining farm behind the contract. The running away of platforms and mining farms may involve crimes such as illegal fundraising or qualification fraud. The "Regulations on the Prevention and Disposal of Illegal Fundraising" which will take effect on May 1, 2021 has included the use of virtual currency to absorb funds in the disposal and investigation and identification of illegal fundraising.

2. Risks in the cloud computing market caused by the sharp drop in coin prices and the increase in mining difficulty

        The static rate of return mentioned by the trading platform is based on the premise that the future mining output remains static. However, there are two prerequisites for this premise: the price of Bitcoin has not plummeted and the difficulty of mining has increased. Different mining machines represent different computing power. Taking S19 as an example, according to the Bitcoin mining rules, the difficulty increases by 2% every 14 days. A mining machine can mine about 0.3057 Bitcoins in 2 years. The spot price of the mining machine is about 40,000 yuan, the unit price of electricity is 0.35 yuan/kWh, the electricity bill for two years is 20,097 yuan, and the total cost is 60,097 yuan. Using an extreme algorithm to set the depreciation period of the mining machine to 2 years, the cost of obtaining one Bitcoin is about 180,000 yuan (about 0.6 Bitcoin in terms of currency-to-currency transactions), and the current transaction price of one Bitcoin is about 300,000 yuan. At the same time, a condition is also set that time, electricity costs, mining machine costs, and depreciation rates remain unchanged. If the mining difficulty increases significantly due to a substantial increase in computing power during the investment period and no more than 0.6 bitcoins can be obtained, or if the bitcoin price plummets and the price of the currency obtained within 2 years is less than 180,000 yuan, investors will suffer losses.

3. Risk of power outage during operation

        The main resource cost of mining is electricity cost. To save electricity expenses, most mining machines will be hosted in mining farms with lower electricity costs. However, mining farms are also at risk of power outages for various reasons. Power outages can cause computing power interruptions, equipment damage, and investors to suffer losses. Many platforms will separate the payment of computing power fees and electricity fees, and push the losses of power outages to investors through the rules of cloud computing power contracts. Some platforms also directly assume responsibility for investors through silence.

4. Policy risks

        It refers to the risk that major changes in government policies or important measures and regulations will cause market fluctuations, thus bringing risks to investors. Bitcoin is a market that is extremely susceptible to policy influences. Bitcoin is easily linked to clues of criminal activities such as fraud, gambling, smuggling, money laundering, and dark web due to its decentralization and anonymity. In recent years, my country has increased its supervision of Bitcoin. On December 5, 2013, the People's Bank of China, the Ministry of Industry and Information Technology, the China Banking Regulatory Commission, the China Securities Regulatory Commission, and the China Insurance Regulatory Commission issued the "Notice on Preventing Bitcoin Risks" and successively issued relevant regulatory policies. At present, the trading platform has stopped trading, and the relevant ICO behavior has been identified as illegal fundraising and has been explicitly prohibited. In addition, some mines in Sichuan, Yunnan and other places have been closed down due to illegal electricity use. In February 2021, the Inner Mongolia Development and Reform Commission issued the "Several Guarantee Measures for Ensuring the Completion of the "14th Five-Year Plan" Energy Consumption Dual Control Target Task (Draft for Comments)", which classified virtual currency mining as "backward and excess capacity" and planned to shut down all mines.