American cloud and colocation provider C7 Data Centers has sued its former customer CoinTerra for breach of contract, asking the court for US$1.4 million in unpaid fees, plus at least $4 million in additional costs.
According to the court filing, CoinTerra - which offers Bitcoin 'mining' as a cloud-based service - was regularly late with payments and later stopped paying altogether - which in turn forced C7 to switch off the servers.
CoinTerra denied any wrongdoing and promptly countersued, with its CEO Ravi Iyengar asserting that the actions of C7 forced his company to default on a $4.14 million debt and suspend payments to its own customers. He also admitted that the global virtual currency market has not been performing as expected.
The chicken or the egg?
Bitcoin is a virtual currency based on an open-source, peer-to-peer Internet protocol. New 'coins' can only be produced through a compute-intensive cryptography process dubbed 'mining', which requires massive amounts of power.
In the early days of Bitcoin, the currency could be mined using standard desktop CPUs. It was designed so that the difficulty of mathematical calculations would gradually increase, and miners have had to find more powerful alternatives, switching first to GPUs, then specialized ASIC chips. Today, most coins are mined in data centers around the world by companies like CoinTerra, which designs and manufactures its own ASIC based systems (pictured left).
C7 is a privately held data center operator with four facilities in Utah. According to the filing, in April 2014 it agreed an 18-month colocation and maintenance contract with CoinTerra, that would see the mining machines distributed across three sites.
“Almost immediately after entering into the contract, CoinTerra fell delinquent, often paying less than the amount required to bring it current. Upon information and belief, CoinTerra often had revenue sufficient to make larger payments to C7," states the filing.
C7 claims that despite weekly invoicing and is repeated efforts to resolve the situation, by December 1, CoinTerra's past due balance stood at $1.4 million and C7 had no other option but to terminate service and go to court.
All of these allegations are disputed by CoinTerra, which took the conflict further and filed a counterclaim. "CoinTerra intends to vigorously prosecute its claims against C7 while defending the claims levied by C7. Yet, CoinTerra is hopeful that the parties can resolve this matter quickly," said the company in a statement.
On Tuesday, in an interview with the Wall Street Journal CEO Ravi Iyengar admitted that CoinTerra had to default on its debts and suspend payments to miners, but blamed C7 and the volatility of Bitcoin.
In a different interview, this time with Datacenter Knowledge, he said the development of the Bitcoin market was going against economic theory. “There is irrational mining going on in some parts of the world that defies ROI,” said Iyengar. “People are mining when they are not making a profit. There are other factors in place. Perhaps it’s unfair access to power. As a result, the models we all assumed have collapsed.”
CoinTerra is currently in negotiations with its note holders, seeking to restructure payments. If these negotiations fail, the creditors are likely to go after CoinTerra's assets - including mining machines currently residing at C7's data centers.
C7 is no stranger to virtual currency: in 2013, the company sponsored Life on Bitcoin, a documentary which followed its marketing director Beccy Bingham and her husband as they attempted to make all of their financial transactions in Bitcoin for 101 days. And in May 2014, C7 itself started accepting Bitcoin as a form of payment.