- >What Proposed FinCEN Rules Would Mean for Bitcoin, Cryptocurrency
What Proposed FinCEN Rules Would Mean for Bitcoin, Cryptocurrency
Last December, the former US administration proposed regulations that would require banks and money service businesses to keep and submit records of specific crypto transactions.
Through a Notice of Proposed Rulemaking (NPRM), the Financial Crimes Enforcement Network (FinCEN) – a bureau inside the Treasury, transactions involving convertible virtual currency (CVA) or digital assets with legal tender status (LTDA) above certain thresholds for both “unhosted wallets” (read: self-custody wallets) and hosted wallets (such as in exchanges) would come under the microscope of the agency.
Hope Mutie | May 7, 2021
When you scrap the bureaucratic jargon, these new rules propose exchanges and other cryptocurrency businesses to collect data on crypto wallet users. What’s glaringly apparent was the proposal’s frantic nature – unveiled just before Christmas with only 15 days for the public to comment. This was intended to push through the rules just before the incoming Biden administration, even though it would mean unprecedented access to individuals’ financial information if enacted.
After considerable pushback, FinCEN added more days for public input. But if the proposals were ever successful, what would that mean for Bitcoin and cryptocurrencies?
What’s The Rule?
FinCEN, an arm of the US’s Treasury Department, released a notice for proposals in December 2020 seeking to force exchanges and transacting entities to reveal KYC information in certain transactions.
If enacted, the proposal would force banks and money service businesses ‘MSBs’ (including exchanges) to record identifying information of customers who transact in more than $3,000. The information would even include physical addresses of all counterparties. This information would be available upon request by FinCEN. Under the rule, banks and MSBs would also collect the name and physical address of individuals who engage in transactions totaling $10,000 or more within a 24-hour period and report this to FinCEN.
The rules, dubbed ‘Requirements for Certain Transactions Involving Convertible Virtual Currency or Digital Assets,’ also took a swing at ‘structuring’ – a method by which ‘malign actors’ break large transactions into smaller parts to avoid detection, according to the agency.
FinCEN sought to explain the drastic new rules by citing an increased use of cryptocurrencies by ‘malicious actors’ in terrorism financing, weapons proliferation, sanctions evasion, fraudulent IDs, money laundering, ransomware attacks, and illegal computer hacking.
Background on Proposal
There had been whispers that the US Treasury Department had plans to unleash new tough rules on crypto transactions as early as November. 26th of that month, Coinbase CEO Brian Armstrong took to Twitter to blast the proposed regulations, citing privacy violations, potential snuffing of emerging crypto use cases, and a terrible legacy for the US.
The rules were definitely a parting shot to the crypto industry from the Trump administration and former Treasury Secretary Steve Mnuchin. Both Trump and Mnuchin were never really fans of Bitcoin and cryptocurrencies.
The thing is, no one is refuting that some ‘malign actors’ are capitalizing on crypto’s privacy for dirty deeds. Blockchain analysis company Chainalysis reported that 2020’s darknet revenue exceeded that of 2019. August last year, the US Department of Justice revealed crypto had been at the center of three terrorist financing outfits.
But enacting these rules, which seem harmless on the surface, would be like taking a sledgehammer to a mosquito.
What This Means For Bitcoin and Cryptocurrency
It’s obvious these rules are arbitrary and even potentially legally grey. What’s even more obvious is Bitcoin and crypto would take a massive blow if they were ever ratified.
Let’s see how:
1) Undermine Crypto’s Promise of Privacy and Anonymity
First, crypto is a success partly due to the financial privacy and anonymity it offers users. Requiring exchanges and banks to record information of hosted and self-hosted wallets makes a joke of that provision. Even cash itself provides more privacy than that.
Hong Kong protesters used cash in 2019 to buy train tickets to avoid a trackable paper trail that might be later used against them. Crypto offers such privacy, albeit this time electronically. These rules threaten the privacy and self-sovereignty that crypto represents.
2) Stifle The Crypto Industry
The road to hell is paved with good intentions. While FinCEN may have wished to ‘protect national security’ per Mnuchin, the end result would be to repress the crypto industry. From the ambiguity of the rule (how will MSBs, for instance, collect the information of transacting counterparties?) to infringing on individuals’ privacy, the regulation would inhibit crypto adoption across the board.
Second, it’s impractical to expect businesses to go beyond their relationship with customers and go after their counterparties’ names and physical addresses. It would place an undue burden on the businesses, and customers would undoubtedly find it ridiculous and unnecessary. Many people would be happy to abandon such services rather than go through the tenuous procedures. All this would stifle crypto’s growth.
3) Wrong Precedent
The US sets the tone for a lot of policies around the globe. Fintech is not exempt. If the US were to crack down on crypto in this way, it would set a terrible precedent for how governments and regulators around the world should treat crypto. This very fact would threaten the evolution of the industry.
4) Bitcoin Would No Longer Be a Superior Alternative to Banks
Remember when Satoshi created Bitcoin? They wanted a currency system with no central server and that didn’t rely on third parties for transactions to occur.
Bitcoin arose to challenge the traditional finance system and give people autonomy over their financial affairs. If the US government were to ram through these regulations, crypto exchanges would start acting just like the banks. This would be a punch in the gut for the censorship-resistant, peer-to-peer-only status of Bitcoin.
Pushback And Current Status
March 29 was the last day for the public to comment on the rule. As you’d expect, it was greeted with loud opposition from the beginning. As we noted earlier, Brian Armstrong of Coinbase slammed the proposal a month before it came out. Twitter CEO Jack Dorsey, a noted advocate of Bitcoin and Square‘s CEO, railed against the rule.
Civil liberties and digital rights groups such as the New Civil Liberties Alliance, Electronic Frontier Foundation, and Coin Center joined the clamor. Even politicians weighed in. Incoming Wyoming Senator Cynthia Lummis urged Mnuchin to “let the sunshine in” while a group of lawmakers wrote a letter expressing concern.
It remains to be seen how FinCEN will process the public commentary. Hopefully, they’ll realize while their intentions are good, the rule could end up suppressing the crypto space and stifling Fintech innovation in general. FinCEN should either amend the rule or scrap it altogether.