A Greenville-based cryptocurrency business led by a former gubernatorial candidate says a bankrupt vendor that supplies high-powered computers critical to its operations is threatening to pull the plug unless it is paid more money.
GEM Mining has asked a judge to intervene in its dispute with Austin, Texas-based Core Scientific Inc., which filed for bankruptcy protection in December.
The legal battle offers a glimpse into the murky world of bitcoin mining, an industry that relies on thousands of computers to solve complicated mathematical equations to earn the world’s most valuable form of crypto.
GEM said in court documents that data processor Core Scientific has repeatedly threatened to reject contracts to supply computing equipment, known as “miners”, as part of the restructuring unless GEM agrees to renegotiate the contracts “at a significantly higher hosting rate”.
During a conference call last month, Core Scientific executives said they would “intentionally shut down” GEM’s equipment by April 3 if GEM did not agree to end or rework the agreements, according to court documents.
Judge David Jones called the allegations “troubling” in an April 13 order requiring Core Scientific to provide uninterrupted service to GEM pending a May 22 hearing.
John Warren, GEM’s president and a 2018 candidate for South Carolina governor who previously founded Lima One Mortgage, did not respond to requests for comment last week. Neither did a lawyer representing Core Scientific.
John Warren is CEO of Greenville-based GEM Mining. File
The bankruptcy filing stems in part from the turmoil following last year’s epic collapse of cryptocurrency exchange FTX and the subsequent arrest of founder Sam Bankman-Fried on fraud charges. Bitcoin fell from a 52-week high of $42,945 to a low of $15,516 in the wake of the scandal. Prices have since stabilized at around $30,305, but are still well below the peak.
Core Scientific — which provides mining services for itself and clients at data centers in five states — also felt the brunt of high energy costs, with electricity to power and cool the company’s high-speed computers one of the biggest expenses. The company listed about $1.3 billion in debt and has received financing to reorganize its operations.
Part of that restructuring is deciding which contracts to keep or offload.
GEM said it has repeatedly asked Core Scientific to either accept or reject the agreements, so it can either continue under the same terms or find a new contractor. Core Scientific has refused to make a decision, GEM said in court documents, but has instead tried to get GEM to pay higher prices.
The collapse of cryptocurrency exchange FTX in November sent shockwaves through the industry. File
Copies of the contracts filed with the US Bankruptcy Court show that GEM paid more than $99 million in upfront costs to Core Scientific in 2021 to establish the mining operation. GEM also pays the Texas company a monthly fee. That service charge for the next month totals nearly $1.3 million, according to court documents. In exchange, Core Scientific is providing 10,400 computers dedicated to mining bitcoin, or about a third of GEM’s total fleet, according to the company’s website.
There are other ties between the two companies. Russell Cann heads both businesses, serving as GEM’s corporate strategy partner and as executive vice president of client services at Core Scientific.
Core Scientific was also announced in 2021 as the company that will provide blockchain technology to an “Agriculture Technology Campus” planned for Hampton County. Zeb Portanova, strategic initiatives partner with GEM Mining, is the developer of the rural South Carolina project through his investment group GEM Opportunity Zone Fund.
Core Scientific is among the largest North American providers of blockchain infrastructure, software and services. The company went public through a merger and its shares began trading on the Nasdaq stock exchange in January 2022. It swung to a net loss of $2.15 billion last year from a profit of $47.3 million in 2021.
Announcing the launch of GEM Mining in late 2021, Warren said he and four other founding partners decided to form the privately held business when the bitcoin market began to take off. The Upstate startup said it had raised more than $200 million from large institutional investors.
“We saw tremendous opportunity with our connections to mining,” Warren told The Associated Press at the time.
Bitcoin mining can be lucrative, but it requires large amounts of computing power and electrical power to compete with millions of other digital currency seekers around the world.
The process starts when a unit of bitcoin is transferred from one owner to another. Since there is no central regulatory authority, validating the transaction involves guessing a random 64-digit hexadecimal number generated by the system. The first miner to find the answer gets to validate the next block of transactions on the “ledger,” known as the blockchain, and is compensated with 6.25 Bitcoin – nearly $190,000 at current market prices.
It’s harder than it sounds. The odds of solving the challenge are about 1 in 22 trillion, and the competition is fierce. That’s why the industry uses fast, powerful computers with special software that continuously tries to guess the right numbers. Leveraging tens of thousands of devices in unison, as GEM does, increases the likelihood of success.
