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Cryptocurrency. CryptoStar Corp. v. 611890 Alberta Inc.
In CryptoStar Corp. v. 611890 Alberta Inc. (Div Court, 2023) the Divisional Court provides some insight into cryptocurrency 'mining', here with a contract for electricity and subsequent dealings:[4] CryptoStar is a cryptocurrency mining company that generates cryptocurrency using computer hardware that continuously runs complex algorithms. This continuous operation – “mining” – requires substantial amounts of electric power. Pursuant to the agreement between CryptoStar and the respondents (collectively, “Avila”), Avila was to build and commission infrastructure and equipment at sites in rural Alberta where Avila would generate power to supply to CryptoStar. CryptoStar was Avila’s first and only customer for electric power. All of Avila’s funds, lands, and assets are in Alberta.
The Agreement
[5] On April 17, 2020, following from a letter of intent dated April 3, 2020, CryptoStar and Avila entered into an original version of the Agreement. On April 12, 2021, the parties executed an Amended and Restated Power Supply Agreement.
[6] In s. 2.1 of the Agreement, Avila agreed to provide CryptoStar with power upon the payment by CryptoStar of USD $1,481,010 (plus tax) per 10 MW of power (an “Upfront Payment”). Each Upfront Payment included: (i) the costs of “prepaid power” for the “first 6 months of supply”, after which CryptoStar was required to pay for power, invoiced monthly in advance; and (ii) the cost of “commissioning the required infrastructure and equipment.” The Upfront Payments did not include the cost of building the containers required to host CryptoStar’s equipment (the “hosting containers”).
[7] As found by the motion judge, there is no express requirement in the Agreement that Avila segregate or hold the Upfront Payments pending the provision of prepaid power: “[i]n fact, the Agreement is explicitly structured so that Avila can access capital from the Upfront Payments to build infrastructure for power generation facilities.” As the motion judge explained, “[t]his reflects that, as both parties understood, prior to the Agreement Avila had no power generation business or infrastructure of any kind, such that power plants would have to be built in 10 MW increments.”
[8] Section 2.8 of the Agreement states that, in the event Avila fails to provide power within 120 days pursuant to s. 2.1(d), CryptoStar has the right to demand repayment of the Upfront Payments, “other than expenses actually incurred and paid by Avila for infrastructure and equipment.”
Dealings Between the Parties Under the Agreement
[9] Owing to CryptoStar’s financial circumstances, Avila agreed to allow CryptoStar an indulgence whereby Avila would supply power in three tranches of power totalling 4 MW, rather than the 10 MW contemplated in s. 2.1 of the Agreement. CryptoStar made the Upfront Payments for these smaller tranches between September 2020 and July 2021.
[10] CryptoStar then requested an additional 10 MW of power, but could not immediately afford the entire Upfront Payment. Avila agreed that CryptoStar could pay for the 10 MW in two instalments. CryptoStar paid for 5 MW of power, rather than the 10 MW for which it asked and was invoiced.
[11] In total, CryptoStar paid Avila USD $1,332,819 plus GST for 9 MW of power. For its part, Avila purchased generators, turbines, transformers, breakers and cabling, as well as housing containers. Aviva built a 3.5 MW power plant that was commissioned and operated at the “4-20 site” in Alberta until the site shut down in December 2021. CryptoStar received and consumed at least CAD $216,141 of power from the power plant at the 4-20 site.
Treatment of the Upfront Payments
[12] CryptoStar transferred all the Upfront Payments it made to Avila’s general bank accounts. Avila’s evidence – which the motion judge described as “essentially unchallenged (subject to the legal argument...)” – was that these funds were then co-mingled with Avila’s pre-existing funds, and that the co-mingled funds were used to pay for all of Avila’s operating expenses, including the expenditures in connection with the power generation business.
[13] The motion judge found that Avila did not and was not contractually obliged to set aside or hold the Upfront Payments in cash. Avila used the funds to defray the capital costs of building the power plants. The Upfront Payments were not held in a segregated fund. The motion judge accepted the evidence of Avila’s controller that the Upfront Payments were indistinguishable from the other funds with which they were co-mingled “from the moment they were deposited into Avila’s general accounts.” The motion judge found “inasmuch as the Agreement did not place any restrictions on the use of the Upfront Payments, Avila could and did use the funds as it saw fit, and did not track the trajectory and depletion of these payments from the general bank account.”
[14] The motion judge found that the funds that Avila spent to install and generate power had to be incurred regardless of the source of revenues received. These were booked to the “allowance for expenditures” for the project. CryptoStar was credited for its power consumption in the first six months of supply and was not to be charged per kWH over that period. Therefore, for revenue recognition purposes, Avila accrued the Upfront Payments as a liability in the form of “deferred revenue.”
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