The story behind a massive bitcoin mining heist in China

Former Chinese government and Communist Party official Xiao Yi has recently been arrested, stripped of his titles and handed over to prosecutors for the alleged crime of corruption and abuse of power — for  “supporting”  a local crypto mining business. 

To outsiders, the arrest may appear to be a direct outcome of China’s ongoing crackdown on crypto mining. But the story actually stretches back more than three years, and Xiao is accused of doing far more than just supporting a crypto mining business. 

Some have even speculated that it's possible that it was the magnitude of Xiao’s involvement in hiding a massive and rather blatant crypto mining embezzlement scheme that led to China’s crackdown on the mining sector to begin with.

International incidents

The story began during Xiao’s tenure as the Municipal Communist Party Secretary of Fuzhou, a city in the province of Jiangxi, which stretched between 2015 and May of this year. In China, a municipal Party secretary is effectively the chief of a city, who can wield more power than a mayor.

During this time, as Xiao pushed for the "Digital Economy" in Fuzhou, he was connected with a man named Lin Qingxing. Lin, who was also arrested recently, is regarded by some in the Chinese crypto community as a bad actor in the industry. This relationship is what led to Xiao’s undoing. 

On the back of the December 2017 bull run, Xiao and Lin went on a business trip on behalf of Fuzhou city to Germany, where they signed a tripartite deal with Genesis Mining, one of the biggest Bitcoin mining companies at the time.

The deal was to build two phases of “supercomputing” data centers in Fuzhou, with a total investment of more than $1.6 billion. The Fuzhou government would provide the land, resources and political support. Lin’s company, called Fuzhou Chuangshiji, would build and manage the infrastructure while Genesis Mining would provide the equipment. 

The goal was to operate a 3.2-million-square-feet facility that could house half a million super servers, the Fuzhou government said at the time. But it didn’t explicitly say that the deal was for crypto mining.

By then, Lin and Genesis Mining had already set up a $600 million data center in Fuzhou with the initial capacity to host 24,000 miners.

So the tripartite deal seemed like a win for everyone: Genesis Mining could access stable energy supply for Bitcoin and Ethereum mining under a government sanctioned project. Lin could profit from hosting for Genesis Mining and the local government could benefit from taxation, jobs and the GDP growth.

It all went well until Lin got his hands on the hundreds of thousands of crypto miners that belonged to Genesis Mining. And had that customer been a Chinese domestic company, the story might have ended up differently.

A rollercoaster in Fuzhou

In September 2018, Lin’s Fuzhou Chuangshiji abruptly suspended the mining payouts to Genesis Mining, accusing Genesis of not paying its utility bills on time. But it subsequently switched the mining payout to its own addresses.

As the deal went sour and negotiations proved fruitless, Genesis Mining filed a lawsuit the next year in the Fuzhou Municipal Intermediate People's Court demanding the return of 560,000 units of its GPUs as well as 60,580 AntMiner S9s. 

The net worth of that equipment and the mining profit they were able to generate over the past three years could well be worth over $1 billion. 

According to people familiar with the matter, the case initially faced headwinds due to the local government’s protection over Lin. But given the significant amount of assets at stake, Genesis Mining took the rare step of elevating the situation to a diplomatic issue via the German embassy. After all, it was a Chinese municipal government that Genesis Mining signed a business deal with. 

That could partially explain why the case eventually made it all the way up to the China Supreme Court, which ultimately ordered the return of nearly half a million GPUs to Genesis Mining.

But the attention from the higher ups throughout the case put a spotlight on the nature of the business that Lin was operating, which was Bitcoin and GPU mining disguised as “supercomputing” — and how the local government was allegedly helping behind the scenes.

It appears that the following three years were a rollercoaster ride for Lin and his company. 

National Business Daily (NBD), a Chinese business publication, recently visited Fuzhou Chuangshiji and reported that all of its main buildings and data centers are now sealed by police as Lin is under arrest.

An employee of the firm told NBD that the company is currently shut down and more than 1,000 staff have been laid off and dismissed. Only a few dozen people remain on duty for administrative issues. 

But they said that over the past two years the company had its prime time, with all kinds of luxury cars that parked outside of its main building. 

“Maybachs were just for managers and department heads. VPs and above all drove luxury sports cars,” one staffer was quoted as saying in the NBD report. They added that Lin himself was a bit more extravagant, with Rolls Royce Cullinan and other fancy cars.

The staff said there were days they would have seven or eight groups of guests come to visit the company and learn from its experience as the Fuzhou city almost hyped up the company like an iconic local landmark.

So what exactly did Xiao do wrong? The circulating rumors among Chinese crypto media reports were that Lin bribed Xiao with some 8,000 bitcoin over the years. When Lin himself was arrested in a separate criminal case, the law enforcement confiscated about 100,000 bitcoin from him.

The Block has not been able to verify these claims independently. 

In the Communist Party’s announcement on the arrest of Xiao in November, it said he colluded with illegal business operators and abused his power for profits to sign off investment projects that were discouraged by the State — and that he accepted massive amounts of financial assets as bribes.

It didn’t specify what those financial assets were, but the allegedly illegal proceeds in the case have been confiscated and handed over to prosecutors.