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US proposal to collect names, records of cryptocurrency users draws heat from industry, customers
05 Jan 2021 12:00 am by Robert Thomason
Proposed US cryptocurrency regulations that would toughen record-keeping and reporting rules for virtual currencies has generated thousands of comments from cryptocurrency users who say they're impractical and an assault on their rights.
Electronic payments-processor Square said such a rule would drive cryptocoins away from legitimate US financial firms and toward foreign or malign actors. Coinbase, a major cryptocurrency exchange, called on the US to withdraw the proposal, and said a shortened comment period for the regulations is unlawful.
The Financial Crimes Enforcement Network, which is promulgating the rule, says it's accelerating rulemaking because terrorists and criminals use the anonymity of unhosted wallets to purchase weapons and drugs and to otherwise hide the financial means or proceeds of their crimes. FinCEN said it's important to combat this illicit financing quickly.
The proposal would require financial firms to keep records, including names and physical addresses, of non-customers using "unhosted," or self-maintained, wallets to transfer more than $3,000 through the firms' systems. The proposed rule would also require the reporting of transactions exceeding $10,000.
Square Chief Executive Officer Jack Dorsey said the proposal addresses neither the inherent nature of cryptocurrency nor its risks.
"This Proposal places impractical burdens on these networks, creating existential threats to both protocols and the companies building upon them, and does not effectively monitor and address whatever risks they may present," Dorsey said in a letter submitted yesterday to FinCEN.
"Due to the inherent design of the technology, Square would not have the name or physical address of a party to a transaction unless that party is our customer," said Dorsey, who is also Twitter's CEO.
"By adding hurdles that push more transactions away from regulated entities like Square into non-custodial wallets and foreign jurisdictions, FinCEN will actually have less visibility into the universe of cryptocurrency transactions than it has today," Dorsey said.
Michelle Bond, CEO of the Association for Digital Asset Markets, concurred, saying that implementing a US rule to collect the names and physical addresses of a broad range of cryptocurrency holders would be "a substantial departure" from international practice.
"Doing so would have significant unintended consequences, including forcing American companies offshore, disincentivizing use of virtual asset service providers in the United States, and reducing our global leadership position in digital assets," Bond said last month.
She also objected to the quickened pace of the rulemaking. "Promulgating an interim final rule without public notice and comment circumvents the stakeholders most impacted by burdensome or unbalanced government regulations," she said.
FinCEN provided only a 15-day comment period, which ended last night. As of today, more than 6,500 comments have been received. FinCEN didn't say when it expects to issue final regulations.
Quoting exceptions to standard federal rulemaking, FinCEN said it was abbreviating the comment period because of the need to combat crime and terrorism and because it advanced a "foreign affairs function" of the US government.
In its letter submitted yesterday, Coinbase said the proposal marks a substantial change to current law. It said the "foreign affairs function" exception to the standard 60-day comment period under the Administrative Procedure Act only applies to government-to-government agreements, which isn't the case in this rulemaking process.
Coinbase also said FinCEN offered no evidence that prompt implementation of the rule would have a greater impact in fighting crime and terrorism than would a longer period of comment and discussion with industry.
"Coinbase asks Treasury to withdraw the Proposed Rule and engage in earnest with the cryptocurrency industry and the public on how to achieve its goals while maintaining the integrity of the crypotcurrency ecosystem and protecting the privacy of its users," wrote Paul Grewal, Coinbase's chief legal officer.
Also, nine members of Congress last week asked FinCEN to extend the comment period from 15 to 60 days and to consider a time frame of about six months to implement any final rules.
FinCEN had requested feedback on the competing goals of combatting malign finance and protecting privacy. "Has FinCEN struck a reasonable balance between financial inclusion and consumer privacy and the importance of preventing terrorism financing, money laundering, and other illicit financial activity?" FinCEN asked in its request for comments.
The answer came back from many quarters as an emphatic "no."
"This requirement flies in the face of Americans’ reasonable interest in privacy, forcing everyday Americans to provide their name and physical address not just to FinCEN and a regulated institution, but to every counterparty with whom they wish to transact using cryptocurrency," wrote Matt Corallo, a Bitcoin developer.
Chris Simmons, a Bitcoin investor, summed up attitudes repeated throughout the comments. "I believe the proposed regulations on unhosted wallets are being made in a hasty manner, will stifle innovation, are an invasion of personal privacy and liberty, and ultimately endanger the citizens of the USA," Simmons said.
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