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Bank Secrecy Rules Applied to Crypto Wallets

After many weeks of speculation that the Treasury Department was working on regulations that will affect crypto wallets, the Financial Crimes Enforcement Network (FinCEN) issued proposed rules that will “require banks and money service businesses (‘MSBs’) to submit reports, keep records, and verify the identity of customers” who make crypto transaction into private wallets.

The new policies, which have gone out for public comment until January 4, 2021, suggest that “convertible virtual currency” and “legal tender digital assets” will be categorized as “monetary instruments” and are subject to the requirements of the Bank Secrecy Act (BSA).

The rules state that any transaction totaling more than $10K in 24 hours must be reported to FinCEN. The customer’s identity must be verified; many transactions will require a lower brink of $3,000.

Know-your-customer rules, then, apply to level private crypto wallets. FinCEN says that the “targeted expansion of BSA reporting and recordkeeping obligations” is intended to halt illegal finance containing cryptocurrency.

“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,” the notice says.

In particular, “anonymity-enhanced cryptocurrency,” or privacy coins like Monero, as having a “well-documented connection to illicit activity.”

Furthermore, while the proposed rule has been sent out for public comment, FinCEN makes clear that it is a form of a courtesy:

“FinCEN has noted that notice-and-comment rulemaking 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 proposed changes were not unexpected. Brian Armstrong, the CEO of cryptocurrency exchange Coinbase, reported about the rumors of impending crypto wallet regulations and publicly urged the department to reconsider:

“Given these barriers, we’re likely to see fewer transactions from crypto financial institutions to self-hosted wallets. This would effectively create a walled garden for crypto financial services in the U.S., cutting us off from innovation happening in the rest of the world.”

Senator-elect Cynthia Lummis, a bitcoin lover, tweeted many hours before the rules were issued that the Treasury Department was going about the changes in the wrong way.

“Congress is best placed to weigh the competing policy issues at stake. A rule adopted now could also potentially extend the BSA to new types of transactions beyond Congress’ intent,” she wrote. “Treasury’s rule would also likely be adopted without public comment under an often-abused portion of the Administrative Procedure Act. Transparency makes good policy. It’s that simple. Let the sunshine in, Mr. Secretary.”

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