Financial Crimes Enforcement Network (FCEN) proposed in October a new regulatory framework for crypto mixing services. This would treat all privacy tools as money-laundering threats, and force U.S. individuals or entities who use them to comply with new recordkeeping requirements. The industry was given the opportunity to comment. Here is the essence of their answers.

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The Narrative

FinCEN released a proposed rulemaking in October suggesting that it could designate crypto mixers to be primary money laundering concerns. The public was asked for feedback via a comment period, which ended last week.

Why it matters

Crypto mixers, privacy tools which allow users to obscure the source or origin of funds while transacting, have caused controversy in U.S. National Security circles because malicious actors may be using them to launder money from hacks or support terrorist groups. OFAC, the U.S. sanctions agency, added several mixers on a global “blacklist” in an effort to keep these entities from accessing the global financial system. The sanctions it imposed against Tornado Cash have been challenged in court.

Breaking it Down

As of this writing, there were about 2,000 comments (of which I have read or skimmed several dozen). Respondents expressed concern that the proposed rule could infringe upon personal rights, capture a larger portion of the crypto-ecosystem than FinCEN intended and drive legitimate crypto usage offshore.

Chainalysis, an analytics company that specializes in cryptography, has said that the proposals are “too broad” to have any real impact and will “result in inconsistent and excessive reports on transactions”, most of which would not be linked to illegal activity.

A letter sent by the DeFi Education Fund stated that “everyday” economic activities like swaps or liquidity pools could be included in the section of the proposal that deals with users exchanging digital assets.

Several of the letters warned FinCEN that its rule could lead to activity in other jurisdictions and backfire against the U.S. regulator.

In the Blockchain Association letter for example, it was stated that “FinCEN should be aware of the possibility that overly broad and inappropriate anti-money laundering regulations could drive digital assets businesses to countries with less regulation, where they would not be required to submit suspicious activity reports to FinCEN, and thus limit U.S. Law Enforcement’s access valuable information.”

In a letter, attributed to America‚Äôs Credit Unions (), a newly formed entity following the merger of Credit Union National Association with the National Association of Federally-Insured Credit Unions, it was stated that credit unions do not currently engage in cryptocurrency transactions but that the proposed recordkeeping regulations would be “potentially cumbersome” and that they “shouldn’t be duplicative of current requirements

FinCEN should limit its reporting and recordkeeping obligations to certain transactions. FinCEN’s extensive experience with different thresholds is noted in the letter.

The letter didn’t provide a threshold and suggested that creating one might not work at all “given the complexity” of crypto-mixing.

“Perhaps, a safe harbour based on frequency of transactions would be appropriate.” FinCEN is encouraged to work with industry and analyze this issue, eventually pursuing changes via a proposed rulemaking.

Fewer comments supported the rule. One comment, from GeoComply, a data analytics company which uses “geolocation intelligence to verify individuals’ digital fingerprints”, called the rule an “effective first step” but said it could have been stronger in some areas.

The report warned against relying solely on IP addresses, for instance, noting how virtual private networks can obfuscate these digital addresses.

HTML1? HTML1? HTML1 _____ ? The FIU did say that the proposal was a little too harsh. The Bangladesh FIU was not available for comment, nor to confirm that it had indeed sent the response. FinCEN labelled the comment as being from a government entity.

Bill Hughes, of Consensys, pointed out that there were also a few comments which appeared to have been written by a robot. Many of these comments stated that they were written to “express [their] concern” and said parts should be reconsidered. The comments deal with reusing bitcoin addresses, mixing, bitcoin programability, bitcoins’ use in terror funding, and crypto users using less secure offshore platforms.

The bots “urge” the Securities and Exchange Commission to assess the unintended consequences, presumably because the programmer didn’t know that FinCEN was not the same thing as the Securities and Exchange Commission. It has happened before.

A FinCEN spokesperson responded to my question about how the Treasury Department evaluated GPT comments. “In accordance the Administrative Procedure Act, other applicable laws, regulation and Executive Orders, FinCEN reviews and responds all public comments.”

Some of the comments that appeared to be submitted by real people (and not bots), anonymous or from individual contributors, expressed concern about privacy and right to transact.

As is now the tradition, there are a few comments that are totally off topic, such as a couple of people who support Richard Heart of Hex fame and another person who supports the Financial Innovation and Technology for the 21st Century Act. This is one of the many pending attempts to create comprehensive crypto legislation.

FinCEN must now review the comments to decide whether it wants to finalize, revise or take other actions.

  • The European Banking Authority (EBA) will hold an hearing at 9:00 UTC (10:00 CEST), to discuss the details of prudential regulations within the Markets in Crypto Assets regulatory framework.

  • The Times has published a disturbing story about click-farms and how AI is now just another tool they use.
  • TAC’s Jon Ostrower (The Air Current), created a timeline of the Boeing 737 MAX 9 wing fuselage that lost a door connector mid-flight in this month.
  • Fortune reports that Caitlin’s Custodia is in litigation with Federal Reserve for its refusal to grant a bank charter to the crypto bank. Leo Schwartz of Fortune has been digging through recent filings.

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Next week, we’ll see you!

Marc Hochstein is the editor.