U.S. cryptocurrency users who wish to move their holdings from an exchange to their own personal wallets may need to meet the new Know-Your-Customer (KYC) requirements under a rule proposed by the Treasury Department on Friday.
According to the pre-announcement of the proposed rule creation, users who wish to send cryptocurrencies from centralized exchanges to a private wallet would have to provide the exchanges with personal information about the owner of that wallet if the amount sent is more than $ 10,000 in a day. The exchanges would also be required to file and maintain records of such transactions totaling over $ 10,000 in any given reporting period, or keep records only for transactions over $ 3,000.
In other words, users of centralized cryptocurrency exchanges wishing to transfer their holdings to their own private wallet or someone else’s would have to provide detailed personal information for transactions over $ 3,000, and the exchanges would have to report to either individuals or groups of transactions that make more than $ 10,000 for the Financial Crimes Enforcement Network (FinCEN).
Along with another recent proposal, the move would increase the number of manpower and exchanges required to transfer cryptocurrencies, as well as the number of personal data exchanges that need to be held or reported to the finance department.
This would bring crypto closer to the traditional banking system and potentially more convenient for institutional investors who are increasingly thinking about the asset class, but undermine the technology’s early promise of privacy and self-sovereignty.
To protect privacy, at least more tires would have to be jumped through:
In a press release, the Treasury Department said the rule would close “loopholes” in reporting transactions in virtual currencies.
The general public has until January 4, 2021 to provide comments or feedback (although another part of the document says that feedback can be submitted within 15 days of the rule being posted in the federal register, the national logbook, on December 23rd ). .
“FinCEN assesses that there are significant national security requirements that require an efficient process to propose and implement this rule,” the document reads, adding:
“US. Authorities have found that malicious actors are increasingly using CVC to facilitate international terrorist financing, arms proliferation, sanction evasion, and cross-border money laundering, as well as controlled substances, stolen and fraudulent ID and access devices, counterfeit goods and malware to buy and sell and other computer hacking tools, firearms and toxic chemicals. “
Rumors that this rule was in the works began last month when Coinbase CEO Brian Armstrong tweeted that the Trump administration was preparing a rushed rule that would require an exchange to transfer information about your customers to the recipient Check transfer to a self hosted wallet.
The move would mean a lot of friction for crypto users, Armstrong warned at the time.
The rule would largely correspond to the guidelines of the Financial Action Task Force (FATF) from last year, according to which their member states have to implement KYC rules for Virtual Asset Service Providers (VASPs), a term for crypto exchanges and other startups called the “travel rule” “.
At the time, the FATF guidelines suggested that individual crypto wallets could be referred to as VASPs.
“In cases where the VASP is a natural person, it should be licensed or registered in the jurisdiction in which its place of business is located. The determination may include several factors that need to be considered by countries.”
Public comment period
Every time a VASP customer sends $ 10,000 or more of crypto to a self-hosted wallet in a single day, their VASP must verify their identity, record the identity of their counterparty, and report to FinCEN according to the rule proposed by the Treasury Department Submit .
The rule would force banks and money service providers to compile and review the same information for all non-hosted wallet transactions over $ 3,000. However, you would not need to file a report with FinCEN for these four-digit transfers.
As has been rumored for weeks, the main target usually seems to be self-hosted wallets (FinCEN calls them non-hosted wallets). These are wallets that give their users access to the private keys and give them full control over the money, just like the leather wallet in your pocket or purse.
The Treasury Department also intends to apply the reporting rules to foreign wallets tied to countries on FinCEN’s money laundering watchlist. This means Myanmar (which FinCEN calls Burma), Iran and North Korea begin.
Suggested that much of the crypto transaction activity may be suspicious, FinCEN wrote, “Despite significant under-reporting due to compliance issues in parts of the CVC [convertible virtual currency] In 2019, FinCEN received approximately $ 119 billion in suspicious activity. “
“A significant majority” of these transactions could relate to possible legal violations, the document says.
Central bank digital currencies
The document also makes references to “legal tender digital assets (LTDA),” a term that appears to refer to central bank digital currencies (CBDCs). The term first appeared in government documents in late October.
According to a footnote, LTDAs have legal tender status but are not currencies. They may be treated similarly as “Foreign Coins and Currencies, Travelers Checks, Owner Bargaining Tools” or other financial instruments.
Another note states that “there are currently” a limited number of transactions with LTDA “although several countries are developing LTDA systems.
LTDAs are referred to as distinct from CVCs in the notice.
Widely used pushback
Marta Belcher, a civil liberties and technology attorney, told CoinDesk, “One of the most important things about cryptocurrency is that it is bringing the civil liberties benefits of cash into the digital realm by allowing anonymous transactions.”
The ANPR is part of a trend in which the U.S. government is trying to implement traditional banking system monitoring tools in the crypto room, said Belcher, who is also a special advisor at the Electronic Frontier Foundation.
“There are photos of the protests in Hong Kong against long lines at the subway stations as protesters waited to buy tickets with cash so that their electronic purchases would not be placed at the protest location,” she said. “These photos underline that a cashless society is a surveillance society. This is why the ability to import the anonymity of cash into the digital world is so important to civil liberties. “
The rule was pushed back by the crypto community long before details were officially announced. Armstrong criticized the rule, saying he believed there could be unintended consequences.
Part of the concern stems from the rapid pace at which Mnuchin – and agencies reporting to the Treasury Department – are implementing new rules. FinCEN, an office of the Treasury Department, has attempted to lower the threshold for applying the travel rule to international money transfers, including cryptocurrencies. While this rule change proposal saw a public comment deadline, it was at least 30 days shorter than usual.
Kristin Smith, executive director of the Blockchain Association, said in a statement, “Falling below this ability by creating rules at the last minute in the twilight days of an outgoing administration is not the way to create the kind of permanent, responsive regulation that does Support the Safe Growth of This Industry in the US Regardless of whether regulators acknowledge it or not, crypto is here to stay and should be viewed as a growth-enhancing part of the economy, and not silently pushed aside at midnight. “
Peter Van Valkenburgh, Research Director at the Coin Center, also called Friday’s proposal “rushed,” saying some of the record-keeping requirements may be “unworkable in relation to cryptocurrency transactions.”
FinCEN does not appear to be affected by these fears. In fact, the agency claims that it is not legally required to give any length of time to comment, but is still giving the public a chance. Delaying implementation could cause individuals to move their funds quickly, FinCEN warned.
The moves increase the number of people who need to invest labor and exchanges in transferring cryptocurrencies, as well as the number of personal data exchanges that need to be held or reported to the finance department.
Republican lawmakers even rejected the move in a public letter signed by U.S. Representatives Warren Davidson (Ohio), Tom Emmer (Minn.), Ted Budd (NC), and Scott Perry (Penn.) Asking Mnuchin to discuss the move with elected officials. Earlier on Friday, Senator-elect Cynthia Lummis (R-Wyo.) Said she was concerned about the move.
Other industry officials criticizing the move include Jeremy Allaire, CEO of Circle, who wrote an open letter to Treasury officials saying the proposed rule would “insufficiently address the real risks at stake” and harm the industry as a whole.
The US is following a number of other nations in implementing stricter rules for verifying the identity of crypto wallets. France, the Netherlands and Switzerland created their own strict wallet rules this year.
De Nederlandsche Bank, the Dutch central bank, apparently asked the exchanges to ask their customers what they would like to use their cryptocurrencies for and to check if they owned the wallets they wanted to send money to.
In a similar way, Switzerland has requested an exchange since the beginning of the year in order to “prove ownership of wallets that have not been kept”.
Before the US, France was the youngest country to enforce such identification requirements on crypto exchanges, block anonymous accounts and point out further rules for digital IDs.
Unlike the rest of the world, however, when the regulations were in place, French Finance Minister Bruno Le Maire cited concerns that crypto was a potential source of terrorist financing and not the FATF.
Van Valkenburgh noted that the US proposal differs from the overseas variants and wrote: “We are nevertheless pleased that the US has not repeated the mistakes made abroad and instead policy makers have an extension of the ones already in place Rules proposed traditional financial institutions that trade in cash. “
UPDATE (December 18, 2020, 11:10 PM UTC): Updated with additional context and information.