In the Kentucky Mountains, a Bitcoin Mining Fantasy Became a Horrific Reality.

During a period of high demand for bitcoin, small industrial facility owners in Kentucky formed crypto mining collaborations with Chinese firms. Then everything went wrong.

AT THE END of a cul-de-sac that ascends from the small town of Jenkins, nestled in the Appalachian Mountains of Eastern Kentucky, there is a sizable warehouse topped with a mint green roof. It shares the area with several other businesses, but is otherwise encircled by a stretch of open fields and tree-covered hills. Inside, the warehouse is filled with towering stacks of racks loaded with computers—thousands altogether. However, none have ever been activated.

The warehouse is operated by Mohawk Energy, a firm co-established by Kentucky state senator Brandon Smith in 2005, initially aimed at restoring landscapes damaged by coal extraction. After remaining inactive for some time, Mohawk was revived in 2022 when Smith made an agreement with HBTPower, a firm previously owned by Chinese crypto exchange Huobi, which aimed to utilize the warehouse for a bitcoin mining venture.

As part of the agreement, Mohawk committed to upgrading its warehouse with the essential power infrastructure and fixing any malfunctioning equipment. In exchange, HBT would compensate Mohawk with a monthly hosting payment, a share of its mining earnings, and the related energy costs.

Smith expressed his hope that the agreement would produce tax income and provide employment for former coal miners, who could receive training as repair technicians. The coal sector left Jenkins ages ago, the resources exhausted, resulting in residents seeking employment. According to the most recent census data, over a third currently reside below the poverty threshold. “I found the concept of transitioning from one mining method to another appealing,” says Smith. “I believed that now in Eastern Kentucky, we are going to have our moment—we’ll make progress and contribute to the technological future.”

However, following a hopeful beginning, the connection between Mohawk and HBT deteriorated and ultimately collapsed. “Nothing has ever been activated.” “It’s an intriguing, nearly Willy Wonka-like environment when you step inside,” states Smith. “It has become a catastrophe.”

In November 2023, HBT filed a lawsuit in federal court, claiming that Mohawk violated its contract in multiple ways, such as not installing the necessary power infrastructure and obtaining specific power subsidies, as well as trying to sell the mining equipment. “Ultimately, the root of the ongoing conflict lies in Mohawk’s fundamental inability to meet its obligations, not just in a timely manner, but in many respects, not at all,” states Harout Samra, an expert in international dispute resolution at DLA Piper and HBT’s representative.

In response, Mohawk initiated a lawsuit against HBT, disputing the multiple reported violations and asserting that HBT owes over $700,000 for rent, labor, and fit-up expenses. The firm is also pursuing compensation for lost revenue during the contract period and the difficulty in securing a new tenant for the premises while the equipment is still present. “The filing indicates that Huobi has made a deal it now considers unfavorable and wishes to exit without settling the debts it owes.”

The legal dispute, still not settled, is merely one of many clashes between Chinese firms and the proprietors of industrial sites in rural America concerning unsuccessful bitcoin mining agreements. What appeared to facility owners in Kentucky as an unmissable chance to explore a new business avenue during a dormant period has transformed into a disaster. They assert that they have been burdened with unpaid hosting expenses and energy costs amounting to hundreds of thousands of dollars, facing limited avenues for retrieving the funds. The Chinese parties have been left just as dissatisfied. “HBTPower clearly expresses regret about how this opportunity has ultimately unfolded,” states Samra.

The bitcoin mining competition—a contest among computers to secure the opportunity to manage a group of transactions and receive a cryptocurrency reward—is primarily controlled by major corporations that possess and run large-scale operations. However, in 2021 and 2022, smaller operations started to emerge across the rural areas of the US wherever power was accessible, including in Kentucky. “Numerous small family-owned businesses started emerging,” states Phil Harvey, the CEO of Sabre56, a company that provides consulting on crypto mining ventures and runs its own operations. “Appalachia has consistently been a reliable source of energy.”

These little establishments were filling a void in the market. A prohibition on crypto mining in China has prompted companies to search for a new location for their numerous millions of dollars’ worth of mining gear. “Many affluent Chinese companies were impacted,” says Harvey. “With each minute these machines are out of service, they are incurring revenue loss.” At the same time, as the value of bitcoin surged—and so did mining profitability—mining companies and investor collectives started stockpiling significant amounts of bitcoin mining gear, according to Harvey, without thinking about potential deployment locations.

In a heated market, owners of mining rigs quickly entered hosting agreements with operators of small facilities, many of whom lacked experience and adequate skills, and who consented to set up the equipment and manage the mining operations for them.

However, the urgency with which these hosting partnerships formed, aiming to capitalize on bitcoin’s popularity, indicates to Harvey that many of the collaborations were doomed to fail. He states that there was insufficient due diligence carried out by both parties, delays in setting up facilities and installing equipment, and disagreements regarding payment terms, among other points of contention. “It’s a chain reaction where everyone ultimately gets irritated with one another,” states Harvey.

Although the American market turned out to be pricier and more complex than anticipated by certain Chinese companies, Harvey states that issues also emerged from the arrogance of facility owners, with some realizing they were in over their heads. “It’s no laughing matter to run a [bitcoin mining] operation, regardless of its size,” he states. “Just because dealing with the Chinese can be challenging, it doesn’t imply they are at fault.” I would argue that the blame is divided equally.

The legal firm representing Mohawk in its conflict with HBT, Anna Whites Law Office, has assisted several small facility owners in Kentucky with analogous legal issues involving Chinese partners. Attorney Anna Whites, founder of the firm, notes that the cases are distinct from the Mohawk situation but have a common element: “We observed a pattern where [companies connected to China] would import machines with unclear origins, heavily mine for three months, and then operate without settling the invoice,” she asserts.

A few of the cases were resolved outside of court; Whites cannot provide the specifics due to client confidentiality reasons. However, some still persist.

Biofuel Mining, a firm previously co-owned by Smith, is embroiled in legal disputes with two companies that Whites suspects are managed from China: Touzi Tech and VCV Power Gamma. Despite both being registered in Delaware, according to SEC filings, they operate in Mandarin and are unreachable at their provided US addresses, asserts Whites. “It’s quite common for foreign entities from various nations to acquire a temporary office to reduce oversight from US investors and government bodies,” she states.

In both scenarios, Biofuel asserts that the companies transported equipment from China to their hosting site in Eastern Kentucky, subsequently absconding with the generated bitcoin, while neglecting to pay hundreds of thousands of dollars in outstanding energy bills and hosting charges.

In early 2022, Biofuel reached an agreement with Touzi for $60,000, but it asserts that it has not received the payment owed to it under the deal, even after returning the mining equipment.

In the ongoing dispute with VCV, Biofuel obtained approval from the Martin County Circuit Court in Kentucky to sell the mining equipment, according to Whites, in order to recover some of the money owed (the amount has not been verified by her), but she asserts that no damages have been granted yet. She claims that VCV has ceased to reply to messages.

Biofuel has since vanished, driven out of the market by the unsuccessful hosting projects. “I truly lost my home—I lost it all.” “It destroyed me financially,” states Wes Hamilton, the ex-CEO of Biofuel Mining. “I’m really annoyed about the entire situation.”

Limited financial recovery alternatives exist for firms such as Mohawk and Biofuel. The situation becomes increasingly complicated, similar to the Mohawk case, when they are involved with what are known as special purpose entities. Since they are established by their parent companies for a particular business purpose, these entities do not have to worry about their long-term capacity to function in the US.

“It can definitely be more challenging to obtain damages from a non-US counterparty,” states Kim Havlin, a partner in the global commercial litigation group at the law firm White & Case. “There is undoubtedly a possibility that an entity not requiring a presence in the US may simply overlook the case.”

Even if the owners of the Kentucky facility prevail in court, obtaining any awarded damages might prove challenging. “A judgment is fundamentally a document.” “Any judgment must be converted into assets or cash to hold value,” states Havlin. If the other party does not pay and lacks US assets to pursue, it may not be feasible.

Nearly a year after the conflict started, the Mohawk case remains in legal limbo. In a setback for Mohawk, the presiding judge recently rejected its motion to dismiss HBT’s complaint, citing that it had not adequately supported its argument. The judge additionally moved Mohawk’s countersuit to arbitration, a setting for settling conflicts privately rather than in a public courtroom. According to Havlin, non-US entities often favor arbitration to “eliminate a home venue for either side.” “You cannot choose an arbitration seat in either country to establish a neutral environment.” A concurrent federal court session is scheduled for December to weigh the possibility of imposing an injunction on Mohawk, barring it from disposing of the remaining HBT equipment it holds.

Smith has abandoned the notion of regaining the entire sum he asserts is due to him. “We’re at a stage where it’s nearly absurd to be debating about reaching the break-even point,” he states.

In a September 2023 interview with PBS promoting the Mohawk Energy facility, Smith expressed his desire to demonstrate that not all businesses that entered Jenkins would leave the region. “I’ve been present at their ribbon-cutting ceremonies and then seen them depart.” “I want to take action to show that not everyone behaves that way,” he stated.

Following the breakdown of the relationship with HBT last year, Smith now confronts the possibility of Mohawk turning into yet another failed attempt. Due to the facility being inactive, the company had to let go of the former coal miners hired as technicians. (The number of people it employed is uncertain.)

The Mohawk facility may not have been destined to rejuvenate Jenkins in the manner Smith envisioned, regardless. “I believe that a rural community gains very little from a bitcoin mining operation.” “When it comes to creating jobs, it’s quite limited in many instances,” states Harvey, the consultant. “It’s definitely not the solution for a declining community.”

Despite this, Smith still holds hope for rescuing the crypto mining venture with a new partner. “I’m optimistic that this will be resolved as it should and that someone will step up to allow us to pursue the vision we had for this area,” he states. “I wish each day that perhaps a large corporation will recognize that there’s a site prepared for development in this region of the country.” Otherwise, Mohawk’s flirtation with bitcoin mining may turn into a warning story. “It was deeply painful to witness these families lose their livelihoods.” Smith states, “We were among the largest payrolls in Jenkins.” “It’s a further humiliation that I’m here debating in court.”