The US Treasury Secretary Steven Mnuchin recently announced the proposal of new rules to regulate the use of non-custodial cryptocurrency wallets.
The new rules would require that anybody sending more than $3,000 in crypto must provide their identity and the identity of the recipient. Additionally, wallet providers must report any transaction exceeding $10,000 to the necessary regulators. Such rules already apply to most custodial crypto wallets that require anti-money laundering (AML) and know-your-customer (KYC) verification, but it’s unclear how the department plans to enforce the rule on self-custody wallets.
The rule was developed by the Financial Crimes Enforcement Network (FinCEN), a bureau within the US Treasury Department, and announced via a press release entitled “The Financial Crimes Enforcement Network Proposes Rule Aimed at Closing Anti-Money Laundering Regulatory Gaps for Certain Convertible Virtual Currency and Digital Asset Transactions.”
The press release begins by stating a request for comment on “proposed requirements for certain transactions involving convertible virtual currency (CVC) or digital assets with legal tender status (LTDA).” It goes on to assert that “banks [..] would be required to submit reports, keep records, and verify the identity of customers in relation to transactions above certain thresholds involving CVC/LTDA wallets not hosted by a financial institution.”
Essentially, the FinCEN wants all crypto wallet providers to operate just like current banks do, keeping detailed records of everything you do with your money. This goes against the original purpose of Bitcoin, which was intended to be “peer-to-peer digital cash“, not “heavily regulated government money.” With very little evidence to suggest criminals use cryptocurrencies extensively for money-laundering or other illicit activities, one wonders why the sudden desire for such strict regulation?
“We’ll be challenging it.”
Following the announcement, Coinbase CEO Brian Armstrong announced via Twitter the company’s plans to challenge the ruling. Rather than deliver a “tweet storm” of his own, Armstrong retweeted a multi-part tweet from lawyer Jake Chervinsky, who outlined in detail the problems and lack of due process around the new regulation.
I was going to do a tweet storm on the proposed rule making from FinCEN and Treasury. But @jchervinsky summed it up really well.
It doesn't follow the correct process, and we'll be challenging it. https://t.co/8lQaDMcz1V
— Brian Armstrong (@brian_armstrong) December 19, 2020
Chervinsky starts by clarifying that the proposed legislation could have been far worse, noting that it doesn’t require KYC for every transaction, nor is it an outright ban on self-custody wallets. This is most likely due the FinCEN’s understanding that such heavy-handed regulation would simply push the crypto market underground, stripping the US of access to a fast-growing, billion dollar industry.
Chervinsky goes on to highlight how the rule will do little to stop criminals, who can simply pay a small extra fee to withdraw to another wallet first. Second, he notes, it “infringes on US citizens’ financial privacy rights” and amounts to an expansion of “warrantless mass surveillance and data collection operations.”
Like the recently STABLE Act, it’s possible the rushed regulations are another response to Facebook’s ongoing plans to launch its own digital currency. Whatever their intention, the new rules will affect the use of all cryptocurrencies. Once again, they highlight a pressing need to increase decentralization in the space and reduce exposure to traditional financial institutions.