JP Koning: FinCEN’s Crypto Rules Aren’t Unfair

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In recent weeks, the US Financial Crimes Enforcement Network (FinCEN) has been inundated with 7,477 angry comments on a rule change it proposed just before Christmas. “Impressive incompetence,” says one anonymous commenter while another writes “Touch Bitcoin,” and you will feel the anger and the robbery [sic]. ”

Dozens of industry leaders like Coinbase, Fidelity, and Coin Center have also submitted more serious comments.

What is at stake? Until now, exchanges like Coinbase have not bothered to de-anonymize the undocumented wallet owners who either send cryptocurrency to exchanges or receive cryptocurrency from exchanges. If you had a few thousand dollars of bitcoins in a paper wallet, Coinbase wouldn’t identify you if you transferred those bitcoins to a Coinbase account.

FinCEN – an office of the U.S. Treasury Department that defines anti-money laundering rules – has proposed changing that. U.S. cryptocurrency exchanges and other financial institutions dealing with cryptocurrency would need to collect information about owners of unstuck wallets. (FinCEN refers to these as non-hosted wallets). This means less privacy and an end to seamless deposits and withdrawals.

The 7,477 letter writers aren’t just annoyed by the limited usability and lower privacy. They also claim that the rule is unfair. Square’s Jack Dorsey says the rule “creates a double standard between them [cryptocurrency transactions] and legacy cash transactions that take place between financial institutions and individuals. “Kraken, a US-based cryptocurrency exchange, claims the rule” shakes “parity between money service providers.

See also: 65,000 Comments and Counting: The Crypto Industry Is Fighting The Arbitrary Treasury Rule

I sympathize with many of the concerns expressed in the 7,477 letters. The new rule forces owners of self-hosted cryptocurrency wallets to reveal important personal data. Financial institutions have to set up expensive systems to collect and store this information. And to boot, the rule proposal was released with just 15 days of public comment, much of it over Christmas and New Years. (Suggested policies typically have at least 30 days to respond.)

But I disagree with claims about injustice. Cryptocurrency inherits the same provisions that already apply to other forms of money transfer.

Not unfair

An essential part of the FinCEN proposal of December 23rd is a new record-keeping requirement. All U.S. financial institutions dealing with cryptocurrency would be required to keep records of non-hosted cryptocurrency transactions in excess of $ 3,000. This would mean collecting and verifying the name and address of people who want to transfer more than $ 3,000 in cryptocurrency from their self-hosted wallet to an exchange, and vice versa, collecting names and addresses of owners of non-hosted wallets To which withdrawals will be made will be made in excess of $ 3,000.

This is nothing new. Since 1996, FinCEN has required money transmitters like Western Union and MoneyGram to keep a record of $ 3,000. The rule proposed in December would extend this to money transmitters like Coinbase, which transmit cryptocurrency.

Let me illustrate. For example, suppose a stranger walks into a Western Union branch with $ 3,000 in cash and asks the agent to deliver it overseas. The Western Union agent needs to identify this stranger and log the transaction. This obligation stems from a FinCEN record-keeping requirement that requires all money transmitters to collect and verify personal information from senders other than incumbent customers for transactions above a threshold of $ 3,000.

Now let’s translate this rule into the cryptocurrency space. A stranger walking into a Western Union branch with $ 3,000 in cash is like an anonymous, non-hosted wallet owner asking Coinbase to transfer $ 3,000 bitcoin to a Coinbase account. If Coinbase and Western Union are to be subject to the same standards for dealing with senders other than incumbent customers, Coinbase should also need to collect information about the owner of that non-hosted wallet.

Cryptocurrency inherits the same provisions that already apply to other forms of money transfer.

The same applies to payments from exchanges. When Coinbase is asked to withdraw to an anonymous, non-hosted wallet, it is in line with instructions from Western Union to provide cash to a stranger waiting at their counter. The law already requires Western Union to collect and verify personal information from recipients other than incumbent customers for all transactions over $ 3,000. Shouldn’t Coinbase also be required to identify recipients who are not established customers?

Cryptocurrency fans can rest assured that FinCEN’s new rule will handle cryptocurrency transactions more easily than traditional fiat transfers. In an earlier proposal in October 2020, FinCEN suggested lowering the 25-year-old recording threshold from $ 3,000 to $ 250. A stranger visiting Western Union and trying to send $ 250 must now be identified before the trigger point was $ 3000.

Fortunately, FinCEN does not intend to apply this stricter $ 250 threshold to cryptocurrency transactions. Cryptocurrency exchanges like Coinbase are subject to the separate and loose $ 3,000 recording threshold proposed on Dec. 23. This lighter grade makes sense. From a money laundering perspective, cryptocurrency isn’t as risky as fiat.

Earth to FinCEN: “We care about privacy”

Fair or not, the rule isn’t going to stop cryptocurrency users from feeling angry. FinCEN is aware of this. From 2008 to December 22, 2020, the day before the proposal for an Unhosted Wallet Rule was published, it received 3,724 public submissions in response to its rules and notices. A typical proposed rule change could have generated 50 legal responses. The 7,477 comments submitted since December 23rd represent 67% of all public responses FinCEN has ever received!

Many of these comments mention privacy. FinCEN and other regulators that enforce anti-money laundering regulations have only briefly considered data protection concerns in the past. The explosion of comments is a stern reminder to the public concerned about this issue. And while this is unlikely to stop the expansion of the existing money laundering law to include crypto, it may affect the discussion about thresholds.

See also: JP Koning – Druckermiller, Jones and Bitcoin’s Perfect Trading Machine

When FinCEN discusses the level at which thresholds should be set (e.g., the $ 3,000 record keeping threshold), it seeks to address a number of conflicting concerns. These include the anti-money laundering duty, the administrative burden on the private sector and the impact on financial inclusion. If the thresholds are too strict, they will be too costly for financial institutions and vulnerable members of society will be excluded from payment. Too easy and FinCEN is not doing its job to stop money laundering.

The 7,477 angry comments will force FinCEN to consider financial privacy, possibly for the first time, in its decision on setting thresholds. Why a $ 3,000 Entry Threshold? Couldn’t privacy concerns deserve a $ 5,000 trigger? Privacy shouldn’t just be a factor in setting thresholds for cryptocurrencies. What about the $ 10,000 threshold for reporting cash transactions or the new $ 250 limit for money transmitters like Western Union?

I have no idea how FinCEN will react to the public reaction. One thing is certain, however. You have a lot to read.