Regulatory hurdles for mining pools
An illustration of this is the SOX Compliance requirements. These are reporting and auditing mandates established by the Sarbanes-Oxley Act of 2002, in direct reaction to significant accounting fraud scandals at the time, such as those involving Enron and WorldCom. The Act imposed a greater burden on public companies, clearly delineating the separation of duties between internal accounting processes and the auditing process, which now legally needs to meet specific independence standards from the concerned company. It also mandates more comprehensive financial disclosures, including assets not listed on the company balance sheet and stock transactions by corporate officers.
- Firstly, miners lacking sufficient scale would face erratic income. Without pools to aggregate miners’ resources and distribute block reward income proportionately irrespective of the block finder, miners’ earnings would become highly unpredictable, with a stretch of bad luck leading to severe financial distress. Without this added income predictability, the mining ecosystem would transform into a radically different landscape with an altered risk profile for all involved.
- Secondly, in a reality consisting solely of solo miners, a minimum percentage of the network’s hashrate would be crucial for any miner to maintain a sustainable business. If you control 1% of the network, your chances of uncovering at least one or two blocks daily are fairly good. However, if your network hashrate share diminishes much below that threshold, the payout irregularities can become severe. With monthly energy bills to settle, that scenario is untenable for miners. An energy provider won’t be sympathetic to your “just had an unlucky month” explanation.
The government is actively pursuing any information about actual mining operations. This was unmistakably exhibited by the recently attempted EIA Emergency Survey led by the Department of Energy, which was revoked after a legal challenge in Waco, Texas, brought against the EIA by Riot Platforms and the Texas Blockchain Council. That undoubtedly does not signal the end of the pursuit. They seek details on privately owned operations with the same fervor as public companies where information is already readily available.
Mining pools stand out as the easiest target for regulators to pursue. Pools are a crucial economic element within the mining sector. In the absence of pools, two major outcomes would significantly alter the experience for all miners.
It is unavoidable that pools will begin facing direct pressure from regulators to fulfill custodial entity requirements. At that juncture, pools will either need to comply or seek to replicate Ocean’s model to eliminate the necessity for compliance. This transition brings its challenges, particularly regarding scalability. As mentioned earlier, a scenario with only solo mining would require a minimum operational size just for regular payout consistency to handle expenses. A simplistic on-chain payout system via the coinbase transaction poses similar dilemmas. Miners must maintain a certain minimum scale; otherwise, they will not secure a sufficiently substantial share of the block reward to justify direct on-chain payouts.
Miners collaborating for more consistent payouts is, for better or worse, a fundamental aspect of the ecosystem that operations rely on for stable business management. Consequently, as long as centralized mining pools are operational, they will remain an appealing target for governmental regulators. Mining pools are inherently custodians; when a pool miner discovers a block, the coinbase reward does not go directly to that miner (with a few recent exceptions like Ocean); rather, it is distributed to the mining pool. This pool manages funds on behalf of the miners until a withdrawal is initiated. Globally, regulators mandate compliance for entities that hold funds on behalf of others, yet they have not adapted to the reality that this is a vital function of mining pools. This is precisely why Ocean adopted a model that directly compensates miners with coinbase rewards, allowing them to operate without having to hold others’ funds.
Public mining firms and regulatory oversight
The EIA sought information concerning every commercial mining site throughout the United States. They demanded GPS coordinates, the power availability in purchasing agreements with utilities, the utility companies supplying that power, the amount of power consumed, and the total hashrate. This trend is set to continue. As the economic significance of this network expands, so does its political relevance. Consequently, the political relevance leads to greater scrutiny from regulators and lawmakers.
Regardless of the approach chosen, this remains a pressing issue. If unresolved, a core component of the mining ecosystem is inevitably going to face a substantial wave of regulations. Major mining pools, such as Antpool and Foundry—nearly half of the network mines through them—already enforce KYC procedures for participants in their pools. As long as fund custody is integral to pool activities, it is likely to become a legally mandated requirement soon.
Being publicly traded allows very little, if any, latitude for ambiguity. These companies operate without privacy regarding their internal workings; any material information must ultimately be disclosed for the benefit of current and prospective investors.
Source: bitcoinmagazine.com
All pertinent information related to these public companies is readily accessible for instant compliance checks and enforcement in light of new regulatory demands. There’s no ambiguity, nothing unknown or uncertain; the structures governing publicly traded entities make non-compliance a non-issue.
Public mining companies have surged in number during this recent cycle, unveiling a host of systemic risks and complications. Primarily, these mining entities are now accountable to their investors, with the potential for legal avenues to override operational choices in favor of shareholders’ interests. On its own, this dynamic isn’t necessarily negative; in fact, it could act as a mechanism to ensure the focus on profit maximization, which is essential in a fiercely competitive environment like Bitcoin. However, this reality unfolds within a context where they face intensified scrutiny from regulators.
This scalability challenge regarding miner payouts must be addressed or we risk facing potentially troublesome constraints, even if we manage to evade regulatory pressures at this level. Several potential strategies could tackle this issue. Braidpool aims to resolve it by employing large Schnorr multisig addresses that necessitate a majority of miners to sign off on the fair distribution of rewards. CTV presents two potential solutions: it either commits to eventual payouts to individual miners, which could be optimistically processed via multisig, or supports coordination-free mining pooling through a scheme initially proposed by Jeremy Rubin. Rubin’s proposal retrospectively examines past blocks within a recent threshold, and upon finding a block, shares the reward with the coinbase addresses of those past blocks. If any participating miner fails to adhere to this when they uncover their next block, they will be excluded from future sharing. The concept is to recreate the benefits of a conventional pool purely through incentives that advantage all participants without requiring central coordination.
