Crypto investors – Don’t be fooled!
An interesting press release circulated around cryptocurrency and blockchain focused online media a couple months ago. The press release, which can be read
here
at Coin Telegraph reports that this venture had obtained “official permission” for operation of a crypto mining facility, or “farm”, from the Chinese government, and this is claimed to be the first operation ever granted such permission in China.
The post goes on to display various documents and certificates which are said to be official licenses for the operation of a cryptocurrency mining company. The press release claims the company has already raised over $50 million USD in private funding and says the farm will operate up to 2500 GPU mining machines. The post closes with an innocuous mention of a token sale to take place May 27, 2018.
Having an interest in cryptocurrency and China blockchain law, our China lawyers wanted to get to the bottom of this operation and what kind of “official permission” this crypto mining farm actually has. The first suspicious was that this supposed mining operation bore some similarities with the
Sinoforest
investment scandal a few years back. We post our findings here because we believe the cryptocurrency and blockchain technology and investment community will have interest in our findings.
Firstly, the company advertised in the press release does indeed appear to be a real Chinese company, registered in December 21, 2017. The above image is the company’s official Business License. The company is indeed registered in Xinjiang as claimed by the press release. This is actually more surprising to a China lawyer than it may appear to be at first glance. We have dealt with many cases in which a Chinese company promoted or advertised to foreigners simply doesn’t exist as a real company at all.
The next interesting thing about this company is its registered “Business Scope”. Every China company has a registered official Business Scope. This is a list of business activities which the company is officially approved to undertake and perform. A company may not legally perform any activity not mentioned within that company’s official “Business Scope”. So, if a company’s Business Scope contains “manufacturing and sales of cars” that company would be able to manufacture products, and sale those products directly to consumers, but it would not be able to operate a retail store selling car parts.
Here is a direct Chinese to English translation of the registered business scope for the company mentioned in the Mine Project press release:
Network technology development, communication network engineering design, construction and maintenance; cloud computing, big data, blockchain information system integration service; software development; game software design and production; digital animation production; information system integration services; Information technology consulting services; computer technology development, technical services; data processing and storage services; marketing planning; advertising design, production, agency release; electronic products, Import and export of goods and technology.
What’s missing here? Critically, “cryptocurrency” and “mining” activities are missing from the Business Scope. This suggests first of all that any crypto mining activities carried out by this company are not approved by the Chinese government as claimed but are in fact illegal and a violation of the representations this company made to Chinese authorities which it was being established. If that’s not a red flag, we don’t know what is!
We mentioned the press release included images of the certificates obtained by this “Mine Project”. But the certificates posted are in Chinese, and most readers of the release will simply see an official looking document and may not stop to understand what the Chinese language means. Let’s take a closer look.
The image above is a photo of an Environmental Impact Evaluation report. Such an environmental impact report is a general requirement of the Chinese government in connection with any proposed construction project. Interestingly, the photo provided only refers to construction of a “Data Center”. As readers will likely know, a Data Center is more like a server farm operated by a large company which stores data in connection with its users, customers and projects.
It is important at this stage to note that operation of a “Data Center” requires separate approval from the Chinese Ministry of Industry and Information Technology (MIIT) as well as a permit to operate a telecommunications business. Our China lawyers have confirmed directly with MIIT that there is no such permit issued to the company mentioned in the press release. Therefore, even though the Business Scope includes terms which are similar to the operations of a “Data Center” and the Environmental Impact report explicitly mentions “Data Center” the company is not legally permitted to legally operate a “Data Center”.
What appears to have happened here is that the company obtained approval within it’s Business Scope for various types of business activities which would be required by a Data Center, but, did not go the extra step of obtaining final approval to operate a Data Center, but instead plans to operate a cryptocurrency mining operation. Interesting to note that a crypto mining operation at a superficial level would very easily resemble a Data Center.
Not only would this mean the company violating its Business Scope by engaging in unapproved activities, it is likely in violation of Chinese law as regards mining and trading of crypto currency. As the Crypto community well knows, China has implemented several policies restricting use of Crypto currencies and prohibiting operations of crypto currency exchanges or offering an ICO. There is an important distinction here, has China has outlaws most functions relating to cryptocurrency, but blockchain technology itself remains officially encouraged.
Let’s take this a step further. Every China lawyer knows that any website hosted in China must obtain an Internet Content Provider (ICP) license. The details of the ICP license must be included on the webpage and viewable by internet users. However, after investigation, our team finds no ICP license registration number of the Mine Project website. This suggests that the website is hosted outside of China, which would be strange for a Chinese company offering a service which has been duly approved by the Chinese government.
One of the documents posted in the Press Release is an agreement with “ETHPool, Technology Labo Inc. This agreement, in Chinese only indicates that the Xinjiang company will cooperation on the construction of a cloud computing data center. Nothing about cryptocurrency mining, Ethereum tokens, or token sales. Interestingly, the contact details on the Mine Project webpage for ETHPool, Technology Labo Inc. appear to be in the Philippines.
As if all that isn’t enough, we wanted to take a look at the management team, as advertised on the Mine Project website.
This management team would be a joke if it was not so clearly a fraud. The President has been supposedly been involved in Blockchain projects for over 6 years, but his bio does not mention any successful projects by name, moreover 6 years is an eternity in blockchain. Any successful projects would be well known by now. Mr. Manahan wishes to create a world in which “all consumption is replaced by mining”… really?
Mr. Manahan aside, the remainder of the management team does not inspire confidence. Mr. Rint advertises his “extensive life experience” and 8 years of sales as his key qualifications. Mr. (Ms.?) Betco’ s qualification includes being a Casino dealer for six years. Mr. Bagui is perhaps the most qualified of the group boasting 9 year of web development, again, not listing any successful projects or representative work. Mr. Padama specializes in “knowledge and development”. What exactly does that mean?
Each of these personnel appear to be based in the Philippines with no clear connection to the company registered in Xinjiang China. It seems a reasonable guess would be that this Philippines based team is managing the Xinjiang company via the ETHPool, Technology Labo Inc. company. But if that’s the case, what is the connection between the management team presented on the website and the Xinjiang company advertised to run the crypto mining farm?
As it turns out, the Xinjing company is owned by two Chinese companies, which each own half of the company. These companies are Hangzhou Jingge Internet Technology Co.,Ltd. (杭州井歌网络科技有限公司), and Xinjiang Tianju Huiyuan Investment Management Co.,Ltd. (新疆天聚汇源投资管理有限公司). No connection is found between these two Chinese companies, and the management team listed on the project website.
After all is said and done, it appears based on our investigation that this cryptocurrency mining company is not in reality the first of it’s kind approved in China but is more likely operating an illegal business under cover false documentation. Token sales were advertised to commence on May 27, 2018, but a search of major cryptocurrency news sites does not give any indication that there has been any progress or press release on token sales. The project’s website is promoting private sales of tokens, however after analysis from a China law perspective, we would be very hesitant about such an “investment”.