Because Bitcoin is firmly classed as a commodity rather than a security, those of a “Bitcoin maximalist” mindset have sometimes seen the crackdown as both a tactical and moral win, and In broad strokes, Bitcoin and similarly structured proof-of-work tokens are commodities rather than securities because there is no central entity that collects capital in exchange for a promise of future returns are two quotes from the original article that illustrate the importance of understanding the difference between cloud and hosted mining when it comes to avoiding SEC risk.
The SEC’s ongoing efforts to rein in the crypto industry have been met with approval from some Bitcoiners, as Bitcoin is classed as a commodity rather than a security. This means that there is no central entity collecting capital in exchange for a promise of future returns. As a result, Bitcoin dominance, or Bitcoin’s share of total crypto market value, has been steadily increasing.
However, Bitcoin miners are not completely free from SEC risk. It is possible to wrap commodity Bitcoin in arrangements that are securities contracts. The SEC has been targeting Bitcoin miners since 2015, specifically cloud miners. Cloud mining contracts offer customers a certain amount of computing power for a set periodic cost, which is seen as a security since it implies a performance standard for the management of a pooled resource. This model has been known to invite fraud.
Hosted mining is an improvement on the cloud mining model. Instead of selling hashrate, hosted miners sell specific, individual machines and charge monthly service fees for remote management. Customers can monitor their individual machines in real-time, leaving less room for deception and mismanagement.
The distinction between cloud mining and hosted mining is similar to the distinction between different models for offering third-party staking services for proof-of-stake systems. Kraken paid a small SEC fine and agreed to shutter its staking service, while Coinbase has pledged to fight classification of its staking service as a securities offering.
The most extreme example of how to turn Bitcoin mining into a securities contract is Celsius, the fraudulent crypto “bank”. Celsius was engaged in highly risky speculation on a chaotic mishmash of assets and ideas, one of which was a small mining operation in Texas. This illustrates how something innocuous can become a fraught securities contract.