PUD Industrial Policy protects low rates for residents and businesses, Does NOT hurt economic growth3/30/2023 Beijing’s Bitmain and Allrise Capital’s bitcoin-mining joint venture LLC, Cascade Digital Mining, recently began negotiating with our PUD for a new electrical service agreement to replace their current contract, which expires this September. One of the points of contention that Bitmain/Allrise will likely seek to publicize is our PUD’s current policy governing how it provides service to industrial customers.
The key points of this report are:
Our PUD’s current policy for industrial customers effectively creates two tiers of service for industrial customers. The first tier is industrial customers requiring less than 2 megawatts of electricity. Our PUD has sufficient electricity from its share of Seattle Power and Light’s Boundary Dam and its block of power from the Bonneville Power Administration to serve these customers with low-cost, clean energy from its own resources. Except for Beijing Bitmain’s/Allrise Capital’s Bitcoin mining facility at the former PNC Papermill in Usk, all other industrial customers in the county fall into this category. For a more detailed explanation of how our PUD gets its electricity, read: Box Canyon - PROTECT PEND OREILLE The second tier is for industrial customers requiring more than 2 megawatts of electricity. The 100-megawatt Bitmain/Allrise bitcoin facility is the only customer in this category. This facility requires more than three times the amount of electricity as the rest of our PUD’s 9,600 industrial, commercial, and residential customers combined. This amount of electricity far exceeds our PUD’s resources, so to meet the needs of Beijing’s voracious Bitcoin Mine, our PUD must purchase large amounts of electricity on the Mid-Columbia Hub market. Over the last year the price of this “market” electricity has been significantly higher than the cost of our PUD’s own electricity. Our PUD’s current policy for industrial customers requires Bitmain/Allrise to be solely responsible for paying for the additional cost of this market power. If this policy did not exist or is changed, the responsibility for paying the additional costs for Beijing’s Bitcoin Mining would be shifted onto the PUD’s other customers. Because the amount of electricity required is so large, this cost-sharing would result in substantially higher power bills for the county’s residents and businesses. Fortunately, as a citizen-owned public corporation, our PUD has consistently recognized its primary responsibility is the interest and well-being of its resident owners. Local executives from Bitmain/Allrise and their surrogates have argued that our PUD’s two-tiered policy limits economic growth in the county. This claim is false. There are many reasons why, but there are two most relevant to this report. First, the primary reason why Bitmain/Allrise have to pay higher rates is that they do not want and cannot afford a long-term financial commitment to our PUD and to our county. To understand why Bitmain/Allrise do not want a long-term contract for the Bitcoin mining business, read our report on the economics of Bitcoin mining in Pend Oreille County here: POC Cryptonomics - PROTECT PEND OREILLE After Bitmain/Allrise failed a due-diligence review of their finances conducted by the prospective power provider, Brookfield Renewable Inc., last fall, they were offered a longer-term power contract at lower power rates by our PUD. They turned it down. Instead, Bitmain/Allrise asked for a short-term contract under which they would purchase power monthly. This contract, which they requested instead of a longer-term, fixed contract, exposed them to higher market prices. Even this short-term contract was a financial challenge for them to meet. In an email from Mr. Wood to Mr. Willenbrock dated June 27, 2022, Mr. Wood complained that “securing $18 million in Performance Assurance is a significant financial undertaking….” Last October, our PUD again asked Allrise’s CEO if they could afford a long-term contract. General Manager Collin Willenbrock wrote to Merkle Standard CEO Steve Wood, “[On] September 26 2022, I met with you and Mr. Trubchik [Allrise Capital’s CEO] at the District offices to discuss your plea to deviate from the requirements of the ESA just two weeks after execution because apparently your models were inaccurate. During that meeting… I specifically asked if Allrise would even have the ability to collateralize a deal of that magnitude and Mr. Trubchik indicated that he didn’t believe so.” The key point here is that an established, financial healthy corporation with a longer-term business plan would be able to secure a long-term power contract for large quantities of CETA-compliant with our PUD at rates comparable to our PUD’s rate for smaller industrial customers. Bitmain/Allrise is not interested in this type of contract because their business plan is short-term, and they do not have the financials or credit worthiness to get such a contract. So, our PUD’s two-tier policy for industrial customers does not prevent lower-risk, financially healthy industrial customers interested in a long-term commitment from accessing clean electricity at competitive prices. That is precisely the type of businesses we want to move into Pend Oreille County. Second, contrary to the claims of Beijing’s Bitmain local representatives and surrogates, our PUD’s policy actually promotes economic growth. By keeping rates for its customers low, the policy incentivizes small- and mid-sized businesses seeking low-cost, clean power to come to Pend Oreille County (something that would change if the residents of the county had to subsidize industrial bitcoin mining). It is also important to remember that an industrial customer can do a lot with 2 megawatts of power. Data from the US Energy Information Administration and the Census Bureau shows that these other industrial customers use less than 8 percent of the electricity but provide more than 20 times more jobs. You can create a lot of jobs with 2 megawatts of electricity. And our PUD can fully support at least 2 percent annual growth through the next two decades. This is many times higher than our historical annual growth rate. Our PUD has the electricity to resource many more Vaagen Lumber-sized enterprises. (NOTE: the limits on our county’s transmission lines and substations maxed out by the many crypto mining companies operating in the county is a more significant limitation on growth than limits on our PUD’s electricity resources).
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Last Friday, the State Senate Committee on Environment, Energy & Technology cleared House Bill 1416 for a floor vote and recommended 5-2 that the Senate vote to pass the bill. HB1416 closes a loophole in the Clean Energy Transformation Act that enables Bitmain/Allirse to purchase electricity from high-pollution sources for their Bitcoin mining operations in Pend Oreille County. Bitmain/Allrise local crypto executives have publicly described the bill as an "existential threat" to their future business operations because it will force them to purchase clean energy at a slightly higher cost (a fraction of a cent per kilowatt hour). But at a time when it already paying between $15,000 and $23,000 in electricity for each Bitcoin they are able to win (depending on the variable price of electricity), that small margin will have an oversize impact on their already sagging bottom line. For more one Bitmain/Allrise's struggling financials, read here: POC Cryptonomics - PROTECT PEND OREILLE In contrast to Beijing Bitmain's and their partner Allrise Capital's plight, HB1416 will economically benefit the other 9,600 customers of our citizen-owned PUD. Every other industrial, commercial, and residential customer in Pend Oreille County already uses CETA-compliant electricity. Only Bitmain/Allrise do not. HB1416 will help ensure that our PUD can deliver low electricity rates to its current and future customers. It will also incentivize small- and medium-sized businesses to locate to the county to take advantage of low-cost, clean energy provided by our PUD. Our PUD can easily support many more Vaagen Lumber-sized business in our County with its current power allocation from Boundary Dam. Read more here: HB1416 - PROTECT PEND OREILLE Bitmain/Allrise, assisted by County Commissioner John Gentle, lobbied State legislators to not pass the bill or to add a "Cascade Amendment" (likely are reference to Cascade Digital Mining) that would have compelled the residents and businesses of Pend Oreille County to subsidize Bijing's bitcoin mining in the county-- which would have cost residents millions of dollars each year. Read more here: Zenk Letter - PROTECT PEND OREILLE Several residents of Pend Oreille County gave testimony asking members of the Committee to pass HB1416 as is and not to support Bitmain/Allrise's proposed Bitcoin amendment. One of witnesses was Newport resident Gloria Jean Wells. Ms. Wells moved to Pend Oreille County after working as a state civil servant for 32 years. She began her career at the Washington State University College of Pharmacy and concluded as a Support Enforcment Officer. She and her husband love Pend Oreille County for its rural living, clean rivers and lakes, open space, and abundant wildlife. Here is her testimony: Good morning and thank you for the opportunity to speak to you about why I support HB 1416. Paper mills have been rapidly closing across the nation. Good example is the former papermill in Pend Oreille Co. The current owners are foreign investors-Allrise/Bitmain, which is Incorporated in Cayman Islands (resource is Wash. St DOR tax information). Please vote yes on HB 1416 because it will protect Pend Oreille County residents from subsidizing Allrise/Bitmain, which is a bitcoin foreign currency corporation; protect wildlife, farm animals, environment, energy, etc. Allrise/Bitmain should be required to develop better ways to bring more environmentally friendly energy, not use Pend Oreille County limited natural resources. As you know, Bitcoin consumes excessive electricity per transaction, doesn't benefit residents of Pend Oreille County or Washington State, doesn't create jobs, is a high-risk business, it's not regulated, we have heard that people have lost their entire life savings by deposits disappearing, etc. I thank you for having this public hearing, please vote “yes” on HB 1416. March 29 is National Vietnam War Veterans Day. Thank You to those who served.The Vietnam War Veterans Recognition Act of 2017 officially designated March 29 as National Vietnam War Veterans Day.
According to the American Legion: "This is a time to pay special tribute to the 9 million Americans who served during the Vietnam War era, to the 58,000 names memorialized on the Vietnam Veterans Memorial in Washington, D.C., and to those who never received the recognition they deserved when they returned to America from war. March 29, 1973 is the day U.S. Military Assistance Command, Vietnam was disestablished and the day the last U.S. combat troops departed Vietnam. In addition, on and around this same day, the U.S. Vietnam War Commemoration stated that Hanoi released the last of its acknowledged prisoners of war." Our County is the proud home of approximately 1,400 Veterans. Half of these Veterans served during the Vietnam War. Approximately one third of the Veterans in our County bear the life-long burden of a disabling medical condition due to their service to Our Nation. We at Protect Pend Oreille want to thank those who served during the Vietnam War for protecting us. Your Service made a difference. The passage of time brings new perspectives of our past. Modern historians of the Cold War now remind us that the Vietnam War played a vital role in the generational conflict between freedom and oppression that we call the Cold War. Your courage and fortitude marked a line around the globe behind which more than half of the peoples of the world living on the western side of the Iron Curtain could prosper in peace and ever-increasing freedom. The peoples of East Asia, Europe, and the United States of America owe you a debt of gratitude for the lives we live today. Thank You. Last Tuesday, our PUD revealed that Cascade Digital Mining, the Bitcoin joint venture LLC between Beijing’s Bitmain and Allrise Capital, had missed its monthly payment. The PUD was forced to issue a Letter of Default to Allrise Capital (Allrise is the guarantor of the payment).
Cascade missed its payment due to the collapse of Allrise’s banking institution, Silicon Valley Bank, collapsed along with Silvergate and Signature Bank. These banks were the top three American crypto banks providing banking services to high-risk crypto companies. Silicon Valley Bank was taken over by the Federal Deposit Insurance Company (FDIC), which saved Allrise’s money. Still, they will need to find a new bank at a time when banks are increasingly wary of crypto customers. While the residents of Pend Oreille County, who own the PUD, were able to eventually get their money from Cascade and Allrise, the default will likely have serious ramifications. 1) The default positively affirms the risk management policies our PUD put in place last summer to protect its citizen owners/ customers from the significant financial risks industrial crypto mining poses to our county. These included prudently rejecting Silicon Valley Bank as the financial guarantor in case Cascade or Allrise failed to make a payment. 2) The default will hurt Cascade’s negotiating position for a new electrical service agreement with our PUD. Ominously, Cascade began its first day of negations by failing to make its power payment. Not a good look, especially since one of the main points of contention between our PUD and Cascade/Allrise is our PUD’s reasonable risk management requirements. The current negotiations are for a new agreement to begin next October. Just two weeks before defaulting, Cascade begged our PUD to reduce by half the monetary obligation of their “Performance Guarantee” (basically like a bond—an open letter of credit from a major bank that the PUD can draw on for payment should Cascade/Allrise default). Fortunately, our PUD declined such a considerable reduction. 3) The default could significantly increase the level of risk for our PUD in providing power for crypto mining. After the triumvirate of crypto bank collapses, the FDIC, Treasury Department, Federal Reserve, and Biden Administration have sent clear signals to other US banks about the risks of crypto customers. For example, last week the FDIC blocked New York Community Bancorp from taking on any of Signature Bank’s crypto customers as a condition of the sale when they purchased the failed crypto bank after it was seized by the FDIC two days after Silicon Valley Bank. According to the Wall Street Journal and other financial news sources, crypto customers from the three failed banks are having difficulty finding new banks willing to accept the inherent risk of crypto customers. This could leave Cascade and Allrise without access to financial services and credit. 4) The default is another indicator of the deterioration of Allrise Capital’s finances since the power provider, Brookfied Renewable Inc, rejected them as a customer last May after conducting a due-diligence review. For a more detailed assessment of Allrise's struggling financial condition, see the letter "Misrepresentations and Omissions of Fact by Ponderay Industries LLC" Section III.e here: https://protectpendoreille.org/uploads/1/4/1/5/141595600/ponderay_industries_evergreen_grant_misrepresentations_and_omissions.pdf One of the critical reasons that Beijing Bitmain’s and its junior partner Allrise Capital’s Bitcoin mining facility in Usk is struggling financially is that Pend Oreille County is simply a bad location for industrial-scale crypto mining. Here are four reasons why:
1) Power Infrastructure. As Bitmain/Allrise have already discovered, the county does not have the infrastructure to support large-scale bitcoin mining. Bitmain/Allrise isn’t the first to learn that lesson. HiTest Sand also found that the county’s infrastructure couldn’t support the 210 MW load they required. Expanding the infrastructure would cost tens to hundreds of millions of dollars and take years to complete. 2) Power Costs. The Pend Oreille PUD effectively has a two-tier price structure for industrial customers. The PUD can service its normal-sized industrial customers in the county with its own power resources, but because Bitmain/Allrise’s requirements are more than three times the rest of the county well beyond the PUD’s native resources (even counting Box Canyon Dam), they have to purchase power from outside the county. The price of this “market power” has been 3-5 times higher than most industrial Bitcoin miners pay. 3) Time horizon. Bitcoin mining is a short-term business. PUD’s (and not just our PUD) are long-horizon businesses. PUD’s deliver the best pricing when they can make long-term, predictable power purchases. Bitmain/Allrise’s would like to make day-ahead power purchases to best match volatile power prices with volatile Bitcoin prices, but our PUD simply cannot provide that kind of power contract. 4) Risk. Bitcoin mining is an EXTREMELY high-risk business not far from a gamble. It single-handedly dwarfs the rest of the PUD’s risk pool. As a citizen-owned public corporation, our PUD focuses on minimizing risk for its owner-ratepayers. The PUD’s prudent risk-management practices constrain the service options available to crypto miners. Crypto mining is hurting Pend Oreille County. Like every other rural community targeted for exploitation by foreign crypto companies, the economic benefits promised to Pend Oreille County have proven to be as tangible as Ethereum. Meanwhile, local bitcoin mining has become a vice crushing the future prosperity of our county.
First, the crypto mines in Usk and along the Highway2 corridor have maxed out the existing power infrastructure preventing any other potential uses for significant manufacturing or industrial development. Second, converting the former PNC mill into a crypto mining facility is drastically shrinking county tax revenues with nascent consequences for the county’s budget. Crypto Bro claims of large tax payouts always omit that very few of those tax dollars are for Pend Oreille County. The conversion of former PNC Mill into a massive crypto mining facility has destroyed the value of the site. Two years ago, the PNC mill site's owners paid almost $600,000 in property taxes. This year the owners will pay 76% less ($145,000) at a time when everyone else is paying higher property taxes. In 2022 the county received only a fifth of the Sales and Use Taxes than the market value of machinery operating in Usk facility should have required. Furthermore, the approximately $600,000 received by the county was a one-time payment unlikely to be repeated in future years. So the county can look forward to a net reduction of $450,000 a year going forward thanks to our commitment to crypto, which will quickly translate into reduced employment and services. Finally, crypto mining has added very few jobs. The Usk facility employs around a dozen personnel split between Allrise and Bitmain (although they sometimes add a number of poorly paid “as-needed” part-time employees to their publicly reported employee count.) In hindsight, almost any other alternative use of the former PNC Mill would have created more economic potential for our county. Perhaps the financial challenges facing the Bitmain/Allrise's Bitcoin mine in Usk (POC Cryptonomics - PROTECT PEND OREILLE) and a potential plan to sell the facility seemly leaked by Crypto Commissioner John Gentle (Did County Commissioner John Gentle just leak Allrise/Bitmain’s plan to sell the former PNC mill? - PROTECT PEND OREILLE) will clear the obstacles to real economic growth that Bitcon has brought to our County. The Spokesman-Review published a deep-dive investigation into the factors behind the failure of HiTest Sands proposed Silicon Smelter project in Pend Oreille County. The article, titled "Silicon smelter once proposed for Newport being built in Tennessee" reports that the "local proposal hit permitting, zoning, pollution and oppositional roadblocks." You can read the full article here: https://eedition.spokesman.com/infinity/article_popover_share.aspx?guid=de46e6db-21c1-4b0d-bcc9-3ee0dc505730 Our summary: The smelter project failed because of: 1) The County Community Development Office was unable to update their comprehensive plan and adjust zoning in a timely manner. 2) The power infrastructure in the County could not the support the 210 MW of power required without expensive and time-consuming new construction. 3) The rail transportation network could not support the smelter's requirements without expensive upgrades. Former HiTest CEO Jason Tymko stated that opposition by environmental groups was not a significant factor in the cancellation of the project. "It (the environmental group opposition) was no hindrance." Tymko said the $300,000 debt that our Economic Development Council owes the State Department of Commerce to repay an economic development grant for the smelter project "wasn't a liability of Sinova" [his current company." Did HiTest and/or PacWest Breach Their Contract with EDC in 2020?Some points regarding our County's $300,000 debt incurred by the EDC:
1) It appears that the contract signed between the EDC and HiTest in summer 2017 in order to receive the grant money from the EDC required HiTest Sand Inc to be licensed to operate in the state. However, according to the State Secretary of State's records, HiTest did not register in the state until February 2018. It appears that the EDC signed a contract that required HiTest to register in the state as a condition of the contract while knowing that HiTest was NOT registered. 2) HiTest Sands Inc's registration in the state was terminated in June 2020 after they failed to submit their annual registration by March 2020. The contract between HiTest and the EDC required HiTest to registered in the state, so it appears that HiTest actually breached the contract not later than June 2020-- two years before the State officially determined that our EDC had breached its contract with the State. 3) PacWest Silicon LLC was created in August 2018 as a separate corporate entity. It was not a drop-down LLC of HiTest Sand Inc. It appears that the EDC never amended its contract or signed a new contract with PacWest vs HiTest Sands. PacWest was dissolved in January 2021 after failing to file its annual report by September 2020. If the EDC had, in fact, amended the initial contract to add PacWest as a contractual partner, than PacWest would have been in breach of contract not later than January 2021. So why didn't the EDC take action two years ago? What were they reporting to the Department of Commerce in their required annual update reports in the years after HiTest and/or PacWest had already breached their contract? Yesterday the Spokesman-Review published an article calling into question Allrise Capital's /Merkle Standard's ability to restart the former PNC paper mill in Usk and the legitimacy of their request through the Pend Oreille County Economic Development Council for a $400,000 grant from the State Department of Commerce. According to the story:
"The company that runs a cryptocurrency operation in Usk is seeking a $400,000 grant from the state that it says will help to restart a shuttered papermill even though the site doesn't have access to the electrical power needed to operate the plant.... "The mill site, which is now home to a cryptocurrency mining operation called Merkle Standard, was told by the Bonneville Power Administration in 2022 that it could not operate both the data mining operation and the papermill without at least $40 million in infrastructure upgrades. "Pend Oreille County Commissioner Robert Rosencrantz said he doesn't think its proper for Ponderay Industries, which owns the mill, to seek grant money if it knew it didn't have a source of power. "But nowhere in the request does it mention that Ponderay Industries never secured the power needed to restart the mill. "Asked if she believed she was obligated to accurately portray the reality to the state, Wyorbek said it was Ponderay Industries' job to provide that information. Read the full story at: Critics question grant request to restart Usk papermill | The Spokesman-Review NOTE: Ms. Wyorbek has recently drawn criticism by withholding that the Pend Oreille EDC owes the State Department of Commerce $300,000 from an earlier grant provided to the EDC for the stillborn HiTest Silicon Smelter. Ms. Wyorbek delayed notifying the County Commissioners (the county will be responsibility for the debt) for over four months while the continuation of her employment contract was being debated. Public records obtained by ProtectPendOreille.org continue to reveal efforts by Allrise/Bitmain to mislead the public about their Bitcoin mining operations at the former PNC paper mill in Usk.
Last Spring, Allrise/Bitmain began publicly blaming our PUD and the Bonneville Power Administration for allegedly blocking a proposed restart of the paper mill. The PUD took the unusual step of publicly responding to Allrise/Bitmain’s false allegations. In a press release dated April 4, 2022, the PUD responded, “Contrary to recent public statements, BPA did not prohibit Allrise from restarting the paper mill.” But new documents recently obtained through public records request reveal that only a few weeks after taking ownership of the mill in June 2021, Allrise specifically directed the BPA that they only wanted power for crypto mining. One of the smoking-gun documents is a letter from Todd Behrend to the PUD General Manager Colin Willenbrock dated November 8, 2021. In the letter, Behrend complains that the BPA study requested by Allrise to evaluate the capabilities of the power infrastructure supporting the former mill site included power parameters that could have supported a paper mill. Allrise, however, had been telling the PUD for months that they only wanted the BPA to consider power parameters suitable for crypto mining. Behrend wrote, “While the consultant report you referenced does mention a 0.9 power factor for crypto mining, you will also note that value is an assumed value. If the District had conferred with Ponderay before submitting the LLIP [BPA study request]… I would have gladly confirmed that the actual data center equipment Ponderay will be operating has a power factor between 0.98 and 0.99.” Note: the paper mill requires electricity with a lower power factor than crypto miners. Allrise/Bitmain’s misinformation campaigns targeting our citizen-owned PUD are reprehensible. County Commissioner John Gentle publicly admitted that he is lobbying State Legislators on behalf of Beijing’s Bitcoin mining operations in Usk. During the public comment period at Monday’s (March 13) Commissioners’ meeting, Gentle was asked about House Bill 1416, an extension of the State’s existing Clean Energy Transformation Act intended to close loopholes that currently allow Beijing’s Bitmain and their junior partner Allrise Capital to use electricity from high-pollution sources that other industrial customers in the State are prohibited from using. Gentle admitted that he was lobbying State Legislators on behalf of Beijing’s Bitmain and Allrise Capital to get their energy-intensive bitcoin mine in Usk exempted from the legislation. He specified that he was working with State Representative Beth Doglio (D-Olympia), the primary sponsor of the bill, to get the exemption added to the legislation. Gentle is traveling to Olympia to meet with state legislators on Thursday and Friday before a Senate committee reviews the bill this Friday. Gentle and Bitmain/Allrise’s other lobbyist Tim Zenk have been pressing State Senator Shelley Short to use her position on the Senate Committee to alter the bill. This is not the first time Gentle has used his position as County Commissioner to use his office to advance Beijing’s bitcoin mining business. Last fall, he skipped a County Commissioner meeting to lobby our PUD to agree to a new power contract for Bitmain and Allrise that would have cost residents of the county millions of dollars. Last spring, he used his position to block a proposed State-standard noise ordinance that would protect county residents from excessive crypto noise pollution that threatens local residents' quality of life—especially during warmer summer months (noise pollution enforcement is a county-level responsibility in Washington). He also used his position to block enforcement of Bitmain/Allrise’s zoning violations that were disrupting nearby neighborhoods. Gentle’s actions are particularly concerning because he had a direct financial interest in this project since the beginning of 2021 through at least February 2022 when his wife was a business partner and later employee with Messers Monty Stahl and Russ Pelleberg (currently of Merkle Standard). HB1416 Update: Senate Committee Review on Friday March 17House Bill 1416 will be considered by the State Senate Committee on Environment, Energy & Technology in a public hearing this Friday morning at 8 am. (March 17). Our State Senator Shelley Short is a member of that committee.
To learn more about HB1416 and how it will benefit our County, read: HB1416 - PROTECT PEND OREILLE To learn more about the misinformation Bitmain’s and Allrise’s lobbyist are spreading about HB1416, read here: Zenk Letter - PROTECT PEND OREILLE Submit your own comments on HB1416 to the State Legislature here: Washington State Legislature - Public Bill Comments Sunday evening the FDIC announced that they would extend their insurance coverage to all depositors at the SVB to cover the total amount of all deposits instead of the normal $250,000. They also announced that all depositors would be able to access their funds on Monday (today). This ensures that Allrise Capital (and potentially Bitmain) will be able to pay their bills in the short term. The commotion over SVB also limited news coverage of the failure of another crypto bank over the weekend. Sunday the FDIC took control of Signature Bank. Like Silvergate Bank which collapsed last week, Signature Bank's core business is providing banking services to crypto companies. In a huge government bailout for the crypto industry, the FDIC also extended its insurance protections to all depositors at Signature Bank as well. Of interest, former US Representative Barney Frank (D-Mass), coauthor of the infamous Dodd-Frank Wall Street Reform and Consumer Protection Act was a member of Signature Bank's board of directors. Here are two takeaways: 1) While Allrise dodged a bullet, the collapse of SVB will likely have a deleterious impact on their pending negotiations with our PUD for a new power contract. Allrise will need to re-bank itself and, given the high-risk status of its current portfolio, may have a difficult time finding a bank as willing as SVB to extend credit and serve as a counterparty. 2) It's unclear which lesson the banking sector will learn from the rapid collapse of a large portion of the crypto-servicing banking industry. They could either learn that crypto clients are high risk and should be treated as such, or they could learn that the government will reward risky baking practices by protecting banks from their own bad risk management practices. Allrise Capital's Bank SVB Collapses. Will Allrise/Bitmain's Bitcoin Mining Survive the Fallout?It's been a tough few weeks for Allrise Capital and their senior partner Bitmain. On Friday (March 10), Allrise Capital's bank, Silicon Valley Bank (SVB), collapsed and was shut down by the FDIC. The collapse could have significant impacts on Allrise's ability to conduct business in the following ways: 1) Make payroll for its 6 employees at its Usk facility (via Merkle Standard) 2) Make its monthly electricity payments to the PUD 3) Make its next property tax payment to the County 4) Result in significant financial loss (the FDIC only insures $250,0000 in deposits) 5) Significantly limit Allrise's access to credit or extend the terms of existing loans. Because SVB had mostly corporate customers with large deposits, over 90 percent of its deposits are not covered by FDIC insurance. SVB also specialized in serving Chinese tech companies doing business in the US, so it is possible that Bitmain will also be affected. In addition to its problems SVB, Allrise and Bitmain had to deal with the collapse of Slivergate Bank earlier in the week. Silvergate was smaller than SVB but specialized in serving crypto customers who, due to their distate for normal standards of financial accountability, would otherwise have trouble obtaining banking services. It is unknown whether Allrise or Bitmain had direct exposure to Silvergate, but the bank's collapse dropped Bitcoin prices by $3,000. Furthermore, several of Allrise's other investments in other crypto companies have gone sour. Gemini has become insolvent and has halted customer withdrawals and Kraken was recently fined $30 million by the SEC for selling unregistered securities. An HB1416 continues its progress in the State Legislature. The House Bill would require Allirise/Bitmain to comply with the Clean Energy Transformation Act (CETA). As they currently use no CETA- compliant electricity, the bill would increase their electricity costs by requiring them to purchase and use clean, renewable power. Allrise/Bitmain is the only business in Pend Oreille County not using CETA-compliant power, so they will be the only ones affected. And just to add insult to injury, the White House announced plans to create a 30% excise tax on crypto miners as part of President Biden's new budget proposal. A remarkable failure to conduct due diligence combined with last May's collapse of the Bitcoin bubble and higher energy costs have already made the Usk facility unprofitable, so these additional financial challenges call into question the Bitcoin mining facilities ability to continue as a going concern. Kudos to the PUD for protecting its ratepayers against the SVB collapseLast May, Allrise/Bitmain's negotiations with Brookfield Renewable for a large power contract to service their Bitcoin Mining in Usk collapsed after Brookfleld conducted a due-diligence review of Allrise/Bitmain. Beijing's Bitcoin team turned to the PUD for a new service agreement. Because Allrise//Bitmain were high risk customers, the PUD required that they obtain a performance guarantee from a major bank who would effectively co-sign the agreement.
Allrise asked the PUD to accept their bank SVB as the guarantor. Fortunately, the PUD viewed SVB as too risky and made Allrise turn to a more traditional major bank. It is now clear that the PUD's effective risk management practices protected it citizen owners from SVB's collapse. The county's crypto-advocates should bear this lesson in mind before advocating that PUD abandon its policy of protecting its ratepayers in order to subsidize Beijing's bitcoin. |