South Carolina Declares Cloud Mining Contracts to Be Securities
The Attorney General of South Carolina has served a cease and desist order on Genesis Mining. In documents filed before its Securities Commissioner, it has declared cloud mining contracts to be securities, in a move that could have repercussions beyond the confines of the Palmetto State.
Attorney General Forecasts Dark Clouds for Mining Contracts
Cloud mining contracts enable individuals to purchase hashing power without the need to get their hands dirty. Rather than have to order, install, and maintain a bunch of miners, capacity can be purchased from a datacenter that’s set up to mine crypto. Genesis Mining is one of the most well established operators in the space. It, as well as companies such as Hashflare, has been plying its trade for years. Now, a cease and desist order looks set to put paid to that, in the state of South Carolina at least.
“Join over 1,000,000 people with the world’s leading hashpower provider,” proclaims the Genesis website. “It’s super simple – Your mining rigs are already set up and running. As soon as you’ve set-up your account you can start to earn your first coins from our bitcoin cloud mining service!” The company operates a datacenter in Reykjavik, Iceland. But in a filing dated March 9, South Carolina Attorney General’s Office has ordered Genesis Mining and Swiss Gold Global to stop targeting residents in the state.
The Company That Lives in the Cloud
Like many web companies, Genesis is everywhere and nowhere. The administrative proceeding document directed to the Securities Commissioner of South Carolina lists Genesis’ last known address as Chinachem Century Tower in Hong Kong. This seems to be a common registration address for businesses and appears in the Offshore Leaks Database that publishes findings from the Panama Papers. Under a section headed Findings of Fact, the Attorney General’s filing states:
Genesis Mining offers mining contracts for six cryptocurrencies: Bitcoin, Dash, Ethereum, Litecoin, Monero, and Zcash, each of which entitles an investor to…a “Mining Contract”…in exchange for investing in a Mining Contract, Respondent Genesis Mining engages in a certain amount of computational effort on behalf of the investors.
Genesis Ordered to Shut up Shop
The reason why the state’s Attorney General is filing the cease and desist then becomes apparent: “Genesis Mining continuously offered investment opportunities in Mining Contracts to South Carolina residents through its website.” It appears that Swiss Gold Global was selling the contracts on behalf of Genesis, but was not registered as a broker in South Carolina. This is illegal, the filing claims, because “investment contracts constitute securities, and an investment contract includes an investment in a common enterprise with the expectation of profits”.
U.S. residents are tiring of hearing that every crypto offering they touch constitutes a security. From ICO tokens to mining contracts, it seems that most investments have the potential to be interpreted as a security given that they’re purchased with the expectation of future profit. The Attorney General seems to have a prima facie case here, however, and Genesis Mining – should it contest the claim – may have its work cut out. It’s likelier that Genesis will focus its efforts elsewhere, for the loss of one U.S. state is inconsequential. But if other states were to follow suit, it could signal the beginning of the end for cloud mining contracts in the U.S.
For mining companies seeking to avoid having to register with the SEC – which is likely to be most of them – the smartest approach may be to avoid U.S. investors altogether. Moonlite, a project raising capital to construct mining datacenters in Iceland, is already taking that stance; U.S. investors are unable to participate in its token sale. Mining firms seeking investment, be it through cloud contracts or tokenization, may find their safest option is to omit U.S. states altogether.