by Peter Smith,
Last week, I sent a letter to Treasury Secretary Steve Mnuchin (embedded below) on behalf of Blockchain.com outlining my concerns about FinCEN’s expected rules regarding self-custody wallets. Since then, FinCEN has published a number of proposed rules that have been widely commented on in the crypto space. The good news is that the proposal published by FinCEN on Friday is less onerous than we expected. For a great recap of the proposed rules, I recommend checking out Compound General Counsel Jake Chervinsky’s thread on Twitter.
Here are some of my thoughts on the proposal to introduce additional restrictions on self-hosted wallets, as noted in my letter. First, the rules can inadvertently harm the underlying objective of combating money laundering and terrorist financing. The challenges of combating money laundering in the global financial system are admittedly immense.
Second, the regulations can simply divide the industry into providers that comply and offshore wallet providers that don’t. It is possible for unregulated offshore hosted service providers to gain a competitive advantage over AML / KYC regulated providers, so US law enforcement agencies may lose access to information that is currently easily accessible to them.
Blockchain.com’s financial crime department interacts with law enforcement agencies on a daily basis. If we were not able to facilitate transactions between self-custody wallets and our hosted offering, this transaction traffic would no longer be recorded and we would also not be able to provide any requested details to law enforcement authorities. It would just go elsewhere. We believe law enforcement officials would prefer to keep their current visibility of the network.
Next, we believe that self-custody wallets are beneficial for the users. Not only because they offer the privacy of cash-like payments, but also because of the innovation they enable. Innovation that, like the Internet, offers opportunities that are only limited by the imagination of entrepreneurs.
While a large and capitalized crypto company like Blockchain.com, which currently operates KYC-regulated products in a number of jurisdictions, can adhere to the strictest interpretation of these rules, we believe they are bad for innovation. Crypto is an emerging and growing industry. We have talented teams and entrepreneurs in the United States who are innovative but would give in under the weight of this regulation. We know because we invest in many of them.
Finally, we believe that there is a fairly effective regulatory framework. The activities of MSBs and money senders are subject to the Bank Secrecy Act and must meet strict KYC and anti-money laundering requirements – Blockchain.com alone has KYCed millions of users in the last 2 years. Third-party intermediaries (banks and payment service providers) are also regulated in accordance with the provisions of banking and financial services law. Thus, the regulatory loophole affects less companies operating in the United States than offshore OTC exchanges and brokerage firms, which these restrictive rules would not affect.
As already mentioned, FinCEN’s published proposal is less restrictive than we feared. However, the obligation on hosted service providers to collect and report personal information from non-hosted wallet recipients does not, in our opinion, target the critical issues here and can have unintended consequences. In conclusion, I would like to state that we unequivocally condemn the unauthorized use of cryptocurrencies to commit crimes of any kind. We just believe there are more effective ways to achieve the goals of FinCEN and the US government.
It’s important to acknowledge that U.S. law enforcement agencies have access to much of the information necessary to fight criminal activity because of the regulations that apply to hosted providers in AML and KYC regulated jurisdictions. Given its inherent complexity, any proposal for a regulation should be subject to an extensive consultation and review process. Only in this way can we achieve sensible, sensible and targeted regulation that preserves the transparency of the US law enforcement authorities today.
Read here in full.