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Tales from the Crypto World 009 | He sold mining rigs for RMB, but took deposits in coins: 380 coins locked up for 540 days per machine

On the night of November 4, 2021, on the third floor of an office building on Xinlong Road in Minhang, Shanghai. A sheet of printer paper was taped to the glass door: “Company employees are working from home. Please call customer service if you need anything.” The door was locked from the outside. No one was inside.

That same night, police from Feng County, Jiangsu, raided locations in Shanghai, Wuhan, and Shenzhen at the same time.

They took away thirty-one people. They seized Ethereum, Tether, and FIL worth roughly 400 million RMB. The founder and chairman, Fang Jun, has not appeared in public since that night.

The fatal flaw was in the staking arrangement: mining rigs were sold for RMB, but deposits were paid in coins. Customers paid out money, while coins were locked on-chain. When prices rose, the two seemed like the same thing. When prices fell, the principal was at risk.

The company sold three kinds of products: complete rigs, hosting, and cloud computing power sold by the terahash. The people who bought cloud computing power had it easiest: they never even laid eyes on a machine case. Their contracts said “computing power”; the coins locked on-chain were the deposit. They had no idea what the machines even looked like.

Filecoin divides hard drives into sectors, each 32 GiB. To write data to the chain, miners first have to pledge coins—around 0.16 FIL per sector. A machine rated at 96 TB had 64 TiB of effective storage, split into more than 2,000 sectors, with over 300 coins locked up. Sectors default to a 540-day term; the coins are returned only when the term ends.

What gets returned is coins, not money. The money is gone. So what is that contract in the customer’s hands worth? A receipt that says “computing power.”

They didn’t pay out all the mining rewards, either. Twenty-five percent of the reward for each block was paid immediately; the remaining seventy-five percent was released gradually over 180 days. That’s how the money got locked up. Trapped on both ends.

In April 2021, one FIL was worth $238. More than 300 coins locked on-chain were worth over 400,000 RMB—about three times the cost of a machine case and hard drives of the same specifications. The metal was worth little. The deposit was what mattered.

Many people thought this business made money on the markup on hard drives. But you only see the truth when you look through the on-chain ledger: the money came from the exchange and lockup process. The better the market, the more that process cost. That was all there was to it.

The price peaked on April 1, up tenfold from the start of the year. At the time, high-capacity hard drives were sold out across China. JHICC publicly warned of an SSD supply crunch, and in May, A-share stocks with even a tenuous connection to hard drives surged. Everyone was scrambling to buy.

Also in April, Star Alliance announced that it would jointly build a big data industrial park with the Fuzhou High-Tech Zone. The project had a total investment of 8.5 billion RMB and covered 150 mu.

Four months earlier, the Fuzhou High-Tech Zone’s industrial fund had invested nearly 100 million RMB in its Series A round. Look through the fund’s ownership structure, and its shareholder was the High-Tech Zone’s Finance Bureau.

When the government fund came in, it looked like the company had already made it.

Its own website claimed it had more than 200 IDC data centers around the world. Founded in June 2019, it received its first angel investment of several million RMB in January 2020, and within two and a half years became one of Filecoin’s biggest mining rig sellers. Fang Jun owned 44% of the company.

The dates in the announcements were particularly interesting. I went through them one by one.

The day after the arrests, the company issued an announcement saying that money paid by a suspect during purchases was suspected to be illegal proceeds, and that at the police’s request, it had handed over its technical accounts and access permissions. Most employees returned to work after cooperating with the police. That same day, the company issued another announcement saying the media had read too much into the situation.

On November 6, a notice from the Xuzhou Public Security Bureau was posted online, classifying the case as an online pyramid scheme.

Two announcements, one day apart.

There’s another date, too. The Fuzhou High-Tech Zone fund exited as a shareholder on October 13. That was twenty-two days before the police came through the door. Twenty-two days.

The people who had been waiting in line for machines were left with rigs gathering dust in warehouses and coins locked on-chain. The paper was still taped to the company’s door. The only thing they actually got was coins. Almost everything was lost. These days, all that’s left of the mining rig business is selling the machines by weight.

Fang Jun was later sentenced to several years, but I couldn’t find a verifiable judgment through public channels. Records in pyramid scheme cases aren’t made public, so no one can say for sure how this case ultimately ended.

FIL is now at $1.03. Down 99.5% from $238. There’s still volume on the order book.

$FIL $AR $BTC #币圈往事 #Filecoin #IPFS #MiningRigs

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