In March 2018, the South Carolina Attorney General’s office surprised the cryptocurrency mining industry when it hit one of the largest cloud-based mining operations, Genesis Mining, with a cease and desist order. South Carolina claimed that the firm was offering unregistered securities and ordered Genesis Mining to stop selling its popular mining services to residents of South Carolina immediately. Genesis Mining agreed to comply in a press release issued shortly after.

For those who are unfamiliar, Genesis Mining offers cloud-mining services whereby customers can lease a certain amount of computer hash power for a specific period of time and receive the mining rewards generated from that activity. According to the cease and desist order, these services qualify as a “security” because it involves the “investment of money in a common enterprise with the expectation of profits to be derived from the efforts of a person other than the investor.”

The majority of securities lawyers I spoke to state that South Carolina’s claim is tenuous because there does not appear to be any “common enterprise” among Genesis Mining’s various customers, as each customer receives different returns depending on the services they purchase and the date they are purchased. But as Crypto Law Insiders know, regulatory and law enforcement actions are not always fair or consistent.

However, regardless of its validity, the cease and desist order is consistent with a recent trend by State and federal regulators to lump all crypto-related activity together as unregistered securities. For now, the primary losers are the residents of South Carolina who can no longer utilize Genesis Mining’s services. However, if other States follow South Carolina’s lead this could severely impact the cloud-based mining industry as a whole, either causing them to register their services as securities which would be costly, time-consuming and likely make the services unprofitable or pull out of the US market altogether.

What does this mean for Crypto Law Insiders?

As entrepreneurs and investors in the crypto ecosystem, we should neither ignore, nor overreact, to the actions of any one regulatory agency. As we’ve discussed before, regulators have constraints. They are not free actors. Even if the South Carolina Attorney General’s office wants to stop cloud-based mining operations like Genesis Mining from operating in its State, it may not be able to do so.

There are other constituents that have interests in what happens. Instead, we should focus on what the regulatory agency can accomplish. Don’t be surprised if Genesis Mining is shut down today, but another is permitted to open tomorrow. The path to regulatory certainty in crypto is not linear. Our goal is to stay nimble and not read too much into any single data point.

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