bitcoin mining aml regulation

Regulation of Bitcoin Mining & the Loss of Decentralization

Bitcoin Mining Laws

Bitcoin mining operates on a decentralized network, and governments generally cannot directly censor or block specific mining activities within the Bitcoin network itself. This is because Bitcoin’s design relies on a consensus mechanism called proof-of-work (PoW), where miners compete to solve complex mathematical puzzles to add new blocks to the blockchain. Miners are distributed worldwide and independently validate and process transactions.

However, there is increasing government support for sweeping cryptocurrency regulation, including exerting influence and control over Bitcoin mining.

To provide context, note that the ledger of transactions used by all Bitcoin merchants is determined by a straightforward majority (50% or more) of the total Bitcoin mining computing hash rate. The Bitcoin code mandates that machines running Bitcoin must acknowledge only the chain of transactions verified by the majority of the network’s hash rate. Presently, most of the Bitcoin mining hash rate is situated within the jurisdiction of Western governments – including the United States, Canada, Germany and Ireland, all of whom favor crypto reform.

While governments can indirectly exert control over Bitcoin mining through restricting access to electricity, internet access and taxation, the primary emphasis to not put miners our of business, but rather to regulate the who, why and what of Bitcoin transactions. Anti-Money Laundering (AML) regulations have become increasingly relevant in the cryptocurrency industry, including Bitcoin mining. AML regulations aim to prevent money laundering, terrorist financing, and other illicit activities by requiring businesses to implement measures to identify and report suspicious transactions.

As the majority of the Bitcoin hash rate holds the power to validate all transactions on the BTC Blockchain, governments overseeing BTC mining can effectively exert control over global transactions by applying AML & KYC regulations to mining operations. Miners who include transactions not complying with KYC & AML regulations risk having their blocks orphaned (overwritten) by the longer blockchain endorsed by the majority who elect to comply with such regulations. Moreover, it is conceivable that governments might either mandate or incentivize (e.g., bribe) the majority of miners to exclude all blocks containing unregulated transactions.

Moreover, governments may use their influence over mining institutions within their jurisdiction to direct the hash power, resulting in the orphaning of any block containing transactions that do not adhere to KYC & AML rules. One may argue that miners will simply redirect their hash rate to unregulated jurisdictions such as Kazakhstan or Russia, but it is not that simple. If the majority of the mining hash rate validates only censored transactions, the number of independent miners or countries that do not require KYC becomes insignificant. The Bitcoin blockchain’s fate is determined by the majority of the hash rate, which will actively work to prevent any unregulated transactions from being confirmed on the mainchain. Couple that with severe penalties for non-compliance, and “corporate” Bitcoin miners become the norm and will have no choice (or otherwise incentivized) but to follow government-led block censorship efforts.

But, the basement Bitcoin miner (who I personally admire) argues, how is this mechanically possible? You can always create a new wallet, thus how could blacklisting wallets meet a government’s AML/KYC objectives?

This is where the regulated, centralized exchanges come into play. Yes, the same exchanges that are currently being sued and shut down by Western governments. In the government control scenario, the regulatory approach will likely involve miners only selecting transactions to be included in the blocks from approved exchanges.

Governments may utilize centralized cryptocurrency exchanges to implement taxation, freezing, or confiscation measures on Bitcoin. This could result in the loss of its pseudonymity and permissionless nature, limiting peer-to-peer transfers. Bitcoin’s value retention may be impacted to align with government objectives, and governments might impose taxes on Bitcoin to bring it in line with their own Central Bank Digital Currencies (CBDCs). While Bitcoin’s immutability will persist, it may be subject to government-defined limitations.

Remember, the government’s goal is not to destroy Bitcoin, but to rather harness control over it.

Thus, what is the probable solution? The answer is simple, but the mechanics behind it are not. The then so-called unregulated jurisdictions would have to combine to retake 50% of the hash rate. Most miners in the West would likely just shut down considering the cost of relocating together with social cost of having to live in some most likely undesirable locales. But, new miners would quickly appear in the non-regulated environments and could spur an “arms” race as Western governments are now forced to effectively prop up their aggregate hash rate to fend off the challenge (see: BRICs+ and the US dollar)

And, finally, like everything else that has been banned and/or severely restricted, the mining of forked or alternative cryptocurrencies will increase substantially in an “blockchain black market,” which will serve to only create more regulation and greater government investment into enforcement.

Our company offers services related to Bitcoin mining operation setup and compliance. Be sure to reach out should you have any questions.

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About Adam Tracy

Adam Tracy is a payments expert and entrepreneur who specializes in payment systems, blockchain technology, digital currencies, and other emerging technologies. He is the founder of Blockrunner, LLC that provides consulting services to clients in the blockchain, payments and cryptocurrency arenas.

Tracy has been involved in the payments industry as an attorney, consultant and entrepreneur since 2005, while he was become an expert in blockchain and cryptocurrency since its advent in 2013. Tracy has worked with a wide range of clients, including startups, established businesses, and investor – both in the United States and worldwide. He has advised clients on a wide range of compliance, legal and operational issues related to payment transfer systems, crypto token generation and architecture, cryptocurrency exchanges, regulatory licensing, smart contracts, and other blockchain applications.

In addition to his consulting work, Tracy has founded several companies in the payments, blockchain and cryptocurrency space, including a digital asset hedge fund, licensed electronic money institution and a blockchain-based tokenization platform. He is also a proponent of decentralized finance (DeFi) and has been involved in various DeFi projects.

Tracy is also a frequent speaker and writer on blockchain and cryptocurrency topics. He has been featured in a wide range of publications, including Forbes, Hollywood Reporters, CNBC, Reuters, CoinDesk, and Bitcoin.com.

Find Adam: https://linktr.ee/adamtracy

Blockrunner, LLC., is a financial services match-making marketplace and consulting company. We are not a bank, FI/NBFI, Payment Service Provider, deposit taking institution, trust, or money services business of any kind. We are not regulated by any financial regulator. Banking, Payment, Processing, and Licensing services are provided by our participating members. This website is for informational purposes only and does not constitute legal advice. If you need legal advice, please consult a licensed attorney in your jurisdiction.

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