Blockchains wanted to build a ‘smart city' in Storey County. Nevada could not sign off on its water rights

In the months leading up to the 2021 legislative session, Blockchains Inc. was preparing to pitch Nevada lawmakers an ambitious proposal. The private cryptocurrency company effectively sought permission to create its own local government, or Innovation Zone, within Storey County.

It already owned ample land. By 2018, it had acquired roughly 67,000 acres in and around the Tahoe Reno Industrial Center. What it needed to construct a city in the high desert was water.

Before briefing lawmakers on its plans, Blockchains quietly purchased a portfolio of water rights valued at about $35 million hundreds of miles away from its land north of Reno-Sparks. In order to get the water to the city, it would have had to pipe it across a region of Nevada that included the Pyramid Lake Paiute Tribe’s reservation and the Black Rock Desert, home to Burning Man.

Such a pipeline would likely face permitting challenges, including opposition from environmental groups and rural communities. Yet another big hurdle unfolded throughout 2021: A title dispute.

That dispute would end with the company — once embraced by Gov. Steve Sisolak — suing the state of Nevada for not officially recognizing the ownership of its water rights. Last month, a judge ruled in favor of the state, leaving Blockchains blocked from using the water.

By September 2021, Blockchains withdrew its “smart city” proposal in an official letter to Sisolak, who had backed the plan in his State of the State address. In the background, a dispute was brewing over whether Blockchains actually controlled its multimillion-dollar water rights, court filings revealed.

As Blockchains’ official plans to build a city faded, its efforts to control the water continued. The company was working to convince state water regulators to recognize its ownership of the water it purchased in 2020 from Sonterra Development Company, which had sought to develop land in the Fernley area. Sonterra proposed exporting the water in 2007 but faced numerous protests.

Then, in December 2021, the Division of Water Resources rejected the company’s documents to officially transfer the water into Blockchains’ name. Another firm, Granite Investment Group LLC, had an interest in the water rights. When asked, Granite objected to approving the transfer.

On Dec. 15, former deputy State Engineer Micheline Fairbank told Blockchains that state water officials would not take further action until the “final resolution of the conflict has occurred.” What that meant was despite its costly water purchase, Blockchains could not actually use its water.

Blockchains then sued the very state that, months earlier, it was asking to permit its “smart city.”

The company, according to its website, is working on developing technology related to Web3, a more decentralized version of the internet. On its site, Blockchains touts technology solutions aimed at creating more secure digital identities that are controlled and owned by their users.

The company appealed the water ruling in court, and last month, Washoe County District Court Judge Kathleen Drakulich upheld the state’s rejection of Blockchains’ attempt to officially update ownership of the water rights. Because the state could not approve the documentation, known as reports of conveyance, it still cannot formally consider Blockchains the holder of the rights.

The Great Basin Water Network, a nonprofit monitoring water rights in the state, first posted the court decision on its website. The network said it believed that exporting water from northern Washoe County to the company’s land in and around the industrial park would “ultimately harm Pyramid Lake and groundwater flow in the region.” It had protested the Sonterra plan in 2007.

But the group added that it expects to see similar proposals fueled by growth in the region.

“While the court’s ruling provides clarity on the ownership status, the fate of the basins remains in the balance,” Kyle Roerink, the network’s executive director, said in an email. “The odds are high that Sonterra and Granite will one day find the right company to sell to — likely leading to groundwater exportation and industrial use. Farming is not the future for that water as I see it.”

Water belongs to the public, but the state issues rights to its use through its permitting system. These rights to the use of water are considered “real property.” As with other forms of property, a third party can place an encumbrance on a water right that can affect the terms by which it is conveyed to a new owner. With real property, a creditor or lender can place an encumbrance, such as a lien or a deed of trust, that states a third-party claim or interest against the property.

In 2017, Granite placed an encumbrance on record with the state. That encumbrance was for debt secured by a deed of trust — an agreement with Sonterra — that is tied to the water rights.

Seeing a conflict in the chain of title, the Division of Water Resources reached out to Granite before signing the paperwork that would have formally given Blockchains control of the water.

This decision formed the basis of Blockchains’ lawsuit against the state.

Blockchains argued, in its initial complaint, that the state agency acted improperly, bringing a third party into a transaction it was not involved with, creating an “extra-judicial title dispute,” exceeding its statutory authority and abusing its discretion, among several additional claims.

The company’s attorney, Gregory Morrison, wrote that the state’s rejection prevented the tech company from filing any new applications to manage its water rights or change how they were used, “thereby depriving [Blockchains] of its ability to use the permits for its desired purposes.”

Drakulich ultimately sided with the state. The state engineer does not have authority to decide ownership of water rights — that is left up to the courts — but Nevada’s top water regulator is responsible for flagging when a conflict exists in the chain of title. In this case, Drakulich wrote that there was “substantial evidence” that a conflict existed, and state officials did not overstep.

She suggested the proper recourse for Blockchains, after state water officials rejected its reports of conveyance, would have been to file a lawsuit in district court aimed at resolving the conflict.

Lawyers for Blockchains and Granite did not respond to a request for comment, including whether the company plans to appeal the judge’s ruling.

— This story is used with permission of The Nevada Independent. Go here for updates to this and other Nevada Independent stories.