FinCEN’s Wallet Rule Aims to Close Crypto-Cash Reporting Gap, Official Says

Financial institutions report large cash and crypto transactions differently. This gap led to a controversial rule proposed by the Financial Crimes Enforcement Network (FinCEN) late last year, an official said Monday.

Speaking at a virtual panel hosted by compliance firm TRM Labs, FinCEN Deputy Director Michael Mosier was referring to a rule that would require crypto exchanges to report transactions involving private wallets (sometimes referred to as unhosted wallets) worth over $10,000 per day, as well as collect counterparty information for wallets that receive over $3,000 in crypto per day. The rule was proposed in the waning days of the Trump Administration by then-Secretary Steven Mnuchin.

If crypto is like cash, “why does the CTR, the currency transaction reporting requirement, apply to cash and banks and money services businesses but you have this gap with crypto,” Mosier asked.. “… There’s a concern at the senior government level, including political leaders here and abroad.”

The proposed rule, which was introduced on Dec. 18, 2020, would impose stringent data collection requirements on exchanges within the U.S.

While the CTR aspect is in line with requirements on cash transactions, the industry pushed back heavily against the counterparty information requirement, noting that among compliance burdens it would prevent U.S. crypto holders from sending funds to smart contract wallets, which by their nature don’t have names or addresses tied to them.

Mapping old laws to new tech

According to fellow panelist Jai Ramaswamy, the head of risk, compliance and regulatory policy at cLabs, one issue is that much of the U.S.’ financial regulations are centered around using intermediaries in financial transactions.

Ramaswamy is a former head of the U.S. Department of Justice’s money laundering section, and wrote an opinion piece on how unhosted wallet restrictions might backfire last year for industry organization Coin Center.

In Monday’s talk, he said the Bank Secrecy Act’s core regulation focuses on these intermediaries identifying malicious or illegal activity and reporting that to the federal government.

“When you move to a world where those financial intermediaries are no longer the gatekeepers, if you will, and individuals are transacting peer-to-peer, it raises concerns about ‘okay what do you do in a disintermediated world when the regulatory regime is focused on having those financial intermediaries play a pretty important and crucial role in managing the risk of bad money in the system,’” he said.

He later added that, in his view, it’s not clear whether the Bank Secrecy Act’s clauses can map well onto a system based on peer-to-peer transactions.

However, he said…