Under proposed new regulations by the Financial Crimes Enforcement Network, it could become much easier for the government to track bitcoin transactions. And while a 15-day comment period is currently open, the Coinbase cryptocurrency exchange and the Electronic Frontier Foundation are calling dirty because that period includes Christmas Eve, Christmas Day, New Year’s Eve and New Year’s Day.
The proposed regulations in question, filed at 4:20 PM ET on December 18th, relate to private wallets. Let’s say I’m a famous and fancy cryptocurrency investor, and I’m doing some trading on Coinbase. If I have my own private wallet to which I want to transfer my money, I will have to identify myself as the owner of the wallet if I send more than $ 3,000 in a transaction. And if I want to do business with someone else who has a private wallet, I need to tell the exchange some pretty detailed personal information. The exchanges are then required to store records of all this and turn them over upon request.
Also under the proposed regulation, an exchange would be required to report my personal information if I am making transactions totaling more than $ 10,000 in one day. You can see why Coinbase – or any other exchange – would see this new requirement known to your customer, at least, like absolute pain in the ass.
It is also the most ironic development in the ironic history of cryptocurrency; Born of a strange group of liberals, anarchists, and utopians, cryptocurrency promised to be a way to negotiate in private, in a distrustful system. Bitcoin, the world’s largest cryptocurrency, rose shortly after the 2008 financial crisis as an alternative to banks – but these new regulations will make cryptocurrency exchanges operate much more like banks. Taken in conjunction with another rule change concerning international transactions, it may be a sign that the cryptocurrency’s wild years are over – and anonymity will be harder to find.
Cryptocurrency exchanges make it easy to move from dollars (or whatever) into cryptocurrency and vice versa. That also means they make cryptocurrency accessible to more people. FinCEN’s current offering does more work for these exchanges a to the people operating within them as well as undermining the anonymity for which cryptocurrency is famous. Taken in conjunction with another recent proposed rule change on how to report cryptocurrency that crosses borders, you can see why cryptocurrency enthusiasts are nervous.
There are some tangible consequences to this, the EFF highlights. First, it makes anonymity more difficult in a transaction between a private wallet and one conducted by an exchange service. Secondly, the proposed legislation also makes it less appealing to have a private wallet.
But the third problem is the real kick in the ass: some cryptocurrencies, including bitcoin, record all transactions publicly. That means if I trade bitcoin in my private wallet from an exchange, I have to send a bunch of identifying information about that wallet, which may then be available to the US government. Because as soon as you know there is a specific wallet address mine, you know every bitcoin transaction I’ve ever done with that wallet. This means that “the government may have access to a large amount of data beyond what the regulation claims to cover,” the EFF writes.
So bitcoin, a cryptocurrency created to ensure anonymity, would achieve exactly the opposite under these rules. Although, I suppose, with a little creativity, it is possible to move around them; you simply create a wallet for your customer identification rules, then transfer your money from there to a second private wallet.
If this proposed bill passes, your withdrawal to your address other than KYC’d takes two transactions instead of one.
Before: Exchange -> Wallet Address
After: Exchange -> KYC Wallet Address -> Wallet Address
– Eric Wall (@ercwl) December 18, 2020
Coinbase’s chief legal counsel, Paul Grewal, yesterday issued a response to FinCEN, complaining about the 15-day period for comment on this rule change: “FinCEN asked the public to provide comments in just 15 days, spanning Christmas Eve , Christmas Day, New Year’s Eve, and New Year’s Day, in the midst of a global pandemic – leaving only a handful of real working days to comment. ”
Coinbase requires a 60-day review period – which is the norm. The shorter review period of just 15 days is because the Treasury Department says “substantial national security orders” mean that this has to move faster. It’s true that some cryptocurrency transactions are criminal – The Silk Road was a significant part of bitcoin’s history, after all. The proposed rule states that cryptocurrencies “facilitate international terrorist financing, proliferation of weapons, evade sanctions, and launder transnational funds,” among its laundry list of possible criminality.
But it’s hard to know how serious that is, since 60 days from now, cryptocurrency exchanges would deal with the Biden administration rather than the outgoing Trump administration. “There is no crisis here; only an outgoing administration is trying to avoid the required consultation with the public to complete a hasty rule before their time in office is done, ”Grewal wrote.
Regardless of the 15-day or 60-day period, the Treasury Department seems to be trying to send a message to any potential breakers: you can’t beat the current financial world – just join.