International law firm McDermott Will & Schulte represented Block Mining, Inc. (Block Mining), a Bitcoin (BTC) miner, in winning summary judgment against a hosting site that locked its doors and refused access to the BTC mining machines right before the BTC-halving. US District Judge James Robart of the US District Court for the Western District of Washington concluded that Hosting Source LLC was liable for unlawfully withholding Block Mining’s BTC mining rigs and diverting BTC rewards for themselves.

The BTC blockchain is controlled by its underlying smart contract. The smart contract requires BTC miners to participate in the protocol, lending their computing power to solve puzzles which effectuate transactions on the BTC blockchain. It is this mining activity that provides the necessary compute power for the BTC blockchain to work. BTC miners are rewarded BTC for lending their computing power to solve those problems. A significant event occurred in April of 2024, called the “halving.” At the “halving,” BTC rewards become more difficult to win as new BTC is “mined” at a slower pace. As a result, there was a race in the market for BTC miners to mine as much BTC as possible prior to the April 2024 “halving.”

This dispute centered on a BTC mining colocation agreement pursuant to which Hosting Source agreed to provide a physical location, electrical power, and internet connectivity for Block Mining’s BTC mining rigs. In exchange, Block Mining agreed to share a portion of the BTC mining rewards with Hosting Source.

There were ongoing disputes concerning whether Hosting Source was providing the necessary electricity and maintenance of Block Mining’s rigs which came to a head right around the BTC halving event. Hosting Source had been reducing power to the mining rigs and eventually shut off Block Mining’s remote monitoring access so that it could no longer monitor its rigs remotely. Hosting Source then began diverting the mined BTC to itself, effectively stealing Block Mining’s property, and refused to surrender Block Mining’s rigs. A team from Block Mining traveled to Hosting Source’s facility in central Washington only to find it locked. Despite many attempts, Block Mining could not get access to the facility or its rigs. As a result, Block Mining filed the lawsuit in early March 2024, about a month before the most recent BTC halving event.

McDermott moved for summary judgment, arguing that Block Mining deserved judgment before any trial and offered expert evidence from J.P. Brennan of JS Held establishing that Hosting Source used Block Mining’s rigs to mine BTC for itself.  The Court agreed. “The agreement unambiguously establishes that the rigs were the exclusive property of Block Mining,” Judge Robart wrote. “The court concludes that Block Mining has shown that it is entitled to judgment as a matter of law that Hosting Source converted Block Mining’s Rigs by unlawfully retaining them.” While the defendant Hosting Source argued that there was a limitation of liability tied to a few months of fees paid, the Court concluded that Block Mining was entitled to the market value of the BTC the mining rigs earned and Hosting Source with held, priced September 2024.

“Crypto is not the Wild West anymore. Participants in the BTC mining industry can’t just ignore contracts, lock their doors, use other’s rigs to mine BTC for themselves, and think nothing bad is going to happen to them” said McDermott’s Head of the FinTech & Blockchain Group Joseph Evans. “We are pleased that the Court saw through the defendant’s meritless defenses and awarded summary judgment for one of McDermott’s key BTC mining clients.”

The court’s ruling clarifies the rights of parties under BTC mining colocation agreements. These agreements are very common as BTC mining companies scale their operations. McDermott’s crypto team routinely represents BTC mining companies and related service providers around the world.

The McDermott team was led by partners Joseph Evans, Eli Berman, and DC Wolf, with assistance from associates Becca Meyer, Patrick Kennedy, Gabrielle Siroonian, and Joseph Aminov. McDermott’s FinTech & Blockchain Group is the industry’s largest team in which every member works exclusively on blockchain matters. Its experience dates back to 2012 and they are ranked Band 1 by Chambers in Crypto Asset Disputes.

The case is Block Mining Inc. v. Hosting Source LLC, No. 2:24-cv-00319.

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