Since the issuance of the "Notice on the Rectification of Virtual Currency Mining Activities" (Development and Reform Commission [2021] No. 1283) ("924 Notice"), domestic mining has in fact become an impossible task.
Given this, is investing in overseas mining farms a perfect alternative? Will investing in overseas mining farms suffer unwarranted disasters similar to the 924 Notice? This article by Lawyer Mankun will discuss this with you.
The main aspects of investing in overseas mining farms involve purchasing mining machines domestically/abroad, selecting suitable locations, and operating production overseas.
01. Can mining machines be purchased domestically?
A mining machine is a machine used to run mining programs to earn virtual currency.
Prior to the 924 Notice, buying and selling mining machines was essentially a normal sales contract. However, after the 924 Notice, because mining has been characterized as a project that "consumes a large amount of energy and carbon emissions, contributes little to the national economy, has limited driving force for industrial development and technological progress, and the risks arising from the production and trading of virtual currency have become more prominent, its blind and disorderly development has adverse effects on promoting high-quality economic and social development and energy conservation and emission reduction." The effectiveness of mining machine sales contracts is easily deemed invalid by the court as damaging to the public interest, and after being deemed invalid, the equipment payment and equipment are returned by both parties to each other.
Typical cases include the Hu Xingrui v. Wang Gang sales contract dispute case published by the Supreme People's Court's Second Civil Division as one of the top ten commercial cases of the year 2022. From the consequences of the court's judgment, for the party buying the mining machine, the main risks of the mining machine sales contract being deemed invalid are:
1. Loss of substantial funds tied up. The buyer has already made payment but the seller has not delivered the goods, resulting in substantial funds being tied up and unable to demand compensation for the tied-up funds.
2. If the mining machine itself has quality issues, it is impossible to demand continued performance or damages through litigation. Since the contract is invalid from the outset, even if the seller delivers the mining machine, if the machine has quality issues and the seller does not resolve them, even resorting to the court would be of no avail.
3. Loss of expected profits. During a bull market, if the coin price continues to rise but the seller defaults on delivering the goods as agreed, causing the buyer's originally expected mining income to evaporate, this loss of expected profits is also difficult to be supported by the court.
In addition to civil risks, considering the 924 Notice and referring to the current practice of domestic e-commerce platforms and second-hand trading platforms having comprehensively removed and blocked mining machines and similar goods, in extreme cases, it is not ruled out that purchasing mining machines domestically may be deemed an administrative violation by law enforcement agencies and subsequently subject to administrative penalties.
02. Is there risk in exporting mining machines?
The "Foreign Trade Law," "Export Control Law," "Data Security Law," and other relevant laws and regulations have formulated requirements and provisions prohibiting or restricting the export of goods, technology, and services.
Specifically for mining machines, export enterprises should, from the perspectives of "physical" and "contained data," based on the existing "Catalog of Prohibited Export Goods," "Catalog of Export License Management Goods," "Catalog of Goods Prohibited from Export and Restricted from Export by China," and "Catalog of Items and Technologies Subject to Import and Export License Management," carefully determine whether the intended export of mining machines and their components belong to goods prohibited from export by the country or require prior processing of relevant export permits; if the intended exported machines are second-hand equipment, an assessment, inspection, and necessary disposal of the internal stored information should be conducted from the perspective of data compliance. Otherwise, export enterprises of mining machines may face administrative penalties, and those constituting crimes may be held criminally liable.
For old second-hand mining machines, when exporting, they should also avoid being recognized as "solid waste" by the importing country, thus facing the risk of being required to be returned or disposed of on-site.
Furthermore, as the transaction price of goods in international trade has always been a focus of customs supervision in various countries, during the process of exporting mining machines, cooperating with overseas import enterprises to modify key customs declaration accompanying documents such as mining machine sales contracts or invoices may face foreign criminal risks such as smuggling.
03. Can domestic companies directly engage in mining overseas?
Domestic entities directly investing in mining farms overseas do not violate relevant domestic regulations, but this architectural arrangement will be subject to multiple legal jurisdictional regulations, which Lawyer Mankun does not recommend. According to the provisions of the "Measures for the Administration of Overseas Investment by Enterprises (Decree No. 11 of the National Development and Reform Commission)," Article 2, Article 5, Article 13, Article 14, as well as the "Notice on Further Guiding and Regulating the Direction of Overseas Investment (State Council Office [2017] No. 74)," "Notice of the National Development and Reform Commission on the Release of the Catalog of Sensitive Industries for Overseas Investment (2018 Edition) (Development and Reform Commission Foreign Investment [2018] No. 251)," and other regulations, virtual currency "mining" business is not a business prohibited or restricted by current regulations for domestic enterprises to engage in overseas investment.
Therefore, according to the current laws and regulations of our country, domestic enterprises investing in mining farms overseas do not violate relevant domestic regulations. However, it is not recommended to directly conduct production and operation overseas as a local entity under the domestic entity, as this architectural arrangement not only leads to multiple legal jurisdictional regulations but also does not enjoy local tax advantages, legal protection, or even market access, and is not a good design for conducting overseas business.
04. Operating mining overseas is not easy either
The grass is not always greener on the other side. The legal regulations and policy provisions for overseas mining may not necessarily be coherent and stable, and require thorough due diligence beforehand.
Many countries such as Canada, Australia, Iran, Ukraine, and certain state governments in the United States have legalized virtual currency mining through regulations, but usually require permits from the competent authorities, known as "licensed mining." If mining is conducted without a permit, or if mining is conducted in violation of the electricity usage conditions stipulated in the permit, it will also face investigation or penalties by the regulatory authorities of that country.
According to Tasmin News Agency, in January 2021, Iranian authorities sealed 1,620 cryptocurrency "mining farms" and confiscated 45,000 Bitcoin "mining machines" because these "mining farms" illegally used subsidized electricity from the state-owned energy supplier Tavanir during the "mining" process. According to Tencent News on April 16, 2022, the Iranian government will increase penalties for illegal cryptocurrency mining using subsidized electricity through new regulations. According to the new regulations, the increased penalties include at least tripling to five times the fines, imprisonment of violators, and revocation of business licenses for repeated violations. Additionally, according to Reuters, in June 2021, the Iranian police confiscated 7,000 cryptocurrency "mining machines" at an abandoned factory in the capital Tehran, on the grounds of illegal "mining" without a permit.
In addition to the risks of mining, due to the shortage of energy supply in some countries, some governments may control virtual currency mining activities through temporary bans. For example, the Iranian government issued a ban on Bitcoin mining on December 28, 2021, ordering the closure of authorized Bitcoin mining centers to avoid an electricity shortage crisis. This ban will continue until March 6, 2022. Therefore, when investing in overseas mining farms, it is advisable to first consult the relevant regulations on mining activities in the host country, otherwise there may be a risk of high fines or confiscation of mining machines due to violations of legal regulations or temporary bans.
For some countries subject to international sanctions or foreign exchange controls (recognizing the legalization of Bitcoin), selling the cryptocurrency obtained from "mining" in that country or remitting foreign exchange may need to comply with its relevant legal regulations, otherwise there may be legal risks such as frozen accounts, and even charges of capital flight, illegal transactions, money laundering, and thus facing criminal liability.
05. Lawyer Mankun's Suggestions
1. When signing mining machine sales contracts domestically, pay attention to the seller's performance capability. If subject to domestic law, the effectiveness of mining machine sales contracts is easily deemed invalid by the court as damaging to the public interest.
2. Mining machines cannot be exported at will. Carefully determine whether the intended export of mining machines and their components belong to goods prohibited from export by the country or require prior processing of relevant export permits; if it involves internal stored information, data compliance is required.
3. The legal regulations and policy provisions for overseas mining may not necessarily be coherent and stable, requiring thorough due diligence beforehand.
Reference:
https://mp.weixin.qq.com/s/QlBHJzXOjkdZVv_QdtDimQ
https://www.defidaonews.com/media/6767976
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