Mining refers to the process of verifying transactions on a blockchain network and generating new digital coins. However, there is a caveat. It requires a vast network of computers spread across the globe to verify and secure them to the blockchain ledger. 

As a reward for contributing to their processing power, computers on the network earn coins. It is a continuous series of events: the miners secure and maintain the blockchain, the blockchain awards coins which are then released into circulation, and the coins provide miners with incentives to maintain it.
Let's take a quick look at a few other critical basic details about mining.  

### **Why does mining matter?**

In addition to releasing new coins, mining plays a crucial role in Bitcoin's (and other cryptocurrencies') security. The process of mining involves verifying and securing the blockchain, and this enables digital currencies to operate as fast  peer-to-peer decentralized networks with the absence of third parties.  

Also, in exchange for mining and contributing to their computing network, the miner who solves the problem is rewarded. 

### **How Bitcoin Mining Works** 

Bitcoin is a decentralized cryptocurrency that stores transaction data on a distributed ledger known as a blockchain.

Bitcoin mining involves verifying bitcoin transactions and recording them on the distributed ledger ( i.e, blockchain) . Blockchain transactions are verified by bitcoin users and it is open to users with mining hardware and internet access. 

To successfully add a block, bitcoin miners must compete to solve a difficult mathematical puzzle that requires specialized computers and enormous amounts of electricity. To finalize the mining process, miners must derive the correct or the closest answer to the question. 

The process involves predicting the proper 64-digit hexadecimal number (hash) known as proof of work. Miners predict the target hash by making as many guesses as they can at random, which demands a significant amount of computing power. Also the level of mining difficulty intensifies as more miners join the network. 

Bitcoin miners can obtain bitcoins through one of three ways:

1. Virtually mining new bitcoins
2. Trading bitcoins for goods and services
3. Purchasing bitcoins on the exchange market.

In the early days of Bitcoin's launch, individuals could compete for blocks with a regular personal computer and discover their own path but this is no longer possible. Mining bitcoin has become more competitive over time and along with the technicalities required to partake in it.

Currently, miners invest in powerful computer equipment such as graphics processing units (GPUs) and application-specific integrated circuits (ASICs). These can range from $500 to tens of thousands of dollars. Electricity consumption by ASICs has been criticized by environmentalists and the cost of these specialized computers can limit the miners' profitability.

To cobble together mining operations at a low cost, some miners purchase individual graphics cards. The majority of Bitcoin mining hardware today is made up of ASIC machines that are specifically designed to mine bitcoins. For this to be profitable, the coins earned must be more valuable  than the cost of mining them.

Rewards are paid out to miners who solve complex hashing puzzles first, and the probability of a miner finding the solution depends on the network's total mining power. If a miner successfully adds a block to the blockchain, they will be rewarded with 6.25 bitcoins. Every four years, or every 210,000 blocks, the incentive value is lowered in half. Bitcoin was trading around $20,000 in September 2022, making 6.25 bitcoins worth $125,000.

### **Final Words**

The role of miners in preserving the integrity of the blockchain cannot be overstated. Mining reduces fraud, improves network security and user confidence. Apart from its importance to the general users on a network, it also serves as another income stream for miners even though it requires considerable resources and technical expertise.

A quick rundown of the basics of cryptocurrency mining

What is Mining.jpg

What is Mining?

According to [Chainalysis’ 2022 Crypto Crime Report](https://go.chainalysis.com/rs/503-FAP-074/images/Crypto-Crime-Report-2022.pdf), the total transaction volume of cryptocurrencies grew to $15.8 trillion in 2021, a 56% increase from the numbers reported in 2020. With such massive adoption, it’s no wonder that crypto use for criminal activity also reached an all-time high in 2021, with illicit addresses receiving $14 billion, up from $7.8 billion in 2020. 

While $14 billion worth of cryptocurrencies being associated with illicit addresses is undoubtedly concerning, a slightly encouraging stat pops up when this is compared with the total crypto transaction volume in 2021. Transactions involving illicit addresses represented just 0.15% of crypto transaction volume in 2021. 

Driving these numbers down is critical, and one of the ways to do this is by stifling bad actors’ access to funds through solid anti-money laundering policies. So what is AML in crypto, and how does it work? Let’s get answers.

### **What is Crypto Money Laundering?**

Cryptocurrency money laundering is the process of making illegally obtained cryptocurrency look legitimate. Bad actors achieve this by funneling such ill-gotten cryptocurrencies through exchanges or other services to keep them safe from the authorities and eventually convert them to fiat money. In 2021, cybercriminals laundered a whopping [$8.6 billion]( https://go.chainalysis.com/rs/503-FAP-074/images/Crypto-Crime-Report-2022.pdf) worth of cryptocurrency.

Bad actors typically adopt one of two methods to launder crypto funds: they either send these funds to unregulated crypto-fiat services or exchanges or use fake or stolen identities to convert the funds on regulated exchanges. Chainalysis found that in 2019, $2.8 billion in Bitcoin was moved from criminal entities to exchanges, with Binance and Huobi receiving just over [50% of these funds]( https://blog.chainalysis.com/reports/crypto-laundering/).

Further analysis revealed an interesting inference. Only a small percentage of accounts on Binance and Huobi received most of the illicit Bitcoin funneled into both exchanges. It’s suspected that these accounts are, in fact, OTC (over-the-counter) brokers. OTC brokers facilitate transactions between crypto buyers and sellers who do not want to operate on an open exchange and some likely provide money laundering services by taking advantage of lower KYC requirements.

Although cryptocurrency-based crimes include everything from stolen funds to scams and terrorism financing, money laundering holds a special spot. The reason is it’s what enables criminals to access their funds in the first place. In other words, crypto laundering is a crucial enabler of other illicit activities or transactions connected to cryptocurrency. As such, crippling its effectiveness would mean making it difficult for bad actors to cash out cryptocurrency, thus reducing their incentive to commit crimes in the first place. And that’s where “crypto AML” comes in.

### **What is Crypto AML and How Does it Work?**

Anti-money laundering in the crypto world entails all the regulations, policies, and guidelines designed to prevent criminals from successfully converting illegally-gained crypto to fiat currency.

The Financial Action Task Force (FATF) is responsible for setting global standards for anti-money laundering laws. In 2014, the organization began releasing the guidelines for crypto anti-money laundering, and legislators in its member jurisdictions started using these guidelines to create crypto AML laws. 

Next up on the chain of command are virtual asset service providers (VASPs), [which according to FATF](https://www.fatf-gafi.org/media/fatf/documents/recommendations/Updated-Guidance-VA-VASP.pdf), are persons or businesses that facilitate one or more of the following activities for or on behalf of other people or services:

1. Exchange between virtual assets and fiat currencies

2. Exchange between one or more forms of virtual assets

3. Transfer of virtual assets

4. Safekeeping and or/administration of virtual assets or instruments enabling control over virtual assets

5. Participation in and provision of financial services related to an issuer’s offer and/or sale of a virtual asset.

(FATF defines a virtual asset as “a digital representation of value that can be digitally traded or transferred and can be used for payment or investment purposes.”) 

FATF’s definition of virtual asset service providers covers crypto exchanges, stablecoin issuers, and on a case-by-case basis (meaning depending on how they are used), DeFi protocols, and NFT marketplaces. All these institutions are required to integrate know-your-customer checks on their platforms and monitor suspicious transactions that may be linked to money laundering, so they can thwart them. VASPs also have to report suspicious activity to regulators so they can trace the flow of funds and ultimately pin such activities to real-world actors.

### **The Basic Pillars of Crypto AML**

While there might be variations in AML stipulations across different jurisdictions, most of the laws have similarities. This means that it’s easy to identify common pillars that VASPs should integrate into their operations for AML compliance. Thanks to the USA's Bank Secrecy Act, no one has to guess what those pillars are. Let’s take a quick look at these principles.

1. Appoint a Compliance Officer

Appointing a compliance officer involves designating someone who would oversee and ensure your company’s compliance with AML regulations. Their job typically involves evaluating your current processes, identifying areas for improvement, drafting new policies in accordance with existing regulations, and supervising their implementation.

Naturally, the designated officer should have the requisite knowledge regarding your company and industry. They should also be conversant with AML regulations and have experience drafting implementation strategies.

2. Create Internal Policies

Another obvious pillar is the development of internal policies and processes that will ensure compliance with AML regulations. These policies include the implementation of customer identity verification systems, monitoring transactions and flagging suspicious activity, conducting regular AML reviews, and more. Companies either build these systems or integrate with platforms that offer them such as Bitpowr.

3. Develop a Training Program for Employees

Getting buy-in from employees is critical to maintaining AML compliance. To kick start the process, employees have to understand what AML stipulations apply to their company, why they are critical, and how to uphold them. This would require frequent training using a program that aligns with updated AML requirements and current industry trends. The compliance team is usually tasked with building this course.

4. Ensure Independent AML Compliance System Testing and Auditing

Beyond internal AML policy assessments, subject your system to testing and auditing by qualified independent entities. Assessments by such third parties will reveal loopholes in your system and help you avoid violations that may lead to serious sanctions. They also provide unbiased proof of AML compliance, which can drive credibility and adoption.

Ensure the party conducting the assessment has ample knowledge of the industry, the latest AML requirements, and your company’s operations. This is so the testing process can be thorough and effective.  

5. Conduct a Thorough Risk Assessment

Risk assessment generally involves conducting customer and transaction due diligence. In 2018, [FINCEN](https://www.fincen.gov/resources/statutes-and-regulations/cdd-final-rule) released a customer due diligence rule which advised financial institutions to verify the identity of their customers and continuously monitor transactions to spot and report suspicious activity.  

FINCEN recommends a risk-based approach to monitoring customer activity. This approach involves assessing the risk specific accounts or customers may pose based on certain characteristics or activities. In this case, financial institutions would have to set triggers for possible red flags, accounts, or transactions that require extra attention.

### **Final Words**

Cybercriminals laundered $8.6 billion worth of cryptocurrency in 2021 alone. It’s critical to drive this figure down because making the crypto ecosystem a convenient pipeline for illicit funds will stifle crypto adoption, increase the likelihood of hostile regulations, and, worse, hurt innocent users. On the flip side, creating solid structures to deter crypto laundering or money laundering via crypto would improve the industry’s reputation and drive widespread adoption and greater support from governments and regulators.

At Bitpowr, we offer robust AML and KYC policies you can tap into when you integrate with us. Now you can easily comply with AML regulations, protect your customers and business and build brand credibility. [Learn more about our AML system here](https://bitpowr.com/features/aml-and-kyt). Ready to integrate with Bitpowr? [Come talk to us!](https://bitpowr.com/contact-sales) 

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Resources and insights

Understanding Anti-Money Laundering Operations in Crypto

What is Mining?

Understanding Anti-Money Laundering Operations in Crypto

What is Mining?

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