On Wednesday the Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) published a proposed rulemaking entitled “Requirements for Certain Transactions Involving Convertible Virtual Currency or Digital Assets” in the Federal Registrar. The proposed regulations seek to “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…”
FinCEN noted that this proposed rulemaking is set to be adopted under the Bank Secrecy Act (BSA). Accordingly, FinCEN declared that CVC, such as cryptocurrency or blockchain-based CVC, and LTDA will be considered “monetary instruments” under the BSA. Furthermore, individuals can move from dollars or another form of currency to cryptocurrency and vice versa in cryptocurrency exchanges.
Under this proposed regulation, FinCEN said it has sought to remedy the illegal finance threat posed by one portion of the CVC market and the expected growth in LTDAs based on similar technology principles by creating “a new reporting requirement with respect to certain transactions in CVC or LTDA, that is similar to the existing current transaction reporting requirement, and by establishing a new recordkeeping requirement for certain CVC/LTDA transactions, that is similar to the recordkeeping and travel rule regulations pertaining to funds transfers and transmittals of funds.”
This proposal arises out of FinCEN assessment that found there is a national security threat as bad actors are using CVCs more and more to “facilitate international terrorist financing, weapons proliferation, sanctions evasion, and transnational money laundering,” among other things. Furthermore, FinCEN noted that ransomware attacks and other events that demand payment often want it performed via CVC. Additionally, FinCEN proffered that this proposal would mean that BSA reporting and recordkeeping obligations are expanding. FinCEN claimed that it has worked with the cryptocurrency industry and taken their feedback for its proposal.
Specifically, the proposal requires banks and MSBs “to file a report with FinCEN containing certain information related to a customer’s CVC or LTDA transaction and counterparty (including name and physical address), and to verify the identity of their customer, if a counterparty to the transaction is using an unhosted or otherwise covered wallet and the transaction is greater than $10,000 (or the transaction is one of multiple CVC transactions involving such counterparty wallets and the customer flowing through the bank or MSB within a 24-hour period that aggregate to value in or value out of greater than $10,000). Second, this proposed rule would require banks and MSBs to keep records of a customer’s CVC or LTDA transaction and counterparty, including verifying the identity of their customer, if a counterparty is using an unhosted or otherwise covered wallet and the transaction is greater than $3,000.”
The proposed rulemaking is open for public comments until January 4, 2021. However, cryptocurrency exchange platform Coinbase and the Electronic Frontier Foundation (EFF) have criticized the timeframe because of the holidays occurring during this 15-day period. Additionally, the EFF claimed that the proposal was removing important anonymity aspects of cryptocurrency transactions and would pose privacy issues, while also hindering the appeal of private wallets.
The EFF also noted that some cryptocurrencies like Bitcoin keep a public record of all transactions, therefore, if the name of a user connected with a particular Bitcoin address is known, a variety of information about the account is known, such as all the transactions that address has made. Thus, the EFF contended that “the government may have access to a massive amount of data beyond just what the regulation purports to cover.” Meanwhile, Coinbase stated that the proposal “would impose new and onerous reporting and recordkeeping requirements for cryptocurrency transactions.”
