Source: Jake Chervinsky, Crypto Law & Policy Newsletter, Q1 2021 in Review.
It feels like ages ago, but we entered 2021 in the midst of a controversy over FinCEN’s attempt to force through a proposed rule expanding AML regulation in the final days of the Trump administration—a practice known as midnight rulemaking.
The rule sought to impose new recordkeeping and reporting obligations on financial institutions for transactions involving non-custodial wallets. For transactions over $3,000, institutions would have to collect the name and address of both their customer and their customer’s counterparty. For transactions over $10,000, institutions would also have to file a CTR (a currency transaction report) with FinCEN.
The proposal wasn’t a total surprise—it followed a global trend among policymakers in favor of expanding AML regulation to cover transactions between regulated entities and non-custodial wallets. It was also widely understood as a personal project of U.S. Treasury Secretary Steve Mnuchin, who had criticized Bitcoin as a tool for criminals and promised to impose “significant new requirements” on crypto companies.
The vast majority of the crypto industry and community strongly opposed the rule, myself included. As a matter of process, it was unjust (and perhaps a violation of the Administrative Procedures Act) for FinCEN to allow only fifteen days for public comment on a brand new rule over Christmas and New Year’s Eve. As a matter of substance, it was unwise (and perhaps unconstitutional) for FinCEN to propose a rule restricting financial privacy rights and increasing compliance costs without actually helping law enforcement detect and prosecute illicit activity.
Despite the short timeframe, thousands of comments were filed in response to the rule. Many industry heavyweights lodged their objections, including exchanges like Coinbase and Kraken, banks and fintechs like Fidelity and Square, venture capital firms like a16z and Paradigm, think tanks like Coin Center and the EFF, trade groups like the Blockchain Association and the Chamber of Digital Commerce, elected officials like Rep. Ted Budd (R-NC) and Rep. Bill Foster (D-IL), academics like Neha Narula, Patrick Murck, Matthew Green, and Eran Tromer, and dozens more.
The concept of a crypto CTR was unpopular, but it was the idea of turning KYC (know-your-customer) into KYCC (know-your-customer’s-counterparty) that generated the most outrage and united the crypto world in opposition to the rule. By the middle of January, FinCEN had received roughly twice as many comments on this proposal as it had on all of its other proposals since 2008 combined.
Ultimately, the comments proved effective. Though it was rumored that Sec. Mnuchin planned to implement the rule days before leaving office, on January 14, FinCEN extended the public comment period by 45 days, citing “the robust responses already provided.” The extension served to delay the proposal into the Biden administration and well past the end of Sec. Mnuchin’s tenure.
FinCEN issued a second extension on January 26, and then the comment period closed in relative quiet at the end of March. For now, we’re stuck waiting to see what FinCEN will do next. It’s still possible that the rule could be adopted in full, but it seems more likely that support for the rule left the Treasury Department along with Sec. Mnuchin. Lately, FinCEN appears more focused on designing a crypto CTR and less focused on requiring institutions to do KYCC.
In my view, this is a huge success story. When we started the year, there was a very real chance that FinCEN might implement burdensome new regulations within a matter of weeks and without properly addressing the concerns of U.S. citizens and companies. Three months later, FinCEN has refrained from taking any hasty action, backed away from the idea of KYCC, and engaged in constructive dialogue with the industry.
No matter what happens next, this is a win—a case study in effective advocacy2 and proof of the industry’s growing maturity and influence in Washington, D.C.
That’s not to say the issue of AML regulation is anywhere near settled. FinCEN does seem likely to move forward with a crypto CTR despite industry opposition. Beyond that, it’s hard to know what to expect from the Treasury Department now that it’s under new leadership. Aside from a brief response during her nomination hearing, Sec. Janet Yellen hasn’t said much about her views on crypto, so we’re still waiting to see how she and Dep. Sec. Wally Adeyemo decide to approach the space.
Read more: Jake Chervinsky, Crypto Law & Policy Newsletter, Q1 2021 in Review.