After the U.S. Securities and Exchange Commission’s repeated insistence to consider initial coin offerings (ICOs) as securities, the Attorney General of South Carolina seemingly has the same case, but against cloud mining contracts.
Primer on Cloud Mining Contracts
A background to cloud mining contracts: these contract providers allow their customers to buy mining or “hashing” power from their own set up. Then, users can leverage physical mining set up that these third party providers have sold them according to the contract, and earn a portion of the profits.
This arrangement does not require any interested party looking to profit from Bitcoin mining to purchase heavy equipment and have it installed at a physical location, but just by paying a variable amount (depending on the currency one chooses to mine and what hashing power they desire), interested people can use the cloud service and potentially earn money.
Okay, so why does South Carolina think that cloud mininng contracts are equal to securities?
Now that cloud mining has been defined, here is what happened.
Genesis Mining is one of the most popular cloud mining services with its datacenter operating from Reykjavik, Iceland. It provides services all over the world, but was very recently told through a cease and desist order from the Attorney General of South Carolina’s office to immediately stop its operations within the U.S. State.
The reason provided by the Attorney General’s office was that the kind of “investments” against profits – or cloud mining contracts – that Genesis Mining was offering through its website and which were fulfilled by its partner firm, Swiss Gold Global, would identify as securities.
The Attorney General defined that Swiss Gold Global was not registered within the State to offer securities to its citizens, and thus could not operate within the State jurisdiction anymore.
Genesis Mining has not responded to the cease and desist order, because it does seem like that the Attorney General’s office is going through a textbook definition of “securities”. Securities are typically defined as investments that offer the individual who provides a contribution to be entitled to potential future profits. Since cloud mining contracts ask for investment and provide profits, Genesis Mining would have a hard time pleading its case if Swiss Gold Global was not registered to provide securities within the State of South Carolina.
The same would hold true for other States as well, which raises the concern that if they also go by the same approach, then they can practically eradicate Genesis Mining from offering its solutions to anyone in the U.S.
This is worrisome, because it alludes towards the possibility that the practice of defining almost every other cryptocurrency investment as a security would eventually bar U.S. citizens from participating in any such offers, no matter from where they are being operated (Genesis Mining is registered at a virtual address in China).