The Financial Crimes Enforcement Agency (FinCEN) issued a notice of proposed rule making today called, “Requirements for Certain Transactions Involving Convertible Virtual Currency or Digital Assets”. FinCEN is providing only 15 days, a highly accelerated timeframe for public comment to administrative rules by the Administration.
The U.S. Treasury agency voids the public comment period for the new rule on crypto reporting, “…because this proposal involves a foreign affairs function of the United States and because ‘notice and public procedure thereon are impracticable, unnecessary, or contrary to the public interest.”
Even though FinCEN is technically providing 15 days for public comment, the notice also highlights that, “notice-and-comment rule making requirements are inapplicable because this proposal involves a foreign affairs function of the United States and because ‘notice and public procedure thereon are impracticable, unnecessary, or contrary to the public interest.”
The new rule would require, “banks and money service businesses (“MSBs”) to submit reports, keep records, and verify the identity of customers in relation to transactions involving convertible virtual currency (“CVC”) or digital assets with legal tender status (“legal tender digital assets” or “LTDA”) held in unhosted wallets,” or in hosted wallets in jurisdictions covered by FinCEN.
FinCEN’s notice is scheduled to be published in the Federal Register on December 23, 2020 with a deadline to comment by January 4, 2021, so the public will still have an opportunity to provide comments. In justifying why such a short time period is being offered, FinCEN notes both ‘significant national security imperatives’ and feedback already received from the cryptocurrency and blockchain community justify the accelerated nature of the process.
First, the notice highlights on a national security front how, “U.S. authorities have found that malign actors are increasingly using CVC to facilitate international terrorist financing, weapons proliferation, sanctions evasion, and transnational money laundering, as well as to buy and sell controlled substances, stolen and fraudulent identification documents and access devices, counterfeit goods, malware and other computer hacking tools, firearms, and toxic chemicals.” FinCEN further points to how CVC is almost exclusively used for ransomware attacks.
Secondly, FinCEN cites outreach events the agency held including a ‘FinCEN Exchange Event in 2019’ up to a more recent ‘FinCEN Exchange Event on Cryptocurrency and Ransomware in November 2020’. In addition, FinCEN points to the numerous trade associations and crypto companies that weighed in publicly on this ‘proposed’ rule making before it was announced. A listing of some of these inputs from the public is below:
FinCEN Outreach Events Cited In Public Notice
1) FinCEN Exchange Event, June 2019
2) Industry Roundtable With The U.S. Treasury, March 2020
3) Virtual FinCEN Exchange Event on Ransomware, November 2020
Cited Industry Outreach To FinCEN
A few of the cryptocurrency trade associations were citied, whose feedback and input on this rule making is noted below. In addition, companies such as Blockchain.com and Circle are mentioned in the FinCEN notice as well.
1) CoinCenter, which describes itself on its website as, “the leading non-profit for policy issues affecting cryptocurrency”.
2) The Blockchain Association, which describes itself on its website as “the unified voice of the blockchain and cryptocurrency industry”.
3) The Association for Digital Asset Markets (ADAM), which according to its website, “exists to foster fair and orderly digital asset markets where participants can transact with confidence,” wrote the attached letter on its concerns over a potential for this rule being issued.
The New Rules For Crypto Reporting
The proposed rule describes the nature of how blockchain-based CVCs pose risks to the financial system, where there are two kinds of digital wallets. First, there are hosted wallets that are held on a cryptocurrency exchange, similar to how you may have a deposit account at a bank that holds your money for you. Secondly, there are what are described as ‘unhosted wallets’ or digital cash, similar to the cash you may have in your wallet in your pocket.
The distinction of, “A person conducting a transaction through an ‘unhosted’ wallet to purchase goods is not a money transmitter,” as stated in the notice, is made to clarify that, just as you may take money out of your wallet to pay someone for a good, you are not responsible for noting the amounts of the transactions according to the Bank Secrecy Act (BSA).
However, if you look to move certain amounts from your ‘hosted wallets’ to ‘unhosted wallets’, just like you may bring cash into a bank to make a deposit, this notice makes both money transmitters and banks comply with similar rules for physical currency, in that any transaction that is $10,000 or more must be reported to FinCEN, and any transaction that is $3,000 or more, must be recorded by the money transmitter or the bank.
In identifying the risks associated with money laundering, the notice describes the Financial Action Task Force (FATF) has observed peer-to-peer transactions on unhosted wallets “could present a leak in tracing illicit flows of virtual assets”. Additionally, FinCEN notes that while some open blockchains are beneficial to law enforcement to trace illicit activity, it does not believe this data does not significantly mitigate the risk of unhosted wallets.
In other words, one of the most heralded benefits of a blockchain on Bitcoin or Ethereum is the ability to follow the history of transactions over the Internet is not great enough to satisfy law enforcement officials that those using unhosted wallets could still achieve nefarious goals such as money laundering or terrorist activity undetected.
With this new rule, not only would any transactions of $3,000 or more need to be reported and $10,000 or more need to be recorded, but the transaction hash and identity of a person would be recorded if multiple banks were used by an individual in making transactions. In addition, the rule would be made so as to avoid structuring of transactions (so if you go to the bank with $10,000 in cash, and you make three deposits in a row for $3,333, $3,333, and $3334, this would still result in a reported transaction.
The notice goes on to explain in detail many aspects of the legal framework for the notice and how the law will be applied to both CVCs and LTDAs. The notice of proposed rulemaking is available here: