Crypto mining is the process by which new cryptocurrency is created and distributed. Transactions are verified using extensive networks of computers, known as “miners,” for cryptocurrencies such as Bitcoin.

Crypto mining has been around since 2009. Since then, a limited body of case law focusing on crypto mining has developed. Examining these cases is instructive for drafting agreements such as purchase and hosting contracts and mitigating litigation risks. In this article, we take a look at select disputes in crypto mining and provide the key takeaways.

Energy Company Failing to Meet Obligations

EZ Blockchain LLC v. Blaise Energy Power, Inc. (D.N.D. 2022), involved a dispute between a blockchain hosting company, EZ Blockchain LLC, and an energy services provider, Blaise Energy. The parties entered into an agreement for Blaise Energy to provide power to EZ Blockchain’s data center. EZ Blockchain rented space in the data center to customers’ miners. Under the parties’ agreement, Blaise Energy was obligated to generate sufficient power to meet EZ Blockchain’s needs.

EZ Blockchain alleged that Blaise Energy provided less than half of the agreed amount of power to the data center and terminated the agreement. Blaise Energy countered that EZ Blockchain’s termination was itself a breach of the agreement and that Blaise Energy should be entitled to its entire compensation under the agreement.

Blaise Energy then allegedly moved over 600 of EZ Blockchain customers’ crypto miners from the data center to its personal shop. When EZ Blockchain attempted to retrieve the miners, Blaise Energy blocked the shop entrance with a truck. EZ Blockchain alleged that Blaise Energy threatened to sell the crypto miners if it did not receive full compensation.

Early in the case, EZ Blockchain sought a temporary restraining order (TRO) from the court to force Blaise Energy to return the miners. The Court granted the TRO, and Blaise Energy returned some of the miners, but issues persisted. EZ Blockchain alleged that 34 of the miners still had not been returned. In response, Blaise Energy represented that it had returned all the miners held at the shop. The lack of regularly updated inventory records complicated efforts to ascertain the truth.

Before the case could be decided, the parties settled.

Takeaways

Minimum Power Level

• When contracting for energy services, make sure the agreement provides clear language regarding the minimum power level.
• It should also be determined how perceived violations of the minimum power level would be handled. A common remedy here would be for the non-breaching party to offer credits equivalent to a discount on the monthly rate for any downtime experienced beyond the agreed minimum power level.
• The agreement should also specify the conditions under which it can be unilaterally terminated.

Handling Mining Equipment after Breach

• The agreement should clearly define the procedure for handling mining equipment should one of the parties fail to meet its contractual obligations.
• Mitigate the risk of mining equipment being considered collateral by adding a clause specifying where the mining equipment should be kept or delivered in case of breach.

Keeping Regular Inventory

Both parties should regularly inventory all mining equipment. Often parties keep a detailed inventory only at the start of the working relationship. When problems arise, they find themselves arguing about whether certain inventory has been returned or not. Proper inventory management is also crucial when there are miners belonging to several companies in one facility. These issues can be addressed proactively by ensuring the inventory is always accounted for.

Failure to Deliver Miners and Information Needed to Prove Damages

Ethereum Ventures LLC v. Chet Mining Co. LLC (S.D.N.Y. 2021), involved Chet Mining failing to deliver miners to Ethereum Ventures, a mining company.

Ethereum Ventures had placed an order for miners with Chet Mining and made a down payment for the entire order. However, Chet Mining failed to deliver any of the mining computers and only provided Ethereum Ventures with a partial refund which amounted to about 4% of the amount it paid to Chet Mining.

Due to Chet Mining’s failure to provide the ordered miners, Ethereum Ventures had to purchase miners from another seller at a much higher price. Moreover, Ethereum Ventures received the miners much later than if Chet Mining had fulfilled its commitment on time.

Ethereum Ventures sued Chet Mining and obtained a default judgment. Ethereum Ventures was awarded a refund for the miners, reimbursement for the higher cost of the alternative miners, and compensation for lost profits due to receiving the alternative miners later than anticipated.

To establish lost profits, Ethereum Ventures provided a document showing the daily rates paid to Bitcoin miners from the hypothetical operational date (had Chet Mining delivered the miners on time) until the actual date Ethereum Ventures obtained miners from the alternative seller. Additionally, Ethereum Ventures provided the court with information on electricity costs and the anticipated daily profit after deducting expenses.

The calculation of expected profits involved multiplying the total number of miners by the daily hash rate of each miner, which represents its operating speed. This product was then multiplied by the publicly posted daily hash rate, representing the network speed at which the miner is connected. This information demonstrated the total revenue generated by the miners per day. Ethereum Ventures then subtracted the daily energy costs of running the miners to determine the expected profit.

Takeaways

Thorough Documentation

• Maintain thorough documentation of all agreements, transactions, and mining equipment.
• Document the energy costs associated with the miners. Keep in mind that fluctuations in actual costs should be documented as well. This information will be crucial in calculating any expected profits and demonstrating the financial impact of the other party’s breach.

Preserve Communications

Preserve all communications such as emails and text messages related to agreements and transactions. These communications often provide a timeline of when and how the issues arose and compounded.

Landlord Troubles

A recurring issue in crypto mining cases involves the landlord of the data center or miner storage facility – who is not a party to any of the agreements – taking possession of the miners, usually as collateral for the facility lessee’s late payments. This can lead to complications regarding miner ownership and payment obligations for power and other services.

In SMH US LLC v. 1110 Linwood Blvd LLC (W.D. Okla. 2023), SMH, a crypto mining company, entered into an agreement to provide a hosting company with miners. In return, the hosting company would provide hosting services in a warehouse owned by the landlord. Sometime after the agreement was signed, and without SMH’s knowledge, the landlord removed most of SMH’s miners from the warehouse.

According to SMH, the landlord informed it that the miners were being held as collateral due to a mechanic’s lien filed against the property stemming from the hosting company’s actions. SMH further alleged that the landlord intended to sell the miners to settle the mechanic’s lien. Consequently, SMH filed a lawsuit against the landlord.

Before the case could be decided, the parties settled out of court and the case was dismissed.

Takeaways

Identify Owner of Facility

• Prior to signing any agreements, identify who owns the land or facility where the machines and equipment will be stored. It could be that the other party does not own the facility and is concealing its status as a renter or mortgagee.
• If the hosting company fails to fulfill its obligations to the actual owner, you could ultimately have to compete against the owner to recover any damages from a delinquent hosting company.

Due Diligence on Company Financial Stability

Relatedly, do your due diligence when scoping out the financial stability of any company you plan on working with. In the crypto mining industry, the other company is likely working with several other companies. If problems arise and you’re facing damages and other losses, you might be out of luck if the company goes bankrupt or if its limited assets must be divided among all the other companies it has contracted with.

Identify Service Providers

Finally, identify each company that provides power or other services. It is best to clearly understand the ecosystem and all other parties your company will rely on to perform.

Hosting Service Provider Misrepresents Ownership of Facilities

Our firm is representing the plaintiff in the case BEEQB, LLC v. Uptime Hosting LLC (Cir. Ct. Miami-Date County 2023). In this case, Beeqb entered into an agreement with Uptime Hosting to provide its miners in exchange for sufficient electricity at Uptime Hosting’s alleged facilities. However, before signing the agreement, Uptime Hosting failed to disclose that it did not own the facilities; instead, the facilities were owned by their respective landlords.

This initial concealment foreshadowed subsequent issues, as the facilities soon experienced frequent power failures. Over the first three months, Beeqb’s miners operated for only a few days, culminating in a complete power shutdown just over three months into the agreement. Instead of attempting to remedy the issue or compensate Beeqb, Uptime Hosting failed to rectify the power outage, neglected to provide the contractual remedy for such an occurrence, and refused to return Beeqb's mining equipment, placing Beeqb in financial distress.

Beeqb then attempted to retrieve its machines. It sent demand letters to Uptime Hosting and the landlords, demanding the release of Beeqb’s miners and other mining equipment. It was revealed that the landlords were suing Uptime Hosting. Furthermore, Uptime Hosting had falsely claimed ownership of Beeqb’s miners and had used Beeqb’s machines to generate crypto in order to cover its debts to the landlords. Uptime Hosting had also sold some of Beeqb’s other crypto mining equipment.

Beeqb then sued Uptime Hosting. After the lawsuit was filed, Uptime Hosting and related defendants filed for bankruptcy, and Beeqb filed proofs of claim in the bankruptcy proceeding. The cases are ongoing.

Takeaways

Due Diligence on Prospective Partners

Before entering into any agreements, verify the financial stability of the prospective business partner and ensure there are no ongoing legal issues involving it.

Preservation of Records

In addition to a regularly updated inventory, you should also preserve the corresponding invoices for mining equipment, the customs information for mining equipment if it is being shipped from outside of the United States, and photos of the mining equipment being unpacked and set up.

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Heeding the recommendations above should go a long way in preventing disputes in your crypto mining business dealings or, if a dispute is underway, in protecting your rights.