Lawyer’s opinion: Is the mining pool PPS model suspected of illegally absorbing public deposits?

Source: Weiyang.com

Author: Zeng Jie, a financial crime defense lawyer, senior partner of Guangqiang Law Firm and director of the Illegal Fund Raising Case Defense and Research Center; Lu Jiepei, a researcher at the Illegal Fund Raising Case Defense and Research Center of Guangqiang Law Firm

The emergence of the PPS model is to solve the problem of unstable income brought about by digital currency mining. The PPS model estimates the output that miners can obtain in the mining pool every day based on the proportion of their computing power in the mining pool. After deducting the mining pool handling fee, the miners are given a basically fixed income every day.

This model is similar to depositing computing power into a bank, and the bank gives you a fixed interest, the income is relatively stable, and the risk is also borne by the bank. Some people are worried that this model is very similar to the promise of guaranteeing principal and interest in the crime of illegally absorbing public deposits, that is, inducement? Because if it is to constitute the crime of illegally absorbing public deposits, it must be consistent with the lack of legal qualifications (illegality), public publicity (publicity), fundraising for unspecified objects (sociality), and promise to repay principal and interest or pay returns in the form of currency, physical objects, equity, etc. within a certain period of time (inducement).

The PPS model of mining pool operation certainly does not have the legal qualifications for public fundraising. It is also promoted through the Internet or word of mouth, and is targeted at non-specific Internet users. Of the four characteristics, the third one meets the most critical point, which is whether it constitutes "inducement."

Is the fixed income of PPS a promise of principal and interest protection, and is it an inducement?

First of all, fixed income is indeed a promise to pay interest, but it is not necessarily a promise to protect the principal. The inducement in illegal deposit-taking must be a promise to pay interest on the basis of protecting the principal. And this kind of promise must be practical. What is practical? It means a promise to repay the principal and interest in a relatively short period of time. For example, if you invest in a financial product suspected of illegal fund-raising, its income promise is generally one year, two years, or three years. However, if it is a promise of ten or twenty years of income, it is generally difficult to truly induce others to invest. Inflation or unexpected factors in ten or twenty years make this kind of principal protection basically unrealistic and difficult to constitute a "inducement" for investors.

As more and more people join the mining team, the computing power of the entire network becomes larger and larger, and the probability of obtaining the blockchain itself becomes lower and lower, which also means that the cost of investing in a mining farm is actually getting higher and higher. After the mining pool concentrates the computing power, the PPS model promise to the miners only represents a certain income, but the mining pool operator generally does not make relevant promises on how long this income will cover the cost of the mining farm, or even whether it can cover the cost. They don’t even care about this. The accounting of income and cost is the financial accounting done by the participating miners themselves. This accounting includes electricity costs, mining machines, sites, maintenance, labor and other costs. This is different from the promise of capital guarantee and interest payment required in illegal absorption of public deposits or fundraising fraud.

In cases of illegal absorption of public deposits, the fundraiser's return promise to investors or participants is clear, that is, it promises that participants can get their principal back and gain profits at a certain time. For example, Zhang San invests 500,000 yuan in a private equity fund. The private equity fund promises to return the principal after six months and an annualized return of 10% for such unqualified investors. This kind of promise is a principal guarantee and interest payment commitment that is suspected of being illegal and irregular. Because this fixed income promise, which is much higher than the ordinary bank savings rate, directly violates the principal guarantee and interest payment commitment of the banking industry's deposit financial order. To put it in a figurative way, although both promises to guarantee 100% principal, the interest you offer is much higher than that of the bank, so investors will of course choose to deposit their money with you. This behavior is "inducement" in illegal absorption of public deposits or fund-raising fraud.

In the current digital currency mining pool PPS model, the fixed income commitment given to miners by the mining pool is based on the proportion of miners' computing power in the mining pool, estimating the output they can obtain in the mining pool every day, assuming that the luck value is 100% theoretical income. This kind of income is not calculated based on all the costs actually paid by the miners. To obtain all the returns in this way, it is not only affected by the return on investment itself, but also by the market price of the currency itself, which is basically uncontrollable. Therefore, this model itself does not meet the constituent elements of the "inducement" in the crime of illegally absorbing public deposits, that is, the promise of guaranteeing principal and interest.

If the mining pool is turned into a capital pool, it may be suspected of illegally absorbing public deposits.

Of course, if someone wants to raise funds illegally by operating a mining pool, the most important key is to turn the mining pool into a capital pool. For example, he will promise the miners that the money you invested (note that it is not the computing power) will be earned back in one year or a few years, and there will be more extra income during the period, which is more reliable than depositing money in the bank! This will be suspected of illegal fundraising.

A more advanced way of playing is, for example, a mining pool publicly announces that it will accept investments of legal currency or Bitcoin in exchange for computing power services, and then give relevant returns in proportion to the computing power. After a certain period of time, the mining pool will return the principal, or if the income does not exceed the principal, the mining pool will make up the difference. This model may also be suspected of illegal fundraising.