FinCEN’s Proposed Crypto Wallet Rule Might Hit DeFi

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The proposed rule, unveiled last Friday, would require crypto exchanges to collect this personal information from customers who transfer an aggregate of $3,000 per day to “unhosted” wallets (which are also referred to by FinCEN as self-hosted or self-custodied wallets; crypto users may know them as private wallets or, simply, wallets). Transfers of over $10,000 per day would require the exchange to file a Currency Transaction Report (CTR) to FinCEN, reporting these transactions and the individuals making them to the federal government.

The proposed rulemaking, which was published in the Federal Register on Dec. 23, has quickly drawn widespread industry backlash, with complaints ranging from the document’s poorly defined terms to the rushed process itself. Comments are due by Jan. 4, cutting what would normally be a months-long public comment period to just two weeks.

The traditional banking system’s financial surveillance could be just imported to cryptocurrencies through a heavy overseeing in crypto transactions on exchanges, said the EFF.

On December 18, 2020, the U.S. Treasury’s bureau proposed new rules “aimed at closing anti-money laundering regulatory gaps for certain convertible virtual currency [CVC] and digital asset transactions,” amid rumors of Treasury Secretary Steven Mnuchin rushing out regulations for self-hosted crypto wallets before Biden took office as president of the United States.

The nonprofit organization clarifies that although they’re still in the process of reviewing the full FinCEN’s proposal, they commented:

The regulation will likely chill the ability to use self-hosted wallets to transact with the privacy of cash. The proposed regulation’s requirement that money service businesses collect identifying information associated with wallet addresses means that the government may have access to a massive amount of data beyond just what the regulation purports to cover.

The EFF also believes that new rules could “hamper broader adoption” of self-hosted crypto wallets at technologies that rely on them, as it could make it “significantly more difficult” for users to seamlessly interact “with other users who have wallets provided by a service subject to the regulations.”