The Securities and Exchange Commission (SEC) warned the public against investing in cloud mining schemes in an advisory released on Monday, April 10. The commission said any transaction related to cloud mining should be duly registered with the agency, and companies engaging in this business should have the appropriate licenses and permits.
Cloud mining is a scheme that allows investors to mine for cryptocurrencies such as Bitcoin without owning and operating powerful computers that run distributed verification processes to validate transactions. The Bitcoin network, for example, compensates miners by releasing new bitcoins to those who provide the processing power to secure the decentralized public ledger that lies at the heart of how cryptocurrencies work.
In a typical cloud mining scheme, investors rent these powerful computers from cloud mining companies, pay for electricity needed to run them, and split the cryptocurrencies earned with the owners of the powerful computers.
Since the SEC has yet to issue a permit to these companies, it discouraged the public from dealing with them. “The public is hereby advised to STOP INVESTING in these kinds of unregistered investment activity and to take the necessary precautions in dealing with these cloud mining companies,” the SEC said.
The SEC released the following guidelines to help the public identify cloud mining companies, both local and foreign:
1. They require registration of an online account in a website or a mobile platform;
2. They require the payment of an initial fee or investment either in fiat currency or cryptocurrency to avail of their offered mining contracts;
3. They promise to pay the investor daily or weekly mining proceeds, usually equivalent to a percentage of the initial fee or investment, directly to the latter’s cryptocurrency wallet or fund account; and
4. They offer affiliate commissions for every recruit that registers and invests using the referring investor’s link.
Operating largely online, cloud mining companies allow investors to rent the capacity of their data centers for purposes of mining for cryptocurrencies. They offer contracts in the cloud, receive payments via credit cards or other online systems, and promise to share the cryptocurrencies generated with investors.
Revenues in cloud mining depend on the exchange rates of cryptocurrencies and the processing capacity of the cloud mining company’s computers. An online calculator run by Hashflare, one of the popular cloud mining services providers, shows than an investment of $100 will yield gross earnings of $140.6 to $179.6 after a year.
However, the net yield is only $34.0-$73.1 after deducting maintenance and electricity fees, resulting in net investment returns of 34 to 73 percent. This estimate was based on Bitcoin exchange rate as of April 12, 2018.
Cloud mining, however, is fraught with risks. Many criminal scammers utilize cloud mining to encourage investors to send them money, and then just shut down the website and run off with the investors’ earned cryptocurrencies afterwards.
That is why the SEC warned unregistered cloud miners targeting investors in the Philippines that they could face criminal prosecution. “Since this scheme involves the sale of securities to the public, the SRC (Securities Regulation Code) requires that the said securities offered are duly registered and that the appropriate license and/or permit to sell securities to the public are issued to the corporation and/or its agents, pursuant to the provisions of Section 8 of the SRC,” the commission said.
The SEC is encouraging anyone who has information about these entities to inform the Enforcement and Investor Protection Department (EIPD) at telephone number (02) 818-6047.
Pauline Macaraeg is Entrepreeur PH's data journalist. Follow her on Twitter @paulinemacaraeg