Treasury Has Self-Hosted Wallets And Adding Crypto To BSA On 2022 Agenda

First reported by CoinDesk, the Semiannual Agenda and Regulatory Plan of the U.S. Department of the Treasury, which includes the most important regulations that are expected to be issued, indicate two critical proposed rules impacting the cryptocurrency industry are likely up for consideration again.

At the proposed rule stage is a ‘Clarification of the Requirement To Collect, Retain, and Transmit Information on Transactions Involving Convertible Virtual Currencies and Digital Assets With Legal Tender Status’, which was proposed originally on October 27, 2020. Both the Federal Reserve and FinCEN want to ensure these rules apply to domestic and cross-border transactions involving convertible virtual currency, which is a medium of exchange (such as cryptocurrency) that either has an equivalent value as currency, or acts as a substitute for currency, but lacks legal tender status.

The Agencies further intend that the revised proposal will clarify that these rules apply to domestic and cross-border transactions involving digital assets that have legal tender status. The common description by the Fed and FinCEN to delineate the different types of crypto are convertible virtual currency (CVC) and legal tender digital assets (LTDA). This rule faced pushback in 2020 because of the shortened 30-day public comment period that included Thanksgiving and with organizations saying more time needed to be spent to analyze the impacts of including cryptocurrency as analogous to money, such as U.S. dollars. The agenda from Treasury seeks to provide a second ‘Notice of Proposed Rulemaking’ by March 2022 with a 60-day comment period that would end by May 2022.

Further along at the final rule stage is a proposed rule by FinCEN that received much publicity for its December 23, 2020 issuance with what was originally only a 15-day comment period. This proposed rule was described as “Requirements for Certain Transactions Involving Convertible Virtual Currency or Digital Assets” and would require banks and cryptocurrency exchanges to file a report with FinCEN containing certain information related to a customer’s CVC or LTDA transaction and counterparty (including name and physical address). In addition, the bank or cryptocurrency exchange would need to verify 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. In addition, banks and cryptocurrency exchanges will need to keep records of a customer’s CVC or LTDA transaction and counterparty, including verifying the identity of their customer, if a counterparty is using an unhosted or otherwise covered wallet and the transaction is greater than $3,000.

According to the original proposed final rule, the Financial Action Task Force (FATF) had noted unhosted wallets permit unregulated peer-to-peer transactions, which could present a leak in tracing illicit flows of virtual assets, particularly if one or more blockchain-based CVC networks were to reach global scale. This particular notice receive thousands of comments originally as the concept of heightened surveillance and identity confirmations for peer-to-peer transactions between individuals was quite antithetical to the crypto movement toward the right to privately conduct transactions without a government watchdog. Final action on the rule is expected by September 2022, although the observation has been made that based on the number of original comments received, a new comment period may be opened.

The public can expect another debate focused around the amount of privacy individuals should have without surveillance of their financial transactions versus the Government’s belief in the need to protect the public from the next terrorist attack or money laundering scheme. Ultimately, it is antithetical to the crypto culture that the U.S. Government would play a significant role in the space; however, as crypto continues to expand in its global scale, the fate of the industry may be similar to that of the regulatory threshold requirements that banks face today.