President-elect Donald Trump visits a cryptocurrency-themed bar called Pubkey in the West Village on Sept. 18, 2024 in New York City. Trump embraced crypto after the young and wealthy community that invests in cryptocurrency supported his campaign. (Spencer Platt/Getty Images)

Republican Sen. Brandon Smith of Hazard was an early booster of cryptocurrency mining to create jobs and use excess electricity as Kentucky’s more traditional coal mining industry declined.?

Smith successfully led an effort in 2021 to pass tax breaks to incentivize cryptocurrency miners to locate in the state. The next year his company, Mohawk Energy, began turning an industrial park warehouse in Letcher County into a space where crypto companies could put thousands of computers to “mine” Bitcoin. In Smith’s vision, former coal miners, veterans and other locals would be hired and trained to maintain and repair the technology, gaining expertise that would extend beyond the crypto world.?

But now Smith and his company are embroiled in a lawsuit with their Chinese partner. It’s not the only crypto deal that has gone sour for Kentuckians.

An effort by an Ashland company to locate a Bitcoin miner in Elliott County also ended up in a federal lawsuit.?

Anna Whites, the Frankfort-based lawyer representing Sen. Smith’s Mohawk Energy, told the Lantern she’s represented Kentucky companies in two other cases that set up host facilities where a Chinese company mined Bitcoin for a few months, only to suddenly disappear, taking the Bitcoin with them and leaving behind “a massive electric bill, unpaid rent for the space.”?

“In some cases they would take their equipment, and in some cases they’d leave it because, kind of like cell phones, the equipment gets outdated pretty quickly,” Whites said. “Not just in Kentucky, but in Texas and some other states that also had low power rates, we’ve seen that.”?

“The Bitcoin world seems to be full of cowboys,” Whites said.

Looking for electricity

Generally, cryptocurrency mining operations involve clusters of high-powered computers that solve complicated mathematical equations that help secure online transactions of the cryptocurrencies through a digital ledger called the “blockchain.” In the case of the popular cryptocurrency Bitcoin, mining companies are rewarded for solving the equations with Bitcoin itself.

Running the computers for Bitcoin mining can be incredibly power-intensive; Bitcoin mining across the globe is estimated to use as much power as entire countries. So when China cracked down on cryptocurrency mining in 2021, citing the industry’s financial instability, Chinese cryptocurrency miners flocked across the United States looking for cheap electricity to power their machines.?

Many of them eyed Kentucky. Domestic players also have capitalized on cheap U.S. power, including Kentucky’s largest coal producer: Alliance Resource Partners has mined and accumulated Bitcoin worth more than $40 million, according to an earnings call with investors last month.?

This kind of “mining” can be very lucrative; the price of a single Bitcoin neared $100,000 last week, surging since the election victory of President-elect Donald Trump who has promised to ease regulations on cryptocurrencies. The crypto industry backed Trump and congressional candidates in this month’s election with tens of millions of dollars in political spending.

Smith had high hopes when he spoke last year to Kentucky Educational Television that the cryptocurrency venture would not end as, he said, so many ribbon cuttings in Eastern Kentucky have with the company leaving. “I would like to do something to restore that, to let people know that not everybody is like that,” Smith told the public television broadcaster.?

But so far those hopes, at least for cryptocurrency mining, have not panned out in Letcher County.?

From crypto promise to legal turmoil

According to court filings, in March 2022 a company now known as HBT Power, a subsidiary of Hong Kong-based HTX and formerly known as Huobi, was looking for electricity to power thousands of Bitcoin mining machines worth millions of dollars.

The company found a match in Smith and Mohawk Energy, signing a contract in May of that year to use the warehouse in Jenkins. Whites, the attorney for Mohawk Energy, said HBT Power helped pay to upgrade the warehouse facilities including a new electrical substation to handle the high amounts of power consumption.

HBT Power would keep the mined Bitcoin as profit. Mohawk Energy would get a share of that profit along with having HBT Power pay rent and electricity bills for Mohawk Energy’s warehouse.

But as of now, those machines have not been turned on. They remain unused in the Letcher County warehouse as the court battle continues.?

HBT Power sued Mohawk Energy in November 2023, alleging Mohawk Energy didn’t install proper electrical infrastructure to service the machines. For its part, Mohawk Energy has accused HBT Power of failing to pay rent and labor costs as agreed. They also disagree on who owns the thousands of specialized computers remaining in the warehouse, with HBTPower accusing Mohawk Energy of trying to sell off the machines.

In a December 2023 filing by Mohawk Energy, Whites wrote the assumption was the Chinese company “realized that U.S. utility rates are too high for it to make much money under current bitcoin pricing and for that reason, refused to commence mining at the Mohawk facility.”?

“Huobi simply made a bargain it believes now is a bad one, and wants to get out of it without paying the funds it owes,” Whites wrote in that filing.?

Attorneys for HBT Power didn’t respond to emails sent by the Lantern requesting an interview about the litigation.

Whites has said it’s not the only cryptocurrency mining operation in Kentucky involving Chinese partners to have gone awry.?

WIRED, which was the first to report Smith’s legal dispute with the Bitcoin mining company, also ?reported a company called Biofuel Mining, formerly co-owned by Smith, is also caught up in litigation by business partners that Whites says are also from China. Biofuel Mining was planning to gasify municipal waste to turn into electricity that could then be used to mine Bitcoin.

Disputes over power?

As reported by WIRED, the litigation between HBTPower and Mohawk Energy reflects a larger trend in recent years with Bitcoin miners. According to the CEO of a cryptocurrency mining consulting firm, Chinese miners were looking for available power and space for excess machines following China’s crackdown on the industry. In a rush to capitalize on higher Bitcoin values, per WIRED’s reporting, smaller overseas mining operations entered deals with companies in rural America without either side doing due diligence on the specifics of the deals.

The value of a Bitcoin dropped from $64,402 in November 2021 to less than $17,000 by the end of 2022.?

Winston Ma, an adjunct professor at the New York University School of Law and author of a book about the blockchain, in an email told the Lantern that long-term power contracts for crypto mining operations have “always been tricky for Chinese crypto players” in the United States and elsewhere since “Chinese-tightened regulations forced them to move their mining operations to overseas markets.”?

“The renewable energy push has made energy supply tighter in many markets, and the latest AI boom is squeezing the energy supply significantly, further disrupting the power supply-and- demand balance,” Ma wrote.?

In the case of the Elliott County crypto operation located near the Little Sandy Correctional Complex, Ashland-based Hensyn Resources has sued Bitcoin miner Horizon Mining for contractual damages. Horizon Mining declined to make payments to Hensyn Resources after complaining of higher-than-expected electricity costs, according to court filings.?

Monica Sturgill, listed as a managing member of Hensyn Resources on LinkedIn, previously told the Lantern another Ashland company she’s affiliated with was trying to locate cryptocurrency mining operations by electrical substations as a business opportunity. One facility suspected to be a cryptocurrency mine in Wolfe County that Sturgill helped locate generated noise complaints from neighbors of the facility.?

Sturgill did not respond to a text message requesting an interview about the Hensyn Resources lawsuit. Tom Mills, a representative of Horizon Mining, did not return a phone call asking about the lawsuit.

Another ‘booms and bust’ industry?

Kentucky utilities in recent years have signed a number of electricity contracts to supply power to cryptocurrency mining projects in rural counties, though it’s not always clear if the mining facilities are operational or backed by overseas investors. Cryptocurrency mining operations usually appear nondescript, consisting of metal structures with mining machines hooked up to an electrical line.?

Interest from cryptocurrency mining companies in locating to Eastern Kentucky has also tapered off, according to an electricity utility.?

After receiving hundreds of inquiries from cryptocurrency miners a few years ago, only “a few projects have since come to fruition,” Sarah Nusbaum, a spokesperson for Kentucky Power told the Lantern.?

Kentucky Power has signed contracts offering discounted electricity rates for two cryptocurrency mining operations in its service area covering 20 Kentucky counties.?

Kentucky Power is asking a Franklin Circuit judge to overturn a decision by the state Public Service Commission rejecting a cryptocurrency mining deal. Concerns that vast power usage could drive up costs for ratepayers sunk the utility’s request? for incentives for a Chinese company Ebon International that wanted to launch a massive Bitcoin mining operation next to the utility’s lone natural gas-fired power plant in Lawrence County. Environmental advocates and then-Attorney General Daniel Cameron, a Republican, raised objections, and the utility regulator ultimately rejected the incentives.???

As Bitcoin’s value soars coinciding with the industry gaining a friend in the White House, it’s unclear whether higher prices will spark a resurgence of interest in operating crypto mines in Kentucky. Almost all of the 21 million Bitcoins already have been mined. When the finite supply runs out, Bitcoin miners are expected to make money by collecting transaction fees.?

Looking to crypto’s future in Kentucky, an environmental advocate and economic developer in interviews with the Lantern raised caution flags.

Lane Boldman, executive director of the Kentucky Conservation Committee, compared foreign investment in cryptocurrency mining to concerns some state legislatures have raised about foreign ownership of farmland. She questions whether cryptocurrency mining is the best use of Kentucky’s electricity and whether the potential benefits for Kentucky justify the demands on power and water to cool the computers, along with the risks posed by some Bitcoin mining companies’ lack of transparency.

?“There’s a lot of questions that need to be asked, and I’m not clear how well they’re being vetted,” Boldman said. “You don’t want to create a situation out of desperation that creates more risk and exposes an electricity base even more so.”?

Colby Kirk, president and CEO of the regional economic development organization One East Kentucky, acknowledged Smith’s “good intentions” with Mohawk Energy’s venture into cryptocurrency.?

Kirk said he fielded numerous inquiries from cryptocurrency miners when he first started at One East Kentucky in 2022. “A lot of these crypto projects, they’re kind of just, ‘Plug in, you set it and forget it,’” Kirk said. “I don’t think any of them have really materialized at the level that, you know, anyone hoped they would. That market is just such a volatile market.”?

Kirk says he’s not against cryptocurrency mining — but he noted the operations often don’t create “substantial long-term employment.”?

At a time when the region is trying to move beyond “extractive type of industries,” he wonders if crypto mining would have “booms and bust” cycles similar to coal mining. He’d rather provide jobs that can create generational, sustainable wealth for families.?

“Have a cycle that generates wealth over the years versus something that we plug in, and it makes wealth for people who live hundreds or thousands of miles away and there’s not a lot of jobs locally associated with that,” Kirk said.

By contrast, larger industrial-scale Bitcoin mining operations elsewhere in Kentucky are more successful, ranging from a McCracken County operation that sold earlier this year to one of North America’s largest Bitcoin miners, to an Bitcoin mining operation in a former Marshall County steel mill that launched in 2019.?

Meanwhile, the court case between Mohawk Energy and HBTPower remains in arbitration.?

Whites said she believed Mohawk’s Energy idea to incorporate cryptocurrency mining was a good one, something to boost employment.?

But “it all fell apart,” she said.?

Even without a cryptocurrency miner at the warehouse, Whites said Mohawk Energy remains? primarily a technology repair and training site.

“While it was offered as a host facility as well, during the height of Bitcoin mining, that time has come and gone and Mohawk is renewing its focus on technology repair,” Whites said.