The Financial Crimes Enforcement Network (FinCEN) issued its new proposed rule extending anti-money laundering (AML) regulation to non-custodial wallets on Friday.
Under the latest proposed rules, banks and money service businesses that involve exchanges and custodians would be required to keep records and verify the identity of customers transacting greater than $3,000. For those above $10,000, they should report to FinCEN in the form of a currency transaction report.
The information to be collected includes the name and address of the sender and receiver, type and amount of wallet used in the transaction, time and value of the transaction, and any other payment instruction or related information.
These proposed rules, “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 Secretary Steven T. Mnuchin, in the official announcement by FinCEN.
The bureau within the U.S. The Department of the Treasury is requesting comments on these proposed rules for which the public only has 15 days, that too right in the middle of the holiday season — “midnight rulemaking.”
Doesn’t Really Help Anyone
According to the crypto resident lawyer, Jake Chervinksy, General Counsel at Compound Finance, “It could’ve been worse (really), but it’s still a terrible rule in both process & substance.”
The proposal follows a global trend as already seen in Switzerland and France, where AML regulation is extended to transactions from virtual asset service providers (VASP) to wallet.
The “bright” side is it doesn’t require KYC for every transaction or outrightly bans self-custody or even prohibits the act of using a permissionless network, said Chervinksy.
Still, it is an awful rule because, first, it doesn’t accomplish its state goal of stopping bad actors or helping law enforcement with its job. Second, “it infringes on US citizens’ financial privacy rights.” Law enforcement has been required to subpoena VASPs to get information about customers; this rule would force them to hand it over automatically, explains Chervinksy.
Third, “the rule is vague & ambiguous,” in the way that who owns non-custodial smart contracts or how does one provide they own a private key.
It is simply the “definition of bad regulation,” he said.
Bullish, Not as Invasive as Feared
It is expected that next week the regulator is going to release guidelines for self-hosted digital asset wallets as well.
Interestingly, the market remained unaffected by FinCEN’s midnight rule announcement. It could be attributed to the fact that the market knew that some form of rules were coming its way, and they had been expecting the worst-case scenario.
“Not as invasive as feared. Bullish,” tweeted trader and economist Alex Kruger who says, these proposed crypto regulatory changes would impact the likes of Coinbase and Circle and won’t be breaking DeFi or smart contracts.
Defi tokens were bid off the Fincen news despite no one having possibly read or thought about it too much my hunch is that’s a super underowned sector and since you ctrl f and don’t find the blue chips it’s probably not as bad as some thought nice weekend to chase maybe ain’t it
— CMSeda Research (@cmsholdings) December 19, 2020
“New proposed FinCEN rule breaks DeFi,” said Jeremy Allaire, CEO of Circle.
DeFi tokens actually pumped on the regulatory news. The rule likely broke DeFi integrations in custodial platforms, i.e., “a regulated exchange that provides their customers with access to a DeFi protocol.”
As Hayden Adams, creator of DEX Uniswap, noted, “Ethereum is the closest thing to a country that Uniswap has.”
The fact that the cryptocurrency markets, as a whole, didn’t react to the news is a bullish sign and when that happens, “the trend in the ensuing direction is usually violently enhanced.”