The digital asset industry in the United States has grown into a trillion-dollar market. Legislators have now realized that crypto isn’t going anywhere any time soon, and some form of regulatory oversight is required to protect investors from unscrupulous practices.
In March 2022, President Biden issued an executive order. He directed relevant federal agencies to consolidate their efforts and come up with draft crypto regulations aimed at, among many things, preventing the illicit use of Bitcoin and other cryptocurrencies.
Is Bitcoin mining legal, and how does it work? This guide explores everything you need to know.
Bitcoin Mining for Dummies
Right off the bat: What is bitcoin mining? The term “mining,” as used in the cryptocurrency world, refers to the creation of a new cryptocurrency. Specialized computers are used to solve complex mathematical problems involved in validating transactions.
Upon completion, a new Bitcoin is generated and added to a public ledger known as a blockchain. The idea behind Bitcoin mining is to help secure the blockchain and curb any potential double-spending.
This public ledger known as the blockchain is a series of blocks, each consisting of a specific amount of Bitcoin. Bitcoin can only be accessed once the solution to a complex mathematical equation is found. Once a specific block is unlocked, it is published on the blockchain that can be viewed publicly. This entire process is what is referred to as “mining.”
Mined cryptocurrency uses a consensus model known as proof of work. This system verifies miners and protects the network from cyberattacks. Bitcoin, Litecoin, Ethereum, Dogecoin, and Monerio are just some of the cryptocurrencies that rely on mining to generate new coins.
A mining rig is a unit used to do the actual mining. Rigs vary in size, performance, scale, price, and efficiency. Miners also consider things like energy consumption, hash rate, and adaptability when choosing a rig to mine Bitcoin.
A little over a decade ago, when cryptocurrency mining was still a fairly new concept, Bitcoin mining started on central processing unit (CPU) rigs. Today, Bitcoin and other major crypto assets rely on upgraded rigs capable of achieving higher kilohash-per-second rates.
Graphic processing unit (GPU) rigs were an upgrade from CPU rigs. Unlike CPU rigs that could reach speeds of 8-20 kilohashes per second, GPU rigs could achieve 10-60 megahashes per second. For miners, this development was nothing short of impressive.
2012 saw the launch of the application-specific integrated circuit (ASIC) rig. Unlike its predecessors, this rig was specifically created for mining and could achieve speeds of 90-100 terahashes per second. ASIC rigs are widely used to mine Bitcoin, Bitcoin Cash, and Litecoin. It’s important to note that not all cryptocurrencies can be mined with ASIC rigs. Monero and Ravencoin are two examples of ASIC-resistant cryptocurrencies.
The fastest and most affordable way for most people to get into Bitcoin mining is through cloud mining. Mining is outsourced to an intermediary, and you would be an indirect participant in the whole process. The other option would be to join a mining pool, where several miners combine their individual computing resources to scale up their mining capabilities.
How Bitcoin Mining Works
Bitcoin mining involves solving a hash. A hash is a complex mathematical equation made up of a series of random digits and characters.
The end-to-end mining process has several components to it, including miners, nodes, hashes, transactions, nonces, blocks, consensus protocols, and the blockchain. To mine Bitcoin, a block is validated by solving a complex mathematical problem, which then reveals its underlying hash functions. There are four main steps involved in mining Bitcoin:
- Get the mining hardware
- Open a crypto wallet account
- Join a decentralized mining pool
- Set up mining software to link all components together
The mining process starts from the nodes when a transaction is initiated. A node is a device or individual within the blockchain whose function is to verify that the initiated transaction is legitimate. This transaction is then consolidated with several other transactions to form a new block that will need to be validated.
Once the block achieves the required number of transactions, the hash of the previous data, the block’s header data, and a new hash is added. Generating a new hash involves linking the previous block’s header data with a nonce. Nonces are values that can only be used once.
The miner’s job begins at the point a new block is created. Miners compete to be the first to validate the block by solving the hash. The one who does it first receives Bitcoin as the reward. Before the crypto can be credited into the miner’s crypto wallet, they must first publish the block on the blockchain as proof of work.
Nodes update the blockchain periodically. It is encrypted using public-key cryptography.
Why Does Bitcoin Use So Much Energy
In theory, Bitcoin shouldn’t need an enormous amount of electricity. After all, buying and selling Bitcoin is as simple as a quick tap on your smartphone or click on your PC. This has been the standard procedure for other digital transactions from time immemorial, so why should Bitcoin be any different?
Bitcoin’s decentralized structure is what drives its huge carbon footprint. Here’s how.
Every time there’s a new transaction that needs to be verified, computers need to solve complex mathematical problems. Before the block can be added to the blockchain, the proof-of-work consensus system kicks in for nodes to verify the transaction. What many people don’t realize is how energy-intensive this mechanism is.
In the case of Bitcoin, proof of work involves having several different nodes racing to see how quickly they can analyze these transactions, package them, and solve a mathematical problem. In its early days, this verification and validation process didn’t consume nearly as much electricity as it does today – nowhere near the nation-state scale we see today.
However, Bitcoin’s technology is set up to make the math puzzles harder to solve as more individuals compete to solve them. The net effect of this is that you now have hundreds of thousands of computers all competing to find a solution to the same problem.
In the end, there can only be one winner that receives the Bitcoin honorarium. The rest of the computers that were in competition with each other will have just wasted their computing resources and yielded no result.
While the result generated is fair, accurate, and secure, it does create a massive amount of carbon emissions. Each transaction takes upwards of 10 minutes to validate, which is also the time it takes to mine a new block. Other digital transactions, such as those for Visa, are much faster and use far less energy in comparison to Bitcoin transactions.
Is Bitcoin Mining Legal in the US
The US and most jurisdictions across the world have not yet enacted laws regulating cryptocurrencies. For this reason, the legality of Bitcoin and other crypto-assets remains unclear.
According to the Financial Crimes Enforcement Network (FinCEN), cryptocurrency miners are classified as money transmitters. As a result, individuals engaged in crypto-related activities are subject to the rules and regulations governing money transmission.
While there’s still a lot of regulatory uncertainty in the US concerning cryptocurrency, Bitcoin mining is considered legal if it’s done within the confines of existing statutes. Here’s what that means.
Illegal vs. Legal Bitcoin Mining: What’s the Difference
Bitcoin mining is considered legal if you use any of the two methods described below to do it:
1. Private Bitcoin Mining
The core of every Bitcoin mining endeavor is an eWallet. This is where you store mined cryptocurrencies. You also need to install a special program that can execute hash functions. If you already have a PC, the process is pretty straightforward. As mentioned before, it is possible to mine Bitcoin using a standard computer.
That said, it would make more sense to install ASIC chips which are specially developed to mine crypto. The downside to this is that this mining method isn’t as profitable as Bitcoin mining through the cloud, given how energy-demanding it is.
2. Cloud-Based Bitcoin Mining
This mining method involves renting hash services from cloud mining providers. In most cases, these firms operate large-scale mining farms. Users can get into contracts to mine several different cryptocurrencies, depending on what they offer. The fees charged are independent of the current market value of the crypto asset.
Illegal Bitcoin Mining
Bitcoin mining is illegal if you use a botnet to mine crypto assets. The term “botnet” is short for “robot network.” It involves connecting as many computers as possible to a single network, infecting them with malware, and having them mine Bitcoin. The resulting crypto assets are then credited into the criminals’ eWallets.
The victims are often unaware that their computers have been infected with malware, let alone being used to mine Bitcoin. Here’s how cybercriminals can gain access to your device:
2. Crypto Mining Malware
Crypto mining malware is a type of malicious software specifically designed to mine Bitcoin and other forms of cryptocurrency. Cybercriminals have devised a number of different ways to smuggle it into their victims’ computers, with some of the most common methods being through infected websites and pirated software.
Mining malware typically uses about 66 percent of the computer’s CPU resources and runs discreetly in the background leaving the owner none the wiser. It bundles the device’s computing power to a botnet that can host thousands of computers. Some of these programs are even designed to bypass some antivirus programs, making them undetectable to the average user.
Countries Where Mining Bitcoin Is Illegal
Below is a list of countries where Bitcoin mining is either illegal or restricted:
- North Macedonia
Bitcoin Mining Scams
According to the Federal Trade Commission, nearly 7,000 people lose more than $80 million worth of assets in crypto-related scams every year. The most common Bitcoin mining scam is one where dubious cloud mining platforms market to investors and retail crypto buyers by enticing them to put down capital upfront in exchange for a continuous stream of higher-than-average computing power and lucrative rewards in the process.
The catch is that these platforms don’t use anywhere near the hash rate they market to unsuspecting investors. What’s more, once victims make the down payment, they don’t deliver the promised rewards.
Keep in mind that cloud mining in itself is perfectly legal. However, you need to do your due diligence before investing in a particular platform.
An article in ABC Everyday reported the story of a man identified as Jonathan who came across an ad on Instagram that promised a 50% return mining Bitcoin. He clicked on the link, which directed him to the website where he sent $50. A month later, he received his initial $50 investment and an additional $30 in profit.
He went on to send hundreds of dollars which eventually turned into thousands. He began to spread the word to his friends and family, who got in on the action and cumulatively sent the scammer $20,000. Jonathan recounts that it was the last time he heard from the thief. Not only did he lose a significant amount of money, but many of his friends cut him out of their lives.
Given the almost non-existent regulatory framework for crypto transactions at both state and federal levels, it is often difficult to hold criminal violators liable for illegal practices. If you’re currently grappling with a crypto-related legal issue, chat online with an experienced Laws101 attorney and find out what your next steps will be.