Tech

The Era of Government-Friendly Bitcoin Miners Is Here

Bitcoin Miners Agree to Censor Transactions to Please the U.S. Government

Bitcoin markets are surging, but it’s no longer the Wild West of financial markets.

American lawmakers are pushing for new cryptocurrency regulations, seemingly eager to intensify rules before the Biden administration takes over on January 20, 2021. The Financial Crimes Enforcement Network (FinCEN) published a statement on New Year’s Eve that it intends to soon include “virtual currency as a type of reportable account,” so that anyone holding these assets with a foreign company, such as the crypto exchange Binance, needs to report it like a foreign bank account.

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This came on the heels of another FinCEN proposal announced during the holiday season, which would require crypto exchanges to collect know-your-customer (KYC) information for any wallet participating in a transaction worth more than $3,000. Plus, these new rules would require exchanges to report customers to FinCEN if their transactions on the platform collectively add up to $10,000 in a single day.

All in all, the proposed regulations show that the Treasury wants to keep tabs on anyone moving significant amounts of cryptocurrency. In response, some Bitcoiners have railed against the proposals, while others are scrambling to get with the program preemptively demonstrate their commitment to compliance.

“We can tell regulators our mining pools are not doing business with child traffickers, terrorists, or miners in Iran”

Jack Dorsey’s fintech company Square, which offers Bitcoin purchases through Cash App, issued a statement arguing these proposals make American companies less competitive. This is especially true for customers who use Bitcoin for remittances or sharing funds with unbanked family members.

“If a Square customer’s mother gifts her daughter $4,000 in physical cash and the daughter deposits those funds in a bank, the bank would have no obligation to collect information on the customer’s mother,” Square’s statement to FinCEN said. “FinCEN proposes a static requirement that would have us collect names and physical addresses from non-customers.”

Crypto wallet providers aren’t the only companies adjusting to the prospect of a more stringent regulatory environment. Two of the largest Bitcoin mining companies in North America, Marathon Patent Inc. and DMG Blockchain Solutions Inc., recently joined forces to create the Digital Currency Miners of North America (DCMNA) nonprofit trade group, the first North American mining pool with a legal entity. Together, they’re pledging to only process transactions that comply with American laws.

“None of the mining pools in China produce the data that I need for my auditors. This new mining pool does have the auditing support needed by public companies in North America,” said Marathon CEO Merrick Okamoto in an interview.

Most Bitcoin miners participate in power-sharing collectives called “pools,” run by companies that are usually based in China. Hardware operators around the world are rarely profitable without joining a remote pool, including hundreds of Iranian miners. The U.S. Treasury, especially under the Trump administration, isn’t keen on the idea of Iranians accessing such global networks.

The U.S. Treasury fined Marathon’s custody provider, BitGo, in December for failing to block activities related to IP addresses in sanctioned countries like Iran, Cuba and Syria. Importantly, BitGo was not penalized for serving customers located in those countries, but for allowing customers to transact with wallets associated with those jurisdictions, potentially without the customers’ knowledge.

Spokespeople for BitGo didn’t respond to Motherboard’s request for comment by press time.

Although there’s no clear connection between custodial rules and the Bitcoin mining industry, DCMNA isn’t taking any chances. The DCMNA is pioneering a technique it calls “clean mining,” meaning it selects which transactions to process based on wallet information instead of the most lucrative fee options. In other words, they’re promising to only mine transactions that the government approves of, even if it means revenue takes a hit.

“We can tell regulators our mining pools are not doing business with child traffickers, terrorists, or miners in Iran,” Okamoto said. “We’ll lose about 0.35% of our potential business. We think that’s a small price to pay for being able to say we are the good guys, according to the U.S. Treasury… if I point my business toward Chinese pools, they might be doing business with those bad actors.”

Combined, DCMNA’s two current members claim to make up almost 8 percent of the entire Bitcoin network’s hashrate. That’s nothing to sniff at, and they’re looking to swell their ranks with more miners willing to only process U.S. government-friendly transactions.

“We do our own mining, but we also do a lot of hosting, around 12 megawatts of power for third parties. Our facility is one of the largest in Canada,” said DMG CEO Dan Reitzik in an interview.

DMG co-founder Sheldon Bennett said DCMNA aims to become the world’s most powerful mining pool, offering an approach that adheres to American laws.

“Clean block mining is specifically related to wallets that have been banned. That doesn’t impact me trading with someone else, unless that someone sent money to say, somewhere like North Korea, in the past…we’ll take the five cleanest people instead of the five biggest transaction fees,” Bennett said. “If you don’t know who you’re doing business with, you should be a little bit more cautious. You might see a wallet that you don’t think has any risk around it but we’d say that wallet has transacted with people who did various things and so we’ll see that as a risky wallet. Everyone who is a part of our pool is devoid of that risk.”

Reitzik said that profits from the DCMNA pool will go toward pro-miner lobbying efforts in Washington D.C. and all the miners participating in DCMNA will need to submit KYC information, including smaller companies renting space in DMG’s warehouses.

Bitcoin advocates from the DCMNA see the new regulatory environment as a boon for the industry, accelerating professionalism and attracting more conservative institutions to the space. On the other hand, Square Crypto developer Matt Corallo said this approach will harm the industry if the Biden administration makes good on the Trump administration’s isolationist penalties and proposals.

“It is absolutely clear [Treasury Secretary Steven] Mnuchin wants this done before Biden takes over, though what’s less clear is whether Biden’s treasury under [incoming Treasury Secretary Janet] Yellen will be more cryptocurrency-friendly,” Corallo said. “The BitGo penalty is likely to make building user-friendly cryptocurrency wallets impossible in the United States. Instead, innovation will happen elsewhere and American competitiveness in the emerging industry will take a huge hit.”