December 21, 2020
by Daniel M. Payne

On December 18, the Financial Crimes Enforcement Network (FinCEN) released a proposed rule for virtual currency transactions involving unhosted wallets.  The new rule would effectively push the Bank Secrecy Act and SARS-type reporting and recordkeeping into the virtual currency space.  The proposed rule has two prongs:

1) Banks and money service businesses ("MSBs") would be required to file a report with FinCEN containing certain information related to a customer’s convertible virtual currency ("CVC") or legal tender digital assets ("LTDA") transactions, including verifying the identity of their customer, if a counterparty to the transaction is using an unhosted or otherwise covered wallet and the transaction is greater than $10,000 (or the transaction is one of multiple CVC transactions involving such counterparty wallets and the customer flowing through the bank or MSB within a 24-hour period that aggregate to value in or value out of greater than $10,000).

2) Banks and MSBs would be required to keep records of CVC or LTDA transactions greater than $3,000 if the counterparty is using an unhosted or otherwise covered wallet. (Note the $3,000 threshhold may be lowered to $250 under a separate proposed rule.)

"Otherwise covered wallets" would be defined as wallets held at institutions not subject to the Bank Secrecy Act and in foreign jurisdictions on a FinCEN money laundering watch list.  The entire filing from FinCEN can be found here.

The crypto community is pushing back.  "FinCEN Floats Long-Dreaded Plan to Make Crypto Exchanges Identify Personal Wallets" read the headline at Coindesk.  The rule will introduce more friction to virtual currency transactions and burdens on the individuals involved in the transactions, lessening a well-recognized benefit of dealing in virtual currency.  The community has at least some allies in Congress, with some Representatives sending a letter to Treasury warning the proposed regulation could "crush a nascent industry."  Indeed, this rule could create a barrier to entry and have an anticompetitive impact on smaller enterprises and pure start-ups.

On the other hand, the proposed rule's reporting and recordkeeping requirements are already in place for MSBs' cash, checks, and other monetary instrument transactions.  The proposed rule is grounded on the work done by the Financial Action Task Force's reporting on the risks of money laundering via virtual currency.  FATF is a global money laundering and terrorist funding watchdog involving many countries.

We encourage potentially affected institutions and individuals to contact legal counsel regarding submitting comments.

About Blockchain Law Center

Blockchain technology utilizes a distributed digital ledger to record and track information, and can be leveraged to gain transparency and certainty in transactions ranging from cryptocurrency to supply chain tracking.  This blog provides information on the legal developments surrounding implementation of blockchain technology, with an initial focus on the financial services sector.