4 Takeaways From Biden's Crypto Mining Divestment Order

In this Law360 article, partners Mario Mancuso, Luci Hague and Justin Schenck discuss four key points of interest and related takeaways from President Biden's executive order prohibiting a real estate transaction after CFIUS determined it presented serious risks to U.S. national security.

On May 13, President Joe Biden issued an executive order prohibiting the June 2022 acquisition of approximately 12 acres of vacant real estate located in Cheyenne, Wyoming, within 1 mile of Warren Air Force Base, by MineOne Wyoming Data Center LLC, a company ultimately majority-owned by Chinese nationals.[1]  

After closing the transaction, MineOne built up a cryptocurrency mining operation on the property, installing equipment and related infrastructure at the site to mine digital assets.[2] The order followed a review and investigation by the Committee on Foreign Investment in the United States. CFIUS determined that the transaction presented such serious risks to U.S. national security that it was impossible to mitigate those risks by any means short of presidential action.

The order marks only the eighth time in CFIUS' history that a president has taken action to block a transaction under CFIUS' implementing statute.[3]

It compels the divestment of MineOne's legal and beneficial ownership interests or other rights in the property within 120 days, unless CFIUS grants an extension, and requires MineOne to remove from the property all equipment and improvements installed or undertaken within 90 days, similarly subject to a potential CFIUS extension.

The order is enforceable in court by the U.S. attorney general, and provides CFIUS with broad rights to audit and inspect the property and MineOne's books and records in order to verify compliance with its terms.

We discuss below four key points of interest from the order and offer related takeaways.

1. The order reflects heightened U.S. government concerns about foreign ownership of land and potential use of foreign-sourced equipment in proximity to sensitive U.S. government and military sites.

The order is the first executive order prohibiting an acquisition of real estate by a foreign investor on national security grounds.[4] CFIUS' jurisdiction was expanded in the 2018 Foreign Investment Risk Review Modernization Act to permit CFIUS to review foreign acquisitions of vacant real estate near one or more sensitive U.S. government sites identified on a list maintained by the U.S. Department of Defense.

The order states that risk to U.S. national security arose from both the proximity of the property "to a strategic missile base and key element of America's nuclear triad" and "the presence of specialized and foreign-sourced equipment potentially capable of facilitating surveillance and espionage activities."

Presumably, the use of such equipment to conduct surveillance could occur anywhere in the U.S. — or even the world — but risks arising from its use would be particularly acute in cases where the equipment was located close to a sensitive site. Court documents filed in a lawsuit by MineOne's former U.S. partner, BCB Cheyenne LLC, indicate that MineOne installed Chinese-origin bitcoin mining computers at the site, and by its terms, the order requires their removal.[5]

Takeaway

Parties to transactions that involve foreign investment in real property should ensure that they include appropriate co-location assessments in due diligence to identify properties that may be close to sensitive U.S. government sites. Even if a transaction may not warrant a CFIUS filing based on the location of a land parcel, the use of foreign-sourced equipment may pique CFIUS' interest — e.g., foreign-sourced equipment may create a vector for surveillance, espionage or sabotage of U.S. critical infrastructure.

2. CFIUS became aware of the transaction through a tip submitted by an unrelated party.

The order states that the transaction "was not filed with [CFIUS] until after CFIUS' non-notified transaction team investigated the transaction as a result of a public tip."

Public reporting suggests that CFIUS' non-notified staff was alerted to the deal by Microsoft's national security team, which submitted a 16-page report to CFIUS in August 2022 outlining concerns about the property's apparent Chinese ownership, and its proximity to Warren Air Force Base and a Microsoft data center that performs work for the U.S. government.[6]

Although third parties, including failed bidders in mergers and acquisitions processes, have long provided information to CFIUS about non-notified transactions, CFIUS established a formal "hotline" mechanism to enable parties to provide information — including anonymously — about such deals in 2020.

Takeaway

Parties to transactions that are not publicly announced and for which other regulatory filings are not required should not assume that they are shielded from CFIUS scrutiny. CFIUS has numerous ways to find out about transactions it is not voluntarily notified of, and is examining these transactions more frequently than ever.

A senior DOD official testified before a subcommittee of the House Financial Services Committee on May 8 that the DOD itself examines thousands of these transactions each year,[7] and the DOD's press release on the order highlighted the DOD's own mechanism for the public to report tips.[8]

In the real estate context, third parties on adjacent or nearby sites may have their own incentives to bring foreign investment transactions to CFIUS' attention.

3. The order was issued after MineOne had signed a definitive agreement to sell the property.

MineOne executed an agreement to sell the property to a third-party buyer on May 8 – five days before the order was issued. The agreement contemplates the sale of the property as well as another Cheyenne site that MineOne had purchased in 2022. Notably, because the second site is located nearly nine miles from Warren AFB, its purchase by MineOne would presumably have been outside of CFIUS' legal jurisdiction to review.

It appears that the order is the first time that a president has ever issued an executive order to prohibit a transaction on national security grounds after a foreign buyer already entered into a definitive agreement to sell the asset that gave rise to CFIUS' concerns.

Ordinarily, a foreign investor's voluntary sale of a target company or real property to a U.S. buyer would be sufficient to address CFIUS' national security concerns about an already closed transaction. When CFIUS identifies national security risks arising from a transaction that it believes cannot be mitigated, parties typically abandon the transaction and withdraw their filing, subject to conditions that CFIUS might require — e.g., CFIUS preapproval of a new buyer, a prohibition on the foreign investor's involvement in the business' governance, interim restrictions on the business.

Here, it appears that MineOne's abandonment of the transaction was not enough to address the risks that CFIUS had identified. The U.S. Department of the Treasury press release confirms that CFIUS referred the matter to the president because it "determined that it would not be possible to enter into a negotiated agreement with MineOne that would sufficiently address the national security risks" that CFIUS had identified "in an effective, verifiable, and monitorable manner," and comments from CFIUS leadership imply that MineOne may not have been fully cooperative with CFIUS' review and investigation.[9]

Takeaway

Parties to transactions about which CFIUS has concerns should not simply assume that they can close the matter by selling their interests. A presidentially ordered divestment of an already closed transaction is rare, and the issuance of an executive order sends a strong signal to the market that the U.S. government has deep national security concerns about a particular foreign investor.

Taken together, the order and the Treasury's press release suggest that parties' failure to cooperate sufficiently with CFIUS during its review and investigation of a closed transaction can have material adverse consequences on the parties' ability to successfully resolve a CFIUS inquiry.

4. Cryptocurrency is under the enforcement microscope at the federal and state levels.

The order follows on the heels of increased attention to cryptocurrency by U.S. regulators and a growing interest in using traditional trade-control enforcement tools to regulate cryptocurrency. The Office of Foreign Assets Control has aggressively pursued enforcement actions against cryptocurrency-related entities for potential sanctions violations, and has added the addresses of cryptocurrency identifiers or wallets associated with sanctioned persons to the Specially Designated Nationals and Blocked Persons List.

The U.S. Department of Justice has also been active in the cryptocurrency space, including assisting OFAC with its enforcement actions and pursuing cryptocurrency-related violations of anti-money laundering laws and regulations.

Similarly, state governments, regulators, and legislatures have increased scrutiny and skepticism of cryptocurrency. The New York Department of Financial Services has enforced anti-money laundering laws and regulations in cryptocurrency cases, often in parallel to federal enforcement actions.

Following citizen complaints about sound pollution, and concern over the electricity and water demands generated by crypto mining operations, Arkansas' Legislature recently passed two laws on an emergency basis that restrict these activities, including prohibiting citizens, residents, agents or governments of countries subject to a U.S. arms embargo — such as China — from owning any stake in a crypto mining operation in the state.[10]

Citizens of other certain states where crypto mining operations have become commonplace have encouraged their legislatures to follow Arkansas' lead.

Takeaway

Federal and state governmental bodies have become adept in the cryptocurrency space, and are using available trade controls and other regulatory and legislative approaches to affect policy. Crypto companies should be vigilant in understanding the latest regulations applicable to their businesses.

Additionally, U.S.-based cryptocurrency companies should consider that foreign investment in this area is being heavily scrutinized by the U.S. government, including CFIUS, and carefully consider the risks inherent in investment from foreign companies, particularly — but not exclusively — with respect to Chinese parties.

Conclusion

Although presidential divestment orders are rare, the disposition of this case is not surprising. Today's CFIUS is energized and vigorously asserting its authorities, making an early and fulsome understanding of the CFIUS profile of a cross-border transaction more important than ever for investors and companies.

Regardless of the outcome of the 2024 U.S. presidential election, we expect that CFIUS will continue to play a prominent role in shaping how transaction parties think about deal timing, certainty, feasibility and cost — even for those transactions that are not announced publicly.

[1] https://www.whitehouse.gov/briefing-room/presidential-actions/2024/05/13/order-regarding-the-acquisition-of-certain-real-property-of-cheyenne-leads-by-mineone-cloud-computing-investment-i-l-p/.

[2] The order defines the purchasers of the Property as MineOne Partners Limited, MineOne Cloud Computing Investment I L.P., MineOne Data Center LLC, and MineOne Wyoming Data Center LLC (collectively, "MineOne").

[3] Section 721 of the Defense Product Act of 1950, as codified at 50 U.S.C. § 4565.

[4] A 2012 executive order issued by President Barack Obama prohibiting the acquisition by Chinese-owned Ralls Corporation of certain wind farm assets in Oregon technically involved the acquisition of legal entities and certain assets (in addition to the underlying real estate). See 77 FR 60281 (Oct. 3, 2012).

[5] See BCB Cheyenne LLC v. MineOne Wyoming Data Center LLC, Plaintiffs' First Amended Complaint, No. 23-CV-79-ABJ (D. Wyo.) at 38; see also Gabriel J.X. Dance and Michael Forsythe, "Across U.S., Chinese Bitcoin Mines Draw National Security Scrutiny," N.Y. Times (Oct. 13, 2023).

[6] Dance and Forsythe, "Across U.S., Chinese Bitcoin Mines Draw National Security Scrutiny."

[7] https://www.congress.gov/118/meeting/house/117274/witnesses/HHRG-118-BA10-Wstate-Taylor-KaleL-20240508.pdf.

[8] https://www.defense.gov/News/Releases/Release/Article/3773780/dod-statement-on-the-presidents-decision-prohibiting-the-acquisition-of-certain/.

[9] https://home.treasury.gov/news/press-releases/jy2335.

[10] https://apnews.com/article/cryptocurrency-mines-arkansas-restrictions-huckabee-sanders-4c385e48411939955ee32ce5d8b4da7a.