Should you be concerned about FinCEN’s proposed regulations on crypto wallets?
FinCEN is crafting legislation that will require banks to keep records of many crypto wallet holders, but should you care? For Bitcoin experts, increased adoption has been a double-edged sword. The price of (BTC) has skyrocketed with individual investors trading in disparate ways, as well as increased institutional investment. And BTC use cases are on the rise. But this has generated increased scrutiny. Governments have accepted that they cannot kill cryptocurrencies, so they are now looking to bring them under regulatory control. It’s unclear how far this will go, but cryptocurrency users are already expressing concern about new Financial Crime Enforcement Network (FinCEN) regulations on crypto wallets. What are the regulations proposed by FinCEN? The ruling essentially requires “money service companies” (banks and exchange houses) to submit reports to the treasury and keep records of any transactions over $ 10,000 that involve convertible virtual currency or digital assets with legal tender status. Additionally, it would require companies to keep records of any customer transferring more than $ 3,000 to a “wallet not hosted or otherwise covered.” This would mean any wallet that the customer has direct control over, including paper wallets or most cold storage wallets. The ruling is designed to close what FinCEN believes is a gap in existing AML regulations. Theoretically it will prevent US residents from hiding their assets from the government and make it more difficult for criminals to operate. So far, very fair, at least on the surface. But trouble is brewing. Typically, these resolutions require months of consultation, but in this case, the crypto industry was given just two weeks to submit comments. This has led to accusations that FinCEN is trying to pass legislation on the orders of Bitcoin detractor Steve Mnuchin, without considering its broader impact. FinCEN’s requirements could hamper DeFi adoption and cripple centralized exchanges.Despite the short comment period, the response from the crypto industry has been strong. One particularly detailed document is the official 11-hour response submitted by the centralized exchange Kraken. This is an interesting example because Kraken has always worked hard to stay on the right side of FinCEN and is a good example of a company that “has nothing to hide.” Kraken’s response argues that the regulation is a substantial departure from existing law and forces regulated entities to spend significant resources to enforce it. Furthermore, he argues that the law would subjugate cryptocurrency exchanges to the control of traditional money service companies. However, the key point made by Kraken is that 15 days is not enough time to provide a cost estimate. Nonetheless, the company made a decent attempt to calculate costs. They estimate that it would take 18 months to install the correct infrastructure and that this would represent a huge logistical challenge. They posit that it would force money service companies that want to ensure compliance to keep track of every transaction or stop doing business with US citizens altogether. This would essentially ban cryptocurrencies and make it difficult to track illicit money flows. Aside from the challenges it would pose to regulated centralized exchanges, it could also make it impossible for DeFi exchanges like UniSwap to do business in the US Smart contracts don’t have a single counterparty or organization attached to it. This could mean that they are unable to interact with the US financial ecosystem, which means that the wallets that interact with them may not be usable in the US. This, again, could amount to banning one of the most common uses. crypto innovators in the United States. Regulation will be challenged While FinCEN’s proposal is clearly designed to be approved before the next administration, there are already increasing legal challenges. These are based on the short comment period and a possible violation of the Fourth Amendment, which protects against “unreasonable searches and seizures.” Leaving aside the legal challenges, there are also doubts about the viability of the decision. It would generate a massive amount of data, and Coinbase alone would generate more than 7,000 reports per day. Also, it would likely be ineffective at capturing illicit funds, as most are inactive. In short, cryptocurrency traders shouldn’t panic. But keeping an eye on the ground is a good idea.