On the Periphery: Financial Crime Risks in Cryptocurrency Mining – Lexology

On the Periphery: Financial Crime Risks in Cryptocurrency Mining – Lexology

Growth in cryptocurrency adoption in recent years has attracted public interest, investment opportunities and regulatory attention. While cryptocurrency-related headlines are now commonplace, cryptocurrency mining remains an obscure topic to most. Anti-financial crime professionals familiarizing themselves with cryptocurrency risks should be certain to focus on what may appear to be a peripheral risk – cryptocurrency mining.

Understanding the lifecycle of a typical cryptocurrency transaction puts into context the role of cryptocurrency mining. When a cryptocurrency transaction is initiated, it is first verified by computers connected to the cryptocurrency network, referred to as nodes. The transaction remains in a memory pool (“mempool”) of unconfirmed transactions until a miner (a mining node in the network) selects it for validation, after which it is propagated to the network and added to the block of transactions (the blockchain).

Mining is typically underpinned by the Proof of Work (PoW) method of validating transactions and reaching consensus about the addition of new blocks (consensus is reached when 51% or more of nodes agree on the transaction validity). In PoW, a miner uses computational power to solve a complex puzzle (the solution of which is called a “hash”) that allows the miner to validate a cryptocurrency transaction. The winning miner is then rewarded with newly generated cryptocurrency (i.e. newly mined Bitcoins, which at present is 6.25 bitcoin), along with transaction fees.

Cryptocurrency mining can be broken down into three distinct segments : (a) proprietary mining, where miners operate and maintain their own hardware for their gains; (b) remote hosting,
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