US Treasury to Apply Bank Secrecy Act Rules to Crypto Wallets

By Jeff Benson

The rumors were true.

After weeks of speculation that the Treasury Department was working on regulations that would affect crypto wallets, the Financial Crimes Enforcement Network (FinCEN) today issued proposed rules that would "require banks and money service businesses ('MSBs') to submit reports, keep records, and verify the identity of customers" who make crypto transactions into unhosted (read: private) wallets.

The new rules, which have gone out for public comment until January 4, 2021, propose that "convertible virtual currency" and "legal tender digital assets" be classified as "monetary instruments" and are therefore subject to the requirements of the Bank Secrecy Act (BSA).

Under those rules, any transaction(s) totaling more than $10,000 in a 24-hour period must be reported to FinCEN, a bureau of the US Treasury Department, and that customer's identity must be verified; many transactions would require a lower threshold of $3,000.

Know-your-customer (KYC) rules, then, apply to even private crypto wallets.

According to FinCEN, this "targeted expansion of BSA reporting and recordkeeping obligations" is designed to stop illicit finance involving cryptocurrency.

"U.S. authorities have found that malign actors are increasingly using CVC to facilitate international terrorist financing, weapons proliferation, sanctions evasion, and transnational money laundering, as well as to buy and sell controlled substances, stolen and fraudulent identification documents and access devices, counterfeit goods, malware and other computer hacking tools, firearms, and toxic chemicals," reads the notice.

It highlights, in particular, "anonymity-enhanced cryptocurrency," or privacy coins such as Monero, as having a "well-documented connection to illicit activity."

Moreover, while the proposed rule has been sent out for public comment, FinCEN makes clear that it's something of a courtesy: "FinCEN has noted that notice-and-comment rulemaking requirements are inapplicable because this proposal involves a foreign affairs function of the United States and because 'notice and public procedure thereon are impracticable, unnecessary, or contrary to the public interest.'"

These proposed changes were not entirely unexpected. Last month, Brian Armstrong, CEO of cryptocurrency exchange Coinbase, reported hearing rumors of impending crypto wallet regulations and publicly urged the department to reconsider:

"Given these barriers, we're likely to see fewer transactions from crypto financial institutions to self-hosted wallets. This would effectively create a walled garden for crypto financial services in the U.S., cutting us off from innovation happening in the rest of the world."

Wyoming Senator-elect Cynthia Lummis, who's made no secret of holding Bitcoin, tweeted several hours before the rules were issued that the Treasury Department, under the leadership of Secretary Steve Mnuchin was going about the changes in the wrong way.

"Congress is best placed to weigh the competing policy issues at stake. A rule adopted now could also potentially extend the BSA to new types of transactions beyond Congress’ intent," she wrote. "Treasury's rule would also likely be adopted without public comment under an often-abused portion of the Administrative Procedure Act. Transparency makes good policy. It’s really that simple. Let the sunshine in, Mr. Secretary."

Recommended News