Filecoin virtual currency mining losses, can we really defend our rights?

Can We Protect Our Rights as Filecoin Virtual Currency Miners Against Losses?

Author: Mancken Blockchain Law

“Mining” activities have always been an essential part of the cryptocurrency field. People who participate in projects in the crypto sphere have varying degrees of understanding and involvement in mining. As early as 2017 to 2018, mining for Fil (Filecoin) became famous, but at that time, it was more of hype and profiteering. In 2020, with the strategic layout of HashKey Capital, Distributed Capital, Ime Capital, and other capital firms in Filecoin mining, people seem to have regained confidence in Filecoin. However, after three years, everything has once again fallen silent, and the most deeply affected are probably the individual retail investors. For investors who have invested in Filecoin mining, their most pressing concern is whether they can seek legal remedies after suffering losses. Before Lawyer Liu provides an answer, a simple review and analysis must be conducted in the following areas:

01 Why was Fil mining popular?

The background of Filecoin can be traced back to 2014 when Juan Benet, who graduated from Stanford University, created a new protocol called IPFS aimed at replacing HTTP. The main feature of this new protocol is the ability to fragment and encrypt file data, and upload it to distributed nodes for storage. Data retrieval occurs by calling, synthesizing, and decrypting from distributed nodes to the requesting node. Its main highlights can be summarized as: distributed, secure, and open. Isn’t that similar to blockchain?

In June 2017, Protocol Labs (Juan Benet’s team) officially released the distributed storage protocol Filecoin and intended to accelerate its adoption through the economic incentive system. The project attracted the attention of many investment institutions as soon as it was launched, and it raised a considerable amount of funds. Many institutions, especially individual retail investors, wanted to invest but did not have the means (because Filecoin’s financing threshold is relatively high, such as raising funds only on the Coinlist platform, and investors must have an annual income of at least $200,000). As a result, there emerged investments through Fil futures and mining machines. Thus, the popularity in the field of Fil mining began to rise.

• Why aren’t people talking about blockchain technology anymore? Is this a good thing?
• Inside story How FTX stays up all night to prevent a $1 billion cryptocurrency theft case
• KYC integration in Uniswap v4 sparks community controversy

(Filecoin’s price trend in 2023, source: Binance official website)

02 China’s mining regulation policies and judicial practices

Regardless of the type of mining, the Chinese government’s attitude towards mining is not clear. It was not until September 3, 2021, when 11 ministries and commissions including the Ministry of Industry and Information Technology, the Ministry of Public Security, the Ministry of Finance, and the National Development and Reform Commission jointly issued the “Notice on Rectifying ‘Mining’ Activities of Virtual Currencies” (hereinafter referred to as the “Rectification Notice”), which clearly stipulates that the addition of new virtual currency mining projects is strictly prohibited at the regulatory level, and the orderly exit of existing mining projects should be accelerated. Since then, mainland China has entered an era of strict regulation of virtual currency mining projects.

In judicial practice, how do courts handle disputes related to virtual currency mining? So far, the most direct basis is the “Minutes of the National Court Financial Trial Work Conference (Draft for Solicitation of Opinions)” issued by the Supreme People’s Court on April 13, 2023 (hereinafter referred to as the “Trial Minutes”). Article 85 of the Trial Minutes provides the guidelines for handling cases related to virtual currency mining:

(I) Mining disputes before the release of the “Regulation Notice”

Before the release of the “Regulation Notice,” national regulations did not explicitly prohibit mining activities. Therefore, the civil actions involving mining machine purchase, leasing, custody, operation and management, hosting, technical development, etc. conducted by the parties before September 3, 2021, are generally valid. If there are contractual obligations that cannot be fulfilled due to the introduction of regulatory policies, the parties can terminate the contract. The unfulfilled part will be considered terminated, and for the already fulfilled part, the parties can request the counterparty to restore the original state, compensate for losses, or take other remedial measures based on the performance and nature of the contract.

(II) Mining disputes after the release of the “Regulation Notice”

Starting from September 3, 2021, civil contracts related to mining machine purchase, leasing, custody, operation and management, hosting, technical development, etc. agreed upon by the parties are considered invalid contracts. The parties to the contract should terminate the performance, return the property, compensate for losses, etc. according to the actual circumstances.

Can Fil Mining Losses be Remedied?

As early as 2018, there were hundreds of types of Filecoin mining machines in the market, some publicly promoted for sale and some secretly sold in private communities. For most retail investors without technical knowledge, they were deterred by the demanding requirements for operating the Fil mining machines, such as temperature control, uninterrupted power supply, and proper technical maintenance. Therefore, few people would buy a mining machine and mine at home. The common practice was for users to directly purchase mining machines from sellers and entrust them for hosting. Some sellers even sold so-called “cloud computing power” to assist customers in Fil mining. However, it was proven that most of these mining machines and “cloud computing power” were unable to conduct genuine Fil mining. The launch of the Filecoin mainnet in 2020 led to another wave in the Fil mining market, but individual retail investors did not make much money, while the mining machine sellers made a fortune. In the face of losses, can investors seek remedies?

To answer this, we need to revisit the second point analyzed by Lawyer Liu regarding the judicial guidelines for mining in China. First, for mining investments made before September 3, 2021, in principle, the courts recognize their legal effect. If the parties have agreements such as mining machine purchase agreements, technical service agreements, and mining machine hosting agreements, it depends on whether the sellers strictly fulfill the agreements. If the losses are caused by the seller’s breach of contract, the parties have the right to seek compensation. If the losses are solely due to market fluctuations of Filecoin’s value, then it falls under market investment risks, and the parties bear the risk themselves. Second, if the Fil mining investment occurs on or after September 3, 2021, such investment activities are generally considered without legal effect. The parties can choose to terminate the mining machine purchase agreements, technical service agreements, mining machine hosting agreements, etc., and the mining machine sellers are required to refund the corresponding payments.

Of course, the above rights protection plan is only a principled analysis, and lawyers in specific cases will still need to formulate legal service plans based on different circumstances.

04 Conclusion

In a bustling world where everyone is driven by profit, we don’t want to be left with nothing but feathers scattered on the ground after the excitement of speculation cools down. We hope at least some people who truly want to make a difference in this industry can remain. Whether it is Fil mining or mining other cryptocurrencies, as long as blockchain continues to exist, there needs to be an incentive mechanism at work, and undoubtedly, virtual currency is the most commonly used and effective incentive tool. Although the regulatory policies for the mining industry in our country have almost reached their limit, it is undeniable that from a global perspective, there are still many computing power contributions from users in mainland China. Whether you are an industry practitioner or an investor, you need to understand our country’s relevant regulations on the mining industry. Only in this way can you better safeguard your legitimate rights and interests.

We will continue to update Blocking; if you have any questions or suggestions, please contact us!