A planned new US Treasury rule aimed at stamping out illicit cryptocurrency transactions has drawn strong opposition from the industry, setting up a battle that threatens to cast a shadow over the recent digital currency boom.
The proposal would require custodians and exchanges to collect and report identifying information about large transactions involving unhosted wallets — cryptocurrency accounts held outside financial institutions.
The Financial Crimes Enforcement Network (FinCEN), a division of the Treasury, said the rule would protect national security and prevent crime.
But more than 7,000 cryptocurrency groups and advocates have filed public comments on the rule citing concerns about privacy rights and accusing Treasury of engaging in “midnight rulemaking”.
The cryptocurrency exchange Coinbase and one of its largest investors, Andreessen Horowitz, questioned the legality of the rule in separate letters to Treasury officials.
Jack Dorsey, chief executive of the payments company Square, has also criticised the proposals, claiming they will “leave people out of participating fully in the economy”.
“Everyone who touches crypto realises that this rule is substantively flawed,” said Gus Coldebella, general counsel of Paradigm, a cryptocurrency venture capital firm.
In a letter cosigned by the venture firms Ribbit Capital and Union Square Ventures, Paradigm said the rule would create “burdensome and unprecedented” requirements for cryptocurrency transactions and could make it more difficult to police bad actors.
The responses reflect the stakes for the cryptocurrency industry, whose most lucrative applications are largely fee-based exchanges. Coinbase, the largest US cryptocurrency exchange, is preparing for a highly anticipated public listing, with Bitcoin surging this year to briefly surpass the $40,000 mark before pulling back sharply on Sunday.
Analysts said the Treasury rule could also create unintended burdens for the fast-growing area of decentralised finance, in which software programmes execute traditional financial activities using cryptocurrencies and without any intermediaries
The Treasury proposal targets unhosted wallets, software apps that allow users to directly hold and transact cryptocurrencies without revealing personal details. Global regulators have grown concerned the accounts can be used for money laundering and other kinds of illicit activity.
Chainalysis, a software company used by government agencies to monitor cryptocurrency transactions, estimated that 1.1 per cent of cryptocurrency trades in 2019 involved illicit activity, representing more than $10bn in transactions.
Some digital token advocates claimed the requirements could drive bad actors to more loosely regulated forums and extend the scope of the Bank Secrecy Act, requiring cryptocurrency intermediaries to collect information not just about customers but also on counterparties.
“The net effect is far, far different [from the equivalent rules in traditional financial markets] and enhances surveillance and the loss of privacy,” said Garrick Hileman, head of research at Blockchain.com, which hosts a cryptocurrency wallet and exchange.
Treasury secretary Steven Mnuchin said in December that the proposed rule was “consistent with existing requirements” and would “increase transparency while minimising impact on responsible innovation”.
Opponents of the rule also criticised the 15-day period the Treasury allowed for comments, which is much shorter than the usual 60-day comment period for new rules. The agency cited national security risks and previous dialogue with the cryptocurrency industry to justify the shortened window.
“It seems fairly clear that the industry believes the proposal may not work and FinCEN may, in response to these comments, make adjustments to the final rule or repropose the rule,” said Joshua Kaplan, a partner at the law firm Wilson Sonsini who focuses on fintech and money laundering rules.
“It is also possible that Congress will be called on to address digital currencies in future legislation.”