One of the more significant controversies to roil the cryptocurrency industry in the last 12 months is the proposed crypto wallet rule.
On 18 December 2020, the US Financial Crimes Enforcement Network (FinCEN), part of the US Treasury, issued a Notice of Proposed Rulemaking (NPRM) that would require banks, crypto exchanges, and any other money services businesses to collect Know Your Customer (KYC) data on anyone transferring cryptocurrency worth $3,000 or more to or from a private wallet.
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It caused an immediate outcry for two reasons.
Firstly, the initial consultation for the NPRM was just 15 days and was scheduled to run over the Christmas and New Year period when most of the world was shutting down for the holidays. Cryptocurrency advocates smelled a rat. Normally consultations last for at least 60 days to allow for wide-scale representations from industry participants.
Second, the diktat appeared designed to be pushed through as part of the death throes of the outgoing Trump administration. Within weeks, Treasury Secretary Steven Mnuchin would be deposed by the incoming Joe Biden presidency, with former Federal Reserve chair Janet Yellen lined up to replace him.
Critics swiftly rounded on FinCEN saying it would be technically impossible for most businesses engaged in crypto services to comply with the ruling. Smart contracts by design do not contain name or address information and are simply pieces of code that enact transactional data.
Within days, FinCEN reported it had received over 7,500 ‘robust’ comments.
The response from Katie Haun, a former Federal Prosecutor and Partner at VC giant Andressen Horowitz (a16z), was typical of the immediate feedback from the industry.
Via Twitter, she alleged that Mnuchin was “trying to squeeze regulatory changes into the tail end of an administration with no process”, promising that a16z would challenge the “procedurally defective…vaguely written…overbroad” ruling in court if it ever got close to being imposed.
Peter van Valkenburgh, Director of research at Coin Center, put it best when he characterised FinCEN’s move as an underhanded ‘midnight rule’, noting that: “The time constraints of the so-called midnight period should never be an acceptable justification for imposing rules on Americans and innovative American businesses without sufficient opportunity for notice and comment.
“In similar situations, banks have been treated to extensive consultation and a gradual (sometimes absurdly slow) rulemaking process. For example, FinCEN has had a bank customer due diligence rulemaking pending and unfinished since 2014.”
Timeline of a Bungled Rule Change
- 18 December 2020: Steven Mnuchin’s FinCEN issues wallet rule NPRM with unprecedented 15-day consultation. Immediate backlash.
- 2 January 2021: Original 15-day consultation planned to close
- 14 January 2021: Under-fire FinCEN announces it is extending the crypto wallet rule comment period for 45 days
- 21 January 2021: President Biden freezes all Treasury Department rulemaking for 60 days pending a review
- 22 March 2021: FinCEN regulatory ‘freeze’ scheduled to end
What the Industry Learned from the FATF Travel Rule
In 2018 the Financial Action Task Force’s ‘Travel Rule’ — later codified as ‘Recommendation 16’ — prompted one of the first major existential crises for the industry. The Travel Rule would attempt to bring cryptocurrency transactions into line with wider regulation around anti-money laundering (AML) and KYC, specifically calling for personal data to ‘travel’ with transactions. Any person who received over $1,000 in cryptocurrency must be identified, they said. The recommendations were finalised in June 2019 and the deadline for compliance set 12 months later.
As one of the world’s most powerful intergovernmental watchdogs, when the FATF speaks, financial services businesses sit up and listen.
But,…
Read More:Why the FATF Travel Rule Shows the FinCEN Crypto Wallet Rule Can Work
