top of page

The Compliance Challenge of Bitcoin Halving

Tuesday, 16 April 2024

by Achille Deodato, CEO Indigita SA


Bitcoin halving, slated between April 19th and April 22nd, marks a significant event in the cryptocurrency world. But what does it mean, and how does it impact compliance for banks?



Bitcoin halving refers to the process by which the reward for mining new bitcoins is halved, occurring approximately every four years. This mechanism is built into the Bitcoin protocol to control its supply and ensure its scarcity.


For Bitcoin owners, halving can have profound consequences. As the supply of new bitcoins diminishes, scarcity increases, potentially driving up the value of existing bitcoins. This phenomenon has historically led to price surges, making it an attractive prospect for investors.


Bitcoin Halving: key events

Event

Date

Mining reward

Reward in USD equivalent

Bitcoin launch

3 January 2009

50 new bitcoins

-

1st halving

28 November 2012

25 new bitcoins

300

2nd halving

9 July 2016

12.5 new bitcoins

8’125

3rd halving

11 May 2020

6.25 new bitcoins

53’125

4th halving

April 2024

3.125 new bitcoins

Est. 208’000

5th halving

2028

1.5625 new bitcoins

N/A

Source: publicly available information – coinbase.com for prices in USD


For compliance officers in banks, Bitcoin halving poses an added challenge within the already intricate realm of digital assets.

Front offices may present cases of clients who have amassed significant wealth through Bitcoin investments. While some may have legitimately profited from early investments, others could be engaged in illicit activities such as scams or money laundering.


The transparency of the blockchain theoretically enables thorough due diligence by tracing transactions back to their origins. However, complications arise when digital wallets evolve over time. Clients must demonstrate ownership of all wallets associated with their Bitcoin holdings, introducing layers of complexity to compliance investigations. Additionally, clients must be able to trace the initial transaction between fiat currencies and bitcoins at the time of the first purchase.


However, with halving, there is no such trace. Newly minted bitcoins, generated through mining activities, leave no identifiable trail. In such cases, clients must validate their participation in mining and confirm that the bitcoins in question were lawfully acquired through such activities.


Bitcoin mining necessitates a specialized infrastructure to validate transactions and fortify the network effectively. This infrastructure typically comprises robust computers outfitted with specialized hardware known as ASICs (Application-Specific Integrated Circuits), tailored explicitly for mining Bitcoin. Moreover, miners necessitate access to a reliable electricity source, given the energy-intensive nature of the mining process, which can consume substantial power. Additionally, miners often opt to join mining pools to pool their computing power, enhancing their chances of successfully mining blocks and earning rewards.


Prospective and active clients engaged in Bitcoin mining must be capable of demonstrating their setup, ownership, and operational methods. This verification supplements the standard investigations conducted on the blockchain.

As illustrated in the table above, the reward for mining bitcoins has substantially increased after each halving event. What was once a reward of only a few hundred dollars in 2012 has multiplied by more than 500 times by 2024. This exponential growth in mining rewards underscores the heightened sensitivity surrounding the origin of funds derived from Bitcoin mining, as substantial amounts can quickly accumulate.


Bitcoin Halving: cost of mining

Event

Date

Average Mining Cost in USD

Bitcoin launch

3 January 2009

-

1st halving

28 November 2012

N/A

2nd halving

9 July 2016

413

3rd halving

11 May 2020

8’192

4th halving

April 2024

66’032

5th halving

2028

N/A

Source: en.macromicro.me through observing consumption of electricity and daily issuance of Bitcoin, provided by Cambridge University


It is essential to consider the escalating costs associated with the infrastructure required for Bitcoin mining. Existing clients involved in Bitcoin mining must navigate the exponentially rising costs of mining equipment, electricity, and maintenance. As depicted in the table above, the expenses associated with mining infrastructure have surged over time. Consequently, clients engaged in mining activities should demonstrate either a decrease in new funds sourced from Bitcoin mining or a substantial expansion in their mining infrastructure to remain compliant with regulatory expectations.


In conclusion, Bitcoin halving represents a pivotal event in the cryptocurrency landscape, with significant implications for both investors and compliance officers in banks.

As the reward for mining new bitcoins decreases, scarcity increases, potentially driving up the value of existing bitcoins and attracting investors. However, for compliance officers, halving poses additional challenges in ensuring the legitimacy of clients' wealth amassed through Bitcoin investments. The transparency of the blockchain theoretically enables thorough due diligence, but complications arise with evolving digital wallets and the lack of traceability in newly minted bitcoins. Moreover, the escalating costs associated with Bitcoin mining infrastructure add another layer of complexity for clients engaged in mining activities. As regulatory expectations evolve, compliance officers must navigate these challenges effectively to uphold integrity and regulatory compliance within their institutions.


To remain compliant, it is crucial that the first line of defense operates effectively, which necessitates comprehensive training and awareness, particularly in the realm of digital assets. This includes not only a broad understanding of money laundering risks but also specific technical training tailored to the unique challenges posed by digital assets.


By ensuring that staff are adequately informed and technically proficient, banks can strengthen their compliance efforts and mitigate the risks associated with emerging technologies like cryptocurrencies.

What do we do at Indigita


At Indigita, we are committed to supporting professionals in understanding and navigating the complexities of the cryptocurrency market. We offer a comprehensive course on cryptocurrencies and tokens designed for banking executives, relationship managers, and compliance officers. This course covers the main concepts and definitions of digital assets and provides an overview on the regulatory framework. Additionally, through our inApp solution, we provide product placement compliance answers on the go, empowering professionals to make informed decisions in the rapidly evolving landscape of cryptocurrency investments.


61 views0 comments

Comments


bottom of page