The United States Financial Crimes Enforcement Network (FinCEN) is proposing that crypto exchanges and other Money Service Businesses (MSBs) keep records for counterparty withdrawal transactions of more than $3,000.
In addition such financial institutions are required to report any crypto transaction of more than $10,000 without any stated requirement for it to be suspicious.
The proposal requires, among other things, “the name and physical address of each counterparty to the transaction of the financial institution’s customer… any other information that uniquely identifies the transaction, the accounts, and, to the extent reasonably available, the parties involved.”
They provide a 15 day comment period for this proposal, but FinCen says they don’t have to provide any comment period because this matter involves foreign entities, even though their proposal makes no distinction between domestic or foreign customers or counterparties. Instead FinCen says:
“First, the proposed rule would require that banks and MSBs identify and verify hosted wallet customers who engage in transactions with unhosted or otherwise covered wallet counterparties when those customers conduct transactions above the equivalent of $3,000 in crypto with an unhosted or otherwise covered wallet counterparty (with reporting required for transactions over $10,000), and that banks and MSBs collect certain information (i.e. name and physical address) concerning the customer’s counterparties.
Second, the proposed rule would cause banks and MSBs to generate reports containing the transaction hash and identity of persons holding wallets engaging with unhosted or otherwise covered wallets engaging in transactions across multiple financial institutions.
Third, the proposed rule would create a new prohibition on structuring—i.e., engaging in transactions in a manner to avoid reporting requirement—applicable to virtual currency transactions.”
The Bank Secrecy Act (BSA) requires reporting of transactions over $10,000, but for cryptos FinCen is requiring record keeping of transactions more than $3,000.
That means in this proposal BSA is being applied more strictly to cryptos than to banks or cash transactions, with FinCen not providing a reason for doing so.
Their requirement for the name and address of a counterparty for transactions of more than $3,000, rather than $10,000, also raises into question the legal basis for this executive decision by FinCen’s Treasury Department.
“The rule, which applies to financial institutions and is consistent with existing requirements, is intended to protect national security, assist law enforcement, and increase transparency while minimizing impact on responsible innovation,” said Steven Mnuchin, the outgoing Treasury Secretary.
However, there is no rule that requires record keeping of cash transactions of more than $3,000. There is only a reporting requirement for cash payments over $10,000. Therefore, it is not consistent with existing requirements.
The usual commenting period moreover is 90 days, not 15 just five days before Christmas with the New Year holidays ahead and their argument they don’t need to provide any commenting period at all because it involves foreign entities is obviously mute because they make no such distinction and because Mnuchin says this rule is aimed at ‘increasing transparency.’
Otherwise known as surveillance of ordinary Americans who happen to send $3,000 worth of crypto to a smart contract.
“The rule would impose huge burdens on crypto service providers, their customers, and society at large, perhaps infringing constitutional rights, without conveying any benefit to government in general or law enforcement in particular,” says Jake Chervinsky, General Counsel at Compound Finance.
He further says “FinCEN is giving us 15. At the end of December. With one month left before a new president is sworn in. There’s a name for this: ‘midnight rulemaking.’
Midnight rulemaking implies that an agency isn’t giving the public a genuine opportunity to participate in the rulemaking process, but rather trying to force through a predetermined result. Courts don’t take kindly to this. Midnight rules are often struck down.”
It’s not clear whether this will be challenged in court as an abuse of process and as a constitutional breach of the separation of powers with the executive making new law by extending requirements to transactions over $3,000, rather than $10,000, without the involvement of congress.
It’s almost a shot by hit by Mnuchin in his last days on office to give his banker friends a last gift by making regulatory requirements more burdensome for crypto services than banks.
However, the law does not require identification proof of the counterparty, so for transactions over $10,000 this is on par with cash and its self-reporting requirements.
As the crypto space grows you’d expect requirements to be at least on par with cash, but this proposal goes further in imposing a $3,000 requirement.
Entities like Coinbase moreover have kind of applied this counterparty reporting since at least 2018 with it asking if you are withdrawing to another exchange, to yourself, or somewhere else, and then having further requirements depending on your answer.
However there are concerns the vague nature of these requirements might make entities like Coinbase go far and beyond and ask for identification of the counterparty or prohibit such withdrawals alltogether.
That would only cause a small inconvenience in withdrawing to your own wallet first and it would be Coinbase’s fault if they go far and beyond, something the market has a tendency to punish.
So it could be worse but this $3,000 requirement is indicative of Mnuchin’s own dislike for the new digital gold which empowers the masses and thus somewhat disempowers his banker friends.
Which is precisely why our constitution does not leave law making to some guy like Mnuchin, but to a system of checks and balances which this proposal breaches with this $3,000 requirement, but provided the $10,000 counterparty crypto payment is on self reporting basis, then it’s just an extension of requirements applied to cash transactions.