This model stipulates that once an individual or entity is KYC verified, they are permitted to transact bitcoins only with other KYC-verified addresses. This requirement is implemented through the use of OP_CTV, which facilitates the transfer of only the Merkle root of the list of KYC'd addresses to the air-gapped device, ensuring a compact and secure process.

A significant point of differentiation highlighted in the conversation is between the covenant model and a cosigner model. The covenant model is lauded for its efficiency and practicality, requiring only a single signature every two weeks, totaling 26 signatures annually. This is contrasted with the cosigner model, where each transaction necessitates a co-signature. In scenarios involving thousands of institutions, this could potentially amount to millions of signatures per year, representing a substantial operational burden.

Additionally, the covenant model is designed to accommodate a slower signing process without negatively impacting transaction speeds. This flexibility allows for the implementation of threshold schemes that can extend over a week, starkly contrasting with the cosigner model. The latter suffers from a critical drawback: the dependency on a governmental cold signing process to complete transactions. The duration of this process directly influences opportunity costs, with longer waiting times inflating these costs. Conversely, shorter wait times necessitate a more complex and less reliable air-gapped signing process.

Contrary to what might be expected, the server responsible for hosting the whitelist in the covenant model does not need to be air-gapped. Instead, it functions as a simple, untrusted, static file server. This simplicity and ease of operation starkly contrast with the complexity and fragility associated with running a cosigning server, emphasizing the practical advantages of the covenant model’s approach to enforcing KYC regulations in cryptocurrency transactions.