Mining and Hashrate Regulation – Guest Post

About the Author: Ethan Vera, is the CFO & Co-Founder of Luxor, a Seattle-based mining pool where he works on building strategies and platforms for miners to better sell their hashrate. Ethan has a background in financial services working in asset management at the Royal Bank of Canada and as an investment banker at Goldman Sachs.

Disclaimer: This article is solely for information purposes. This article has not been approved, reviewed, qualified or registered with any regulatory or governmental authority. This article should not be taken as legal, trading or investment advice. Readers should do their own independent research with the counsel of a legal representative. 

On April 8th, 2020, the Texas State Securities Board (“TSSB”) made a large ruling on hashrate in America. In a cease and desist letter to cloud mining company, Ultra Mining, the TSSB labeled computing power to mine cryptocurrency (“hashrate”) as a security. This follows a 2-year period since South Carolina’s ruling on Genesis Mining.

For people in the mining industry, it is clear that hashrate is not a security and more of a commodity that needs to be used before creating something of value, such as oil being used to power a car. However, this ruling has broader implications for mining companies in America that produce and convert hashrate to rewards on a daily basis. It is crucial that the American mining community works together, and with regulators on understanding this new type of commodity and the platforms miners use to convert hashrate to reward.

Using the Howey Test, regulators can determine if a miner/buyer of hashrate (“miner”) converting their hashrate on a platform is a security. After performing the Howey Test ourselves, we formed the opinion that cloud mining platforms are indeed a security, as properly ruled by the TSSB. We also believe that the other main conversion platforms, being PPLNS mining pools, PPS mining pools and hashrate marketplaces do not pass the Howey Test and are not securities. 

While the TTSB was correct that cloud mining companies have been offering unlicensed securities, it is incredibly important that regulators do not paint all platforms that help miners convert hashrate to reward as securities. Each platform is structured differently and must be assessed independently. This is vital to the survival of US-based mining. 

Let’s dive into the differences between the platforms. 

Mining Players

Miners are people who own specialized machines that produce hashrate. Hashrate is a form of compute power produced by customized hardware and used to solve mathematical problems. By itself, hashrate is not worth anything, it must be used to perform an action to become valuable. Much like oil powers cars, hashpower powers networks. So miners must find a platform to help them convert their hashpower into reward.

There are several platforms miners can use to convert their hashrate into reward. The four main platforms are cloud mining platforms, hashrate marketplaces, PPLNS mining pools and PPS mining pools. 

Cloud mining platforms, such as Ultra Mining, are platforms that buyers can use to purchase hashrate contracts. Buyers put in Bitcoin or another form of money and in return receive the guarantee of a certain amount of hashrate over a period of time. The hashrate is typically produced and controlled by the cloud mining platform. These companies typically give the buyer access to a wallet on their platform. As the hashrate gets used to mine, the wallet gets credited. Cloud mining platforms typically advertise their platform as a way for buyers to earn profits without the need for the CAPEX that is required in actual mining. Cloud mining platforms take a fee from the buyer of hashrate. 

Hashrate marketplaces, such as Nicehash, allow buyers and sellers of hashrate to come together and transact on a spot basis. Sellers of hashrate send their hashpower directly to the buyers which then have control over how to use that hashrate. The hashrate marketplaces take a fee on the buyers and sellers of hashrate. 

PPLNS mining pools, such as Slush Pool, are platforms that pool together miners’ hashrate and use it to mine blocks. Miners are not rewarded until the PPLNS mining pool finds a block. The amount miners are paid is based on how much hashrate they contributed to the PPLNS mining pool. PPLNS mining pools take a percentage of the overall reward as their fee.

PPS mining pools, such as Luxor, are buyers of hashrate. Miners sell their hashrate on a spot basis to the PPS mining pools. Miners are rewarded instantly, regardless of what happens with their hashrate. The PPS mining pools then take the hashrate they acquired and use it to mine themselves. PPS mining pools make money by paying a discount to what they think the hashrate is worth. 

What is a Security?

In America, the go-to test to determine if a transaction between a platform and a user qualifies as an investment contract (“Security”) is the Howey Test. This test and regulation falls under the scope of the Securities Exchange Commission (“SEC”) federally and also State regulators such as the TSSB.

If an investment is considered a security by the Federal or State regulators it means that the investment is subject to certain registration requirements. Almost all securities offered in the U.S. must be registered with the SEC.

Under the Howey Test, a transaction is a security if:

  1. It is an investment of money, and;
  2. The investment of money is in a common enterprise, and;
  3. Reasonable expectation of profits derived from efforts of others

Investment of Money – includes USD, fiat, Bitcoin and any other form of currency/digital asset.

Common Enterprise – Federal courts define a common enterprise as having either horizontal commonality or vertical commonality.  Horizontal commonality is the reliance of individual users’ fortunes to the fortunes of other users. Vertical commonality, focuses on the dependence of the user and the platform/third-party. 

Reasonable Expectation of Profits Derived from Efforts of Others – The final test examines whether any expected profit coming from the investment is largely or wholly outside of the investor’s control. If the investor’s own actions dictate whether an investment will be profitable, then that investment is probably not a security. When the platform provides essential managerial efforts that affect the success of the investment, then this test is met.

Side-by-Side Tests

Howey TestPPLNS Mining PoolPPS Mining PoolCloud MiningHashrate Marketplace
The Investment of Money No
Miners contribute compute power (a commodity, not money)
Miners sell compute power (a commodity, not money)
Buyers use Bitcoin, USD or other currencies
Buyers use Bitcoin, USD or other currencies
Common Enterprise✓ Yes
The platform pools together resources from miners (horizontal commonality)
The miner only interacts with the platform but is also not dependent on the efforts and success of the platform to get paid 
Buyers are interwoven with and dependent on the efforts and success of those seeking the investment (vertical commonality) 
The buyer is not tied to the other users on the platform or the marketplace itself for success
Reasonable Expectation of Profits Derived from Efforts of Others Yes
Miners rely on the pool’s efforts to get rewarded for their investment
Miners sell their hashrate on a spot basis and are not tied to the success of the platform 
Buyers don’t have full control over their hashrate, it is being managed by and relies on the platform
Buyers have full control over their hashrate, it is being managed by themselves
Is the Platform a Security?NoNo YesNo

After performing the Howey Tests on the various methods that miners can convert their hashrate to reward, it can be determined that cloud mining platforms are indeed securities. Buyers put in money into a common enterprise with the expectation of profits outside that are out of their control. 

From our understanding of the law, PPLNS mining pools do not fall under the security label given that users are putting in compute power rather than money. 

In our view, hashrate marketplaces and PPS mining pools are not securities given that miners/buyers are not tied to the platforms and their success is completely in their own hands.


Cloud mining platforms have generally been bad for the ecosystem, they have prayed on retail investors by overpromising investment returns. With the most recent ruling in Texas on Ultra Mining, it is clear that the mining industry is now on the regulator’s radars.

While cloud mining platforms are most certainly a security, it is critical that the regulators do not paint all platforms with the same brush. There are many other types of platforms that miners can use to convert their hashrate into reward that are not securities. 

The future of American Bitcoin mining is dependent on this. 

SEC Security Law:
TSSB ruling on Ultra Mining:
SCSC ruling on Genesis:
Slush Pool:

Disclaimer: The views, thoughts and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of MinerUpdate.