Author: McDermott Will & Schulte
Bitcoin Halving Is Just Around the Corner
By McDermott Will & Schulte on 18. April, 2024
Posted In Crypto Regulation
After the approval of cryptocurrency exchange-traded funds (ETFs) in the United States, another fundamental event for the crypto industry is on the horizon: the expected bitcoin halving in mid-April 2024.
The approval of so-called bitcoin spot ETFs by the US Securities and Exchange Commission (SEC) in early January 2024 led to significant cash inflows into the crypto market, specifically targeting the market for bitcoin spot ETFs. Between March 4 and March 13, 2024, approximately US$3.8 billion was invested into the newly approved bitcoin ETFs, resulting in bitcoin reaching a new record high of around US$ 73,750.
Now, the industry eagerly awaits the so-called bitcoin halving. This is a halving, i.e. a reduction, in the reward that bitcoin miners receive for creating a new block. The halving is an inherent feature programmed into the underlying blockchain of bitcoins, intentionally designed to create shortage. In simple terms, each block in the blockchain contains a summary of all bitcoin transactions. Miners continuously verify the accuracy and completeness of these blocks. Once all transactions within a block are verified, the miner receives a specific number of bitcoins as a block reward. Currently, the block reward is 6.25 bitcoins per validated block. After the halving, this reward will decrease to 3.125 bitcoins per validated block.
Bitcoins are programmed to have a maximum limit of approximately 21 million coins. Every 210,000 blocks – i.e., after verification and creation of 210,000 blocks – a new halving event is automatically and immutably triggered in the source code. On average, a new block is created (mined) approximately every 10 minutes, resulting in a halving event roughly every four years.
The three previous bitcoin halvings, in 2012, 2016 and 2020, have consistently been accompanied by significant price increases for bitcoin. It is widely expected that the upcoming halving will follow a similar pattern. History has shown that the cryptocurrency market in general, and the bitcoin market in particular, is exceptionally volatile – similar to the rapid price movements following SEC approval – often driven by irrational herd behavior. Ultimately, all signs point to the upcoming halving being no exception.
From a regulatory perspective, there is currently no legal framework at either the European or national level to prevent such substantial price fluctuations. In the EU (including Germany), the crypto market is regulated by the European MiCAR (Markets in Crypto Assets Regulation – Regulation (EU) 2023/1114 of the European Parliament and of the Council of May 31, 2023) and, selectively for crypto assets such as security tokens, by MiFID II. MiCAR, which also applies to currency tokens such as bitcoin, will come into full effect on December 31, 2024. For issuers and providers of crypto assets, MiCAR imposes disclosure and business organization requirements, as well as specific licensing and ongoing government supervision. Similarly, crypto service providers offering services such as operating trading platforms, managing crypto portfolios, providing advice on crypto assets and placing crypto assets are also subject to licensing requirements under MiCAR.
The upcoming halving is not affected by this newly established legal framework, and the price fluctuations in the crypto market will not be prevented by the stricter and – at least EU-wide – uniform regulation of crypto assets.
SEC approval for crypto ETF
By McDermott Will & Schulte on 11. January, 2024
Posted In Crypto Regulation
Yesterday, on January 10, 2024, the US Securities and Exchange Commission (“SEC”) made the long-awaited decision by the crypto scene to allow the listing and distribution of exchange-traded funds (“ETFs”) that track the price of the cryptocurrency Bitcoin, so-called Bitcoin spot ETFs. Specifically, 11 of these Bitcoin spot ETFs were approved by SEC, including those from major market players such as BlackRock, Ark Investments and Fidelity. The approval decision was preceded by a false report shortly before the SEC decision, which once again led to considerable market distortions. The approval took a year-long coordination process between the parties involved and the SEC, including a legal dispute in the USA last year regarding the approval of a Bitcoin spot ETF, in which the SEC was ordered by the court to review its legal assessment of Bitcoin spot ETFs. With the approval decision, the SEC has now complied with this, but has also pointed out, that Bitcoin is speculative and volatile and that Bitcoin has already been used to finance illegal activities in the past. The SEC is still not a supporter of Bitcoin. Nevertheless, the general expectation in the market is now a significant increase in crypto investments and a correspondingly strong rise in market capitalization, as institutional investors are now also more likely to have access to crypto investments (via ETFs).
The Bitcoin Spot ETFs approved by the SEC are not initially available in Germany. The approval only applies to the USA. It remains to be seen what impact the SEC decision will have on the German regulatory practice of the German supervisory authority (BaFin) in the future. Under the current legal situation, a comparable structure is not possible for ETFs launched and domiciled in Germany, as here in Germany ETFs are prohibited from investing in just one asset.
You can find the link here.
