There have been increasing reports about the proposed legislation to regulate crypto wallets. It doesn’t come as a surprise because different government agencies have been trying to get a foothold on crypto. Since the inception of cryptocurrency, one of its most important features is that they offer privacy protection to users.
The anonymity of cryptocurrency transactions has generated so must debate among different government agencies. There have been different proposed regulations to tackle the issue of anonymity of crypto transactions. The most recent regulation came from the Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN).
According to the framework of the proposed regulation by FinCEN, the use of privacy coins like Monero and Zcash is “indicative of possible criminal conduct.” It also said that those operating mixers and tumblers, which make it harder to trace crypto transactions, are criminally liable for money laundering. Just like the NSA, financial regulators now believe that anyone trying to protect their financial privacy is a criminal. The United States regulators’ recent actions, including this proposed legislation to regulate crypto wallets, undermine civil liberties.
FinCEN Legislation to Regulate Crypto wallets
The new proposed crypto regulation from the U.S. Financial Crimes Enforcement Network will make it easier to track crypto transactions. This proposed regulation was filed at about 4:20 PM ET on December 18. This regulation will specifically target private wallets. Assuming you are a cryptocurrency investor and conduct trading on Coinbase, if you want to transfer more than $3000 from your private wallet, you will have to provide your personal information.
Before you conduct business with someone that has a private wallet, you also provide detailed personal information. The exchanges will have to divulge your personal information if the government request’s it. Under this same proposed regulation, an exchange will be required to report you if you make more than $10 000 worth of transactions in one day.
Will countries be affected by this regulation?
If the United States Treasury Department through its Financial Crimes Enforcement Network regulates crypto wallets, many countries will follow suit. Coinbase is the largest cryptocurrency trading platform in the United States, and it supports traders from over 30 countries. Therefore, if this proposed legislation to regulate crypto wallets pulls through, these countries will also be affected.
These countries include Austria, Finland, the Czech Republic, Cyprus, Croatia, Belgium, Bulgaria, and Denmark. Other countries include Switzerland, Sweden, Spain, Italy, Netherlands, Portugal, Poland, Norway, Slovenia, Slovakia, Ireland, etc.
If you are a crypto trader or investor from any of the above-listed countries, the regulation will affect you. You don’t have to be physically based in the United States to be covered by such crypto wallet regulation. Since Coinbase is a U.S company, they will transact under the United States financial laws.
Will this proposed crypto wallet regulation be passed into law?
Although we will know the answer with time, we can deduct the current information available to us. According to a blockchain analytic firm known as Elliptic, the proposed FinCEN regulation on crypto wallets would likely not pass. In a published response to the proposed regulation, Elliptic said the regulation could negatively impact other regulations. The already existing regulations include the Anti-Money Laundering and Countering the Financing of Terrorism (AML/CFT).
Also, Elliptic highlighted that the FinCEN proposed regulation overstate the risks posed by unhosted crypto wallets. The reason is that transactions involving cryptos are already traceable by analyzing the associated blockchain ledger. Law enforcement agents currently use this to track criminals. The new legislation by FinCEN to regulate crypto wallets will only add documentation costs for information that is already accessible.
Since malicious entities depend on their ability to cash-out and convert crypto to fiat, the information about such funds can be shared with the FinCEN using Suspicious Activity Reports (SAR). FinCEN’s new regulation will only add more paperwork and more time to an already efficient process.
The Treasury Department’s 15-day comment period from the general public is unjustifiably short and should be extended to 90 days. This new development is an assault on the ability of individuals to conduct transact online privately. The new regulation is an attempt to expand the financial surveillance of the traditional banking system to cryptocurrency.
Cryptocurrency is important to maintain civil liberties because it allows for the anonymous transaction. A good case study is the Hong Kong example where protesters waited in long queues to purchase tickets with cash. The reason is that they want to use electronic purchases, which would place them at the scene of the protest. It means that a cashless society will undoubtedly become a surveillance society.
The Downside Of This Proposed Crypto Regulation
Although we are still reviewing this proposed legislation to regulate crypto wallets by FinCEN, certain concerns exist. The regulation will mean that people who store their crypto in private wallets will be unable to anonymously transact with someone who stores their crypto with a money service business.
In cryptocurrencies like bitcoin, the users’ bitcoin address is permanently recorded on the public blockchain. The implication is that you can know all about a user’s bitcoin transactions if you have the bitcoin address. Therefore, the current regulation on crypto wallets means that the government may have access to a massive amount of data. Such an amount of data is likely beyond what the regulations propose to cover.
The regulation could stifle the broader adoption of self-hosted wallets and technologies that depend on them. It can also make it extremely difficult to integrate the technology with intermediaries like exchanges. The fact that hosted wallet services will collect personal information about self-hosted wallets may complicate certain automated transactions. Such things will be difficult to implement when it comes to decentralized exchanges.
The proposed legislation to regulate crypto wallets is coming barely two months after the Department of Justice published its crypto enforcement framework. Therefore, it is crystal clear that the Department of Justice is out to undermine cryptocurrency users’ ability to transact anonymously. The U.S. government has made it abundantly clear that crypto anonymity will be checkmated. Time will tell how far they are willing to go.