Web3 Legal Education | Can you seek legal protection if you suffer losses in Filecoin cryptocurrency mining?

Navigating Web3 Legal Education Understanding Legal Protection Options for Losses Incurred in Filecoin Cryptocurrency Mining

“Mining” activities have always been an essential part of the cryptocurrency field. People who participate in the cryptocurrency industry are more or less familiar with or even involved in mining. As early as 2017-2018, mining for Fil (Filecoin) gained a lot of fame, but it was mostly speculative and opportunistic at that time. In 2020, after HashKey Capital, Distributed Capital, Yimo Capital, and other capital institutions invested in Fil mining, it seemed like people regained confidence in Filecoin. However, after three years, everything returned to silence, and the ones who were hurt the most seemed to be the retail investors. For investors in Fil mining, the biggest concern is whether they can seek justice after suffering losses. Before Lawyer Liu gives an answer, some simple clarification and analysis need to be done:

01 Why Did Fil Mining Become Popular?

The background of Filecoin’s creation can be traced back to 2014 when Juan Benet, a graduate from Stanford University, founded a new protocol called IPFS, which aimed to replace HTTP. The main feature of this new protocol is that it can encrypt file data after fragmentation and upload it to distributed nodes for storage. Data retrieval is done by fetching, synthesizing, and decrypting data from distributed nodes to the requesting node. Its biggest highlights can be summarized as: decentralization, security, and openness. Doesn’t it sound similar to blockchain?

In June 2017, Protocol Labs (Juan Benet’s team), officially released the distributed storage protocol, Filecoin, and intended to accelerate its application through economic incentives. This project attracted the favor of many investment institutions as soon as it was launched, and of course, raised a considerable amount of funds. Many institutions and especially retail investors wanted to invest but had no way to do so (because Filecoin’s fundraising threshold is relatively high, such as only on Coinlist platform and investors must have an annual income of at least $200,000). Therefore, there was a market for investing through Fil futures and mining machines. Thus, the heat in the Fil mining field continued to rise.

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(Price trend of Filecoin in 2023, source: Binance official website)

02 China’s Regulatory Policies and Judicial Practices on Mining

Regardless of the type of mining, the Chinese government’s attitude towards mining is not clear. It wasn’t until September 3, 2021, when 11 ministries, 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 Cleaning up Virtual Currency ‘Mining’ Activities” (hereinafter referred to as the “Cleanup Notice”), which clearly stated the strict prohibition of new virtual currency mining projects at the regulatory level and the acceleration of the orderly exit of existing mining projects. 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? Up to now, the most direct basis is the “Summary of the National Court Financial Trial Work Conference (Draft for Comments)” issued by the Supreme People’s Court on April 13, 2023 (hereinafter referred to as the “Judicial Summary”), which provides the trial standards related to virtual currency mining in Article 85:

(1) Disputes related to mining before the issuance of the “Rectification Notice”

Before the issuance of the “Rectification Notice”, national regulations did not explicitly prohibit mining activities. Therefore, the civil actions involving mining machine trading, leasing, custody, operation management, hosting, and technical development conducted by parties before September 3, 2021, are generally valid. For the unperformed parts due to the introduction of regulatory policies, parties can terminate the contracts. The unperformed parts shall cease to be performed, while the performed parts allow parties to request the counterparty to restore the original state, compensate for losses, or take other remedial measures based on the performance, nature of the contract, and other factors.

(2) Disputes related to mining after the issuance of the “Rectification Notice”

After September 3, 2021, mining machine trading, leasing, custody, operation management, hosting, and technical development contracts agreed upon by the parties are considered invalid contracts. The parties to the contracts should terminate the performance, return the properties, compensate for losses, etc. according to the actual circumstances.

Can miners of 03Fil claim compensation for losses?

As early as 2018, there were hundreds of Filecoin mining machines in the market. Some were advertised for sale through public channels, while others were sold secretly in private communities. For most individual investors with no technical knowledge, they were discouraged by the stringent requirements of maintaining temperature, uninterrupted power supply, and proper technical maintenance for Fil mining machines. So few people would buy a mining machine and operate it at home. The common practice is for users to directly purchase mining machines from sellers and entrust the sellers to host them. Some sellers even sell so-called “cloud computing power” to help customers mine Fil. However, most of these mining machines and “cloud computing power” have been proven ineffective for actual Fil mining. With the launch of the Filecoin mainnet in 2020, there was another wave of Fil mining market, but individual investors who invested in mining did not earn much money, while the mining machine sellers made a fortune. In the face of losses, can investors seek compensation?

This brings us back to the analysis by Lawyer Liu regarding the current judicial trial standards for mining in China. First, for investment mining activities that occurred before September 3, 2021, the courts generally 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 abide by the agreements. If the losses are due to the sellers’ breach of contract, the parties have the right to demand compensation from the sellers. If the sellers have not breached any contract, and the parties’ losses are purely due to market value fluctuations of Filecoin, then the losses belong to market investment risks and can only be borne by the parties themselves. Second, if Fil mining investment occurred on or after September 3, 2021, then such investment activities are generally considered legally ineffective. The parties can choose to terminate mining machine purchase agreements, technical service agreements, mining machine hosting agreements, etc. and return the mining machines, and the sellers need to refund the corresponding prices.

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

04 Writing in Conclusion

The world is bustling, all for profit and gain. When the enthusiasm for speculation cools down, we do not want to be left with nothing but a mess. We at least want to leave behind some people who truly want to make a difference in this industry. Whether it is Fil mining or mining other cryptocurrencies, it seems that as long as blockchain continues to exist, there needs to be an incentive mechanism at play. And virtual currency is undoubtedly the most commonly used and effective incentive measure. Although the regulatory policies for the mining industry in our country have almost reached their limits, it cannot be denied that from a global perspective, there is still a significant amount of computing power contributed by users in mainland China. Whether you are a doer or an investor, you need to understand China’s relevant regulations on the mining industry. Only in this way can you better protect your legitimate rights and interests.

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