A Greenville-based cryptocurrency business led by a former gubernatorial candidate says a bankrupt vendor that provides high-powered computers vital to its operations is threatening to pull the plug unless it’s 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 provides a glimpse into the murky world of bitcoin mining, an industry that relies on thousands of computers to solve complicated math 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 provide computer equipment, known as “miners,” as part of its restructuring unless GEM agrees to renegotiate the agreements “with a materially 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 terminate or rework the deals, 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 hearing on May 22.
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 an attorney representing Core Scientific.
John Warren is CEO of Greenville-based GEM Mining. File
The bankruptcy filing stems in part from the shakeup following last year’s epic collapse of the cryptocurrency exchange FTX and the subsequent arrest of founder Sam Bankman-Fried on fraud charges. Bitcoin tumbled 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 far below their peak.
Core Scientific — which provides mining services for itself and clients at data centers in five states — also felt the brunt of soaring energy costs, with electricity to power and cool the company’s high-speed computers one of its biggest expenses. The company listed about $1.3 billion in debts and has obtained financing to reorganize its business.
Part of that restructuring is deciding which contracts to keep or unload.
GEM said it has repeatedly asked Core Scientific to either accept or reject its agreements so it either can continue under the same terms or find a new contractor. Core Scientific has refused to make a decision, GEM said in court documents, but instead has tried to get GEM to pay higher rates.
The collapse of cryptocurrency exchange FTX in Novemeber sent shocks waves through the industry. File
Copies of the contracts filed with the U.S. Bankruptcy Court show GEM paid more than $99 million in upfront costs to Core Scientific in 2021 to establish its mining operations. GEM also pays the Texas company a monthly fee. That service charge for next month totals nearly $1.3 million, according to court documents. In exchange, Core Scientific provides 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 is an executive with both businesses, serving as GEM’s partner for corporate strategy and as executive vice president for client services at Core Scientific.
Also, Core Scientific was announced in 2021 as the company that will provide blockchain technology to an “Agriculture Technology Campus” planned for Hampton County. Zeb Portanova, partner for strategic initiatives with GEM Mining, is the developer of the rural South Carolina project through his GEM Opportunity Zone Fund investment group.
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 started trading on the Nasdaq exchange in January 2022. It swung to a net loss of $2.15 billion last year from a $47.3 million profit in 2021.
Warren announced the launch of GEM Mining in late 2021, saying he and four other founding partners decided to form the privately held business as the bitcoin marketplace began taking off. The Upstate startup said it had raised more than $200 million from big institutional investors.
“We saw huge opportunities 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 the millions of other digital currency seekers worldwide.
The process begins 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 that’s 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 rates.
It’s more difficult 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 continually tries to guess the correct numbers. Harnessing tens of thousands of devices in unison, as GEM is doing, increases the likelihood of success.
