How blockchain advocates stopped FinCEN’s ‘crypto wallet rule’—for now
Blockchain association leader Perianne Boring explains the controversial rule and how the industry pulled together to force FinCEN to consider public input.
The U.S. Financial Crimes Enforcement Network’s (FinCEN) proposed “crypto wallet rule,” which had been championed by former Treasury Secretary Steven Mnuchin, is currently on hold so the agency can gather more public comments. But the blockchain, crypto and digital asset industry’s sentiments are already clear.
Perianne Boring — president of the Washington D.C.-based Chamber of Digital Commerce — — calls the proposed rule a “huge overstep in privacy” that could have “major unintended consequences.”
In a special video interview with Forkast.News, Boring also describes the round-the-clock work by her association to stop the “crypto wallet rule” from taking immediate effect and persuade FinCEN, a bureau within the Treasury Department, to allow more time for industry and public input.
“They wanted to publish it as an interim final rule, meaning no comment period. And the day it's published, it would be law,” Boring said. “When we understood that was the intention, we put considerable amount of pressure on the Secretary of Treasury's office to not do that. Because one, that's not the right way to bring something like this forward, and two, any time there's going to be comprehensive new rules on a nascent industry, it's incredibly important that the industry itself, the experts, the technologists, the lawyers, the legal community has the opportunity to work with government to get it right.”
FinCEN’s “crypto wallet rule” would require cryptocurrency exchanges to store the names and addresses of customers transferring over US$3,000 to private crypto wallets. For customers transferring US$10,000 or more in a single day, exchanges would be required to file currency transaction reports to FinCEN that contain the sender and recipient’s information, such as name and physical address.
“What makes this [rule] a huge overstep in privacy is, as anybody knows, in the crypto or the blockchain space, once you have a wallet address, you don't only have the history of that one transaction that applies to that regulated institution, you have that person’s entire transaction history going backwards and going forward,” Boring said. “That is what is an overstep and potentially would create, what I would argue, a surveillance state, which is absolutely not appropriate.”
When initially filed on December 18, 2020 on the Federal Register, the “crypto wallet rule” proposal was to be finalized without any comment period.
However, after heavy backlash from the crypto community, FinCEN granted a 15-day reprieve for public comments. Many thousands of people and organizations spoke up, which in turn pressured the agency to extend the public comment period again, now to March 29.
Boring questioned former Secretary Mnuchin’s motives in pushing this rule to take immediate effect in the last days of a defeated administration.
“It is very typical when you have one administration leaving and another one coming in to have midnight rulemakings,” said Boring, who also cited the possibility of political pressures from an international community that sees cryptocurrency as a threat to sovereign currencies. “Blockchain is not and it should not be a political issue.”
FinCEN states in its public notice that the rule aims to close anti-money laundering regulatory gaps to prevent illicit transactions using convertible virtual currency (CVC) and digital assets with legal tender status (LTDA), including the financing of terrorism. The public notice reiterates that the proposed requirements are “essentially equivalent to the existing CTR (Currency Transaction Reports) requirements that apply to transactions in currency.”
In response, Boring says FinCEN is already equipped with effective tools to protect the financial system.
“FinCEN was the first regulatory agency to issue guidance on convertible virtual currencies like bitcoin,” Boring said, referring to FinCEN’s 2013 guidance. “There are many, many, many incidents where FinCEN has been effective in bringing the law against criminals that are abusing this technology for nefarious purposes.”
The Chamber of Digital Commerce does not push back against every proposed law or rule that affect cryptocurrency — the industry also wants to be part of the solution, said Boring, whose association recently collaborated with the think tank Blockchain Research Institute to produce a 120-page report calling on the Biden administration to take greater leadership over the nation’s blockchain strategy, policy and regulations.
See related article: Don Tapscott’s “personal call” to President Biden to lead blockchain policy
“Where I would like to see the conversation go is, how do we modernize the Bank Secrecy Act? How do we leverage technology to strengthen compliance in a way that protects privacy?” Boring said. ”With Blockchain technology, we absolutely have the tools to do that. But do we have the will and do we have the foresight for regulators to innovate?”
Watch Boring’s full conversation with Forkast.News Editor-in-Chief Angie Lau for more details on the Chamber of Digital Commerce’s behind-the-scenes role on FinCEN’s “crypto wallet rule,” and where she believes U.S. regulations and policymaking on digital assets should go.
- How FinCEN’s “crypto wallet rule” proposal came about: “This is something that was actually being spearheaded by the former secretary of the Treasury, Steve Mnuchin. And there were geopolitical as well as political motivations behind these proposed rules… Secretary Mnuchin was driving this through the public policy process and ultimately he was not able to get this done at the 11th hour, something we were very proud to be able to help play a role in stopping.”
- How the “crypto wallet rule” would affect privacy: “What makes this a huge overstep in privacy is, as anybody knows, in the crypto or the Blockchain space, once you have a wallet address, you don't only have the history of that one transaction that applies to that regulated institution. You have that person's entire transaction history going backwards and going forward. And that is what is an overstep and potentially would create what I would argue, a surveillance state, which is absolutely not appropriate.”
- Consequences to this new rule: “The intention of this would be to protect the financial system. But at what cost are we doing that? This absolutely would have a major impact on any type of smart contract-based system in the entire DeFi space…. What we're unable to put a metric on is innovations that we would never, that would never see the light of day because they were not given a space to exist, to grow and to thrive. So this is something policymakers constantly have to grapple with.”
- Blockchain and politics: “Blockchain is not and it should not be a political issue. This is about technology. This is about jobs. This is about the economy and about innovation. It should not be about partisan politics on the left or the right. So I don't believe we should see a huge change in shifts, a huge change in the shift in administrations, and we wouldn't want that again. We want to focus on the technology and the merits of what this brings to the economy. I'm not turning this into a partisan issue.”
Angie Lau: FinCEN — the U.S. Financial Crimes Enforcement Network of the U.S. Treasury — wants to know how much, where and exactly who is holding cryptocurrency, and it could soon be law.
Welcome to Word on the Block, the series that takes a deeper dive into blockchain and the emerging technologies that shape our world at the intersection of business, politics and economy. It's what we cover right here on Forkast.News. I'm Editor-in-Chief Angie Lau. Well, FinCEN extended the comment period to its proposed ‘crypto wallet rule’ to March 29th, 2021.
Under the proposal, crypto exchanges will be mandated to store personal information of every customer that move funds to their personal wallets. Now the Chamber of Digital Commerce calls this a shocking invasion of privacy, but the implications could have bigger impact than that. Let's learn more. Joining me today is founder and president of the Chamber of Digital Commerce — this is the world's leading trade organization for digital assets and the blockchain industry — Perianne Boring. Welcome to the show.
Perianne Boring: Thanks so much, Angie. This is such an important issue. [I'm] looking forward to chatting with you about this.
Lau: Absolutely. Get us up to speed. Why did FinCEN decide to come up with the proposal in the first place?
Boring: This is something that was actually being spearheaded by the former secretary of the Treasury, Steve Mnuchin. And there were geopolitical as well as political motivations behind these proposed rules. As you know, Steve Mnuchin served as part of the Trump administration, who is no longer in office. It is very typical when you have one administration leaving and another one coming in to have midnight rulemakings, and this was a part of that. What I believe is that Secretary Mnuchin, or former Secretary Mnuchin, wanted to leave a legacy as he was leaving office as hard on crypto. There were also rumors of some geopolitical forces that played a role in this as well. Bitcoin, in particular, has really soared in terms of acceptance and use, and you're seeing huge growth in the overall crypto economy, but also bitcoin. The rumor is that there's many other nations around the world that see this as a threat to their sovereign currencies. I do not think that is the right way for governments to assess bitcoin's role in the financial system. But the idea is that there was pressure from the international community to clamp down on bitcoin and this was one way they were going about that.
Secretary Mnuchin was driving this through the public policy process and ultimately he was not able to get this done at the 11th hour, something we were very proud to be able to help play a role in stopping because, like you said, it wouldn't actually accomplish what it was set out to do. And two, it would have major unintended consequences for an incredibly important, nascent and emerging ecosystem.
Lau: When you rush anything through — be it government policy to doing your fifth-grade homework — there's just going to be a lot of things that fall through the cracks. Time is often, one of the insurance, I guess, of making sure that every T is crossed and I's dotted and that there's full understanding of the concept before moving forward. So do you think that it's a good sign that FinCEN has extended the consideration time period to the end of March?
Boring: Oh yeah, absolutely.
Lau: Speaking in February, it's another month and a half.
Boring: Yes. To kind of go back through what actually happened here, Secretary or former Secretary Mnuchin was not going to have any comment period at all. Mind you, this is an incredibly comprehensive set of rules — 70-plus pages of new regulations that would impact every single money service, business and bank that has virtual currency transactions going through their system. They wanted to publish it as an interim final rule, meaning no comment period. And the day it's published, it would be law.
When we understood that was the intention, we put considerable amount of pressure on the Secretary of Treasury's office to not do that. Because one, that's not the right way to bring something like this forward, and two, any time there's going to be comprehensive new rules on a nascent industry, it's incredibly important that the industry itself, the experts, the technologists, the lawyers, the legal community has the opportunity to work with government to get it right. That is part of the point of a comment period. So we put pressure to get that comment period. And it was a 15-day comment period over the Christmas and New Year's holiday, which put the entire industry in a huge frenzy. I know my team deleted their entire vacation to be able to address that.
What ultimately ended up happening was over 7,500 people and organizations filed comments to a 70+ page rule in 15 days. And our voices were heard and that comment period ultimately was extended for a full 60 days. That's what we asked for. We asked for that in our comment letters. We sent another separate letter directly to Secretary Mnuchin, and we had many people call his office directly and ask for that. And we made a true impact in having this follow a proper policy process.
So now we're under that 60-day comment period. But that certainly was a huge step forward for all those who are working so hard to ensure that the public policy that impacts this space actually achieves the goals that it's looking to set up and does so in a way that does not stifle innovation. It's not over. We're still working through the process, but we now have the opportunity to get this right as policymakers and as industry and innovators.
Lau: The framing of that, it isn't irrelevant, though. The industry has moved at such quick pace, there is not only U.S. concern, but global regulatory concern about just the speed in which the digital assets and cryptocurrency moves. And they want some feeling of being able to apply standards and rules. So it's not irrelevant. But what are some of the things that FinCEN is asking to do? And in your view, what is the impact of that on innovation?
For example, one of the proposed crypto rules would require money service businesses like crypto exchanges and banks to store customer's and counterparty's KYC (know your customer) information for transactions. What would be wrong with that?
Boring: FinCEN was the first regulatory agency to issue guidance on convertible virtual currencies like bitcoin. So they issued the first guidance on March 18th of 2013, and they have issued many other pieces of guidance since then. FinCEN has been one of the most proactive regulators in this space. They have the jurisdiction they need to address criminal activity, leveraging cryptocurrencies and blockchain technology. There are many, many, many incidents where FinCEN has been effective in bringing the law against criminals that are abusing this technology for nefarious purposes. You can see that in the courts. We've had prosecutors and members of FinCEN testify in front of Congress talking about this. First and foremost, it's important to understand that FinCEN has the tools they need to protect the financial system when it comes to cryptocurrencies.
This overhaul, in many ways, was not necessary and would be ineffective. I'll just talk about some of the things there that are different and would change where we currently are.
So this particular rule for transactions at a $3,000 threshold or above, the bank or the money services, like the trading platform, would have to verify the customer's identity and obtain the name and the physical address of all counterparties of the transaction. That ‘all counterparties’ part is the key piece. So it's not just the customer, it's the customer's customer. Then one step forward for transactions of $10,000 above. They need all that information, plus the transaction hash and the wallet address. So this is something we have never seen before in any type of AML/BSA compliance in history. And what makes this a huge overstep in privacy is, as anybody knows, in the crypto or the blockchain space, once you have a wallet address, you don't only have the history of that one transaction that applies to that regulated institution. You have that person's entire transaction history going backwards and going forward. And that is what is an overstep and potentially would create what I would argue, a surveillance state, which is absolutely not appropriate.
Lau: I mean, let's bring it to the real world, right? It would be equivalent to: any time I use fiat, paper dollar, I would have to fill out forms, I would have to get the merchant to fill out forms and verify his or her residential address before I'm allowed to use this currency and before they're allowed to accept it. It's that level of bureaucracy that adds massive bureaucratic friction to what innovation has lauded as being a seamless peer-to-peer transaction.
Boring: Yeah, and it's not just friction, it's the amount of information that government has over the people — over lawful citizens who have not engaged in any type of nefarious or even questionable history. This would be a change and in the relationship between the citizens and the regulators. It's something that we don't think, we should see in any jurisdiction, but especially in the United States of America.
Lau: It's just that one step more that is uncomfortable. If you take a look at the industry, blockchain is very transparent — you can see every transaction. When there is nefarious action, the fact is that cryptocurrency is at the moment with KYC and AML (anti-money laundering) rules, they know exactly who the person is receiving and then trying to exchange for fiat out of that exchange if it's dirty cryptocurrency. We've seen these types of forensic actions already retrieving hacked bitcoin. But are you saying that this is that one step more that creates discomfort for anybody who's holding cryptocurrency?
Boring: Yeah, it absolutely is, and blockchain technology has already proved to be a boon to law enforcement. Again, FinCEN has the tools they need to have jurisdiction over this space and to apprehend criminals who are abusing this technology for nefarious purposes. The laws work. There has been many, many instances where we can show that law enforcement has been effective with the tools that they had. Taking this to where we're submitting now, transaction hashes and wallet addresses to the regulators absolutely is going too far.
Lau: We now have a new U.S. secretary of treasury. Janet Yellen, former Federal Reserve chair, her reputation is of one that is, she's very specific, she's very thoughtful, she listens not only to other board governors. This is by reputation, her style. How have you found this new administration, new leadership, working with both this FinCEN proposal and other policies as it relates to digital assets and blockchain?
Boring: It's a great question. So we're still within the first couple of weeks of the Biden-Harris administration and Janet Yellen has been nominated to be the secretary of the Treasury. She still has to go through that nomination process, as well as many other key regulatory agencies like Gary Gensler, who likely will take the helm at the SEC. There seems to be pretty good indication that Chris Brummer will head the CFTC. Michael Barr is who we're hearing will be at the OCC. It is a little too early to tell, a lot of these positions have not been solidified through the nomination process.
There's definitely a number of people who are very educated on blockchain technology and cryptocurrencies. For example, Gary Gensler has published a number of papers while serving in an academic capacity at MIT. One of the things that I see is a big positive, if we have people who are educated, who understand this industry at a technical level, which is a plus, because when we go in, we have issues or we need to communicate our challenges to them, we will be able to have a more sophisticated conversation and really talk about the substance of what is needed in law.
However, bitcoin and blockchain and crypto is not a part of the Biden-Harris 100-day plan. We do hope blockchain technology will be a priority. In fact, that's something we have called for in this administration. We do think we need to make blockchain a priority in this country to ensure that we can compete on the global landscape. But there's still a lot that we'll be analyzing over the next couple of weeks and months as more people are filling these roles. And we're still in very early days.
But remember, blockchain is not and it should not be a political issue. This is about technology. This is about jobs. This is about the economy and about innovation. It should not be about partisan politics on the left or the right. I don't believe we should see a huge change in the shift in administrations, and we wouldn't want that again. We want to focus on the technology and the merits of what this brings to the economy, and not turning this into a partisan issue.
Lau: I couldn't agree more, but sometimes reality is what it is. It is interesting the framing of cryptocurrency by not only government, but also legacy industries and institutions have been very interesting. Especially with the rise of central bank-backed digital currencies. There's certainly a political aspect to it.
But I absolutely hear you on the technology. Policy as it impacts technology is increasingly one of the big concerns coming out of the industry. This is something that you and I have talked about as the proposed rule that FinCEN is currently considering. There is a lot of potential impact on innovation, including a really fast-moving space called decentralized finance, DeFi. And in speaking with a lot of the blockchain thought leaders joining Forkast, predicting that regulating DeFi is going to be something that regulators will want to focus on.
Now, with this policy, it actually does really put a huge dent on even the space and what we're seeing DeFi in which centralized finance is starting to pay attention as the technology is enormously interesting for financial instruments. So where do you see that? How could this also squash innovation? And what are the things that need to be considered?
Boring: Yeah Angie, you highlight a really good point, which are what are the unintended consequences of a rushed rule? And the intention of this would be to protect the financial system. But at what cost are we doing that? This absolutely would have a major impact on any type of smart contract-based system in the entire DeFi space. A 15-day comment period is not sufficient time to understand or unpack that.
The rule also talked about the cost of implementing this rule. In 15 days, we were able to pull some data from our members about the increase and compliance cost. What we're unable to put a metric on is innovations that would never see the light of day because they were not given a space to exist, to grow, and to thrive. So this is something policymakers constantly have to grapple with. And it's something we're very vocal about at the Chamber, which is, yes, we absolutely need to protect against illicit activity. We absolutely need to have a strong rule of law. That's what's good for business. That is the right thing to do. But you also have to ensure that we are not disincentivizing innovation or encouraging innovators to leave the United States altogether.
We've already done that in the US in many instances, and that is something that certainly keeps me up at night and something we're constantly having to remind ourselves of is how do we encourage the development of this technology within our borders. And anytime you're bringing comprehensive rules and regulations into a nascent space, it needs to be done so very thoughtfully, not through a rushed process.
Lau: Let's just contrast that with what's happening in Asia. So this FinCEN rule, specifically, the one aspect of having to report personal information to FinCEN, both on the customer side and then also, both on the buy and sell side. If they are unable to do so, they would not be able to host the transaction, which would mean that either financially they wouldn't be able to do so because it's so bureaucratically heavy, they might not even be able to do so because it's near impossible. There's a monetary cap of 50,000 to a smart contract. If you're staking in DeFi, that's beyond the cap that FinCEN has put out there.
So to your point, a lot of unintended consequences. And so then what happens in the DeFi space?
Well, I'll tell you what's happening in Asia, we recently reported that a government agency of South Korea basically put out this huge report that, executive headline was that decentralized finance is the future and South Korea should be positioning itself to be a world leader in DeFi. What we're also reporting and seeing in China is this increasing recognition that the DeFi space is very interesting, and we have the Blockchain Services Network in China and they're looking into participating and they're looking into DeFi with much more interest. That's what's happening in Asia. If you're shutting down DeFi participation from the U.S. side, if you want to participate in DeFi and you can't legally do that in the U.S., where are you going to go?
Boring: Yeah, and I think the broader issue is just the tone and the tenor towards crypto and blockchain in the United States. There is no government strategy. You had many, many, many different regulatory agencies. One of the things that really works against the US is we have this fragmented regulatory environment where you have the SEC and the CFTC and FinCEN and IRS and DOJ and then you have Congress and then you have the states. The list just goes on and on and on. You have the regulatory stakeholders that entrepreneurs and businesses have to go through and navigate through to be able to operate in the U.S. and you have different regulators who are enforcing the rules that they have jurisdiction over. And all of the signals that we're sending to the marketplace is, don't do this, don't do that. If you trip up, we're coming after you.
There is very little signal coming from the U.S. government that's saying we understand the critical importance that digital assets and blockchain technologies are going to play in the global economy for generations to come. We should be finding ways to harness this technology and the benefits here. And that's where we're messing up. And it's a lack of leadership. Again, that's why we're calling on the Biden and Harris administration to make blockchain a priority and to have a strategy on how the US is going to compete globally. If we don't, the U.S. has a lot to lose and the next Silicon Valley likely will not be in California.
Lau: It's already going to Texas, that's for sure. But noted and that is a real point to consider. But for a lot of people who are observing this space and certainly at a global level to defend the regulatory principle, is let's just follow the rules. If there are illicit activities out there and if there are loopholes and if crypto has a potential to fund that or participate in that, that is a real concern. What should regulators be thinking about? Are there things that you, as the Chamber, considers recommendations to FinCEN during the comment period? Are there things that FinCEN can do that actually does make sense in your view?
Boring: Again, FinCEN has been very proactive and has been, in many ways a strong partner in the industry. They've worked very closely with the industry to be able to take the Bank Secrecy Act and provide clarity to regulated intermediaries like banks and money services businesses to comply and to ensure we have protections for anti-money laundering and sanctions compliance.
Where I would like to see the conversation going is how do we modernize the Bank Secrecy Act? How do we leverage technology to strengthen compliance in a way that protects privacy. And with blockchain technology, we absolutely have the tools to do that. But do we have the will and do we have the foresight for regulators to innovate? And that's really the challenge that we would put forward to policymakers globally, is how do we strengthen these goals of protecting the financial system while encouraging innovation, but doing so in a way that's pro-growth, that does not infringe on people's rights and on privacy, and that ultimately allows nascent technologies of space to grow and to thrive.
There's many different areas where the Bank Secrecy Act could be improved, and we would like to spend our efforts being more proactive as opposed to retroactively trying to apply decades-old laws and regulations to a nascent and emerging space. And this is not just at FinCEN this is at many other regulatory agencies as well. Digital assets are an asset class in their own. They require their own independent study. We should be looking at the unique attributes of digital assets and blockchain-based technologies. And again, thinking proactively about ensuring we're still accomplishing the goals of regulators and protecting the financial system, but doing so in a way that fosters innovation and development. That requires a little bit more strategy and deep thinking. And again, is not something that can be rushed through at the ninth or the 11th hour.
Lau: It's too important, it's absolutely too important. Final question, we recently spoke with SEC commissioner Hester Peirce to kick off the year. Obviously, the regulatory action that we've seen from the SEC has been very interesting.
Ripple, eight years after inception is facing now enforcement activity. Hester Peirce is an example of increasingly the names that you have also shared with us from the U.S. administration side and on the agency side of people who are more educated, more well-versed, and share a concern that innovation should not be stifled and certainly not at the agency level.
The enforcement activity that provides that kind of definition or clarity of what the rails should be for blockchain. Is this something that you're also reviewing from the Chamber side? Are you concerned for a lot of your members that we're going to see more enforcement activity as a point of regulatory clarity?
Boring: We've already seen some of these issues go to the courts. We saw this in the Telegram versus the SEC case, which the chamber we filed an amicus brief in, and there's going to be other cases that go to the courts. I share Hester Peirce's view that regulation should not be made through enforcement. I think that sends the wrong signal to businesses, to innovators, to entrepreneurs. We should have clear regulatory frameworks and guidelines and it should not take litigation to figure that out. I think that is a failure on behalf of the system today and again, that is sending the wrong signals to business. Guidance should be given in a proactive way, leaving it to the courts to do that is incredibly expensive and it sends the wrong signals to an industry that should be celebrated. We should be thinking more deeply about how do we encourage this innovation and this development here in the U.S. Again, the direction that has gone and it will continue to go is not something we support, but sometimes that's ultimately where it goes and that's an area we've played in as well. We are preparing to continue to play in that space on behalf of our members and to ensure that this industry has the opportunity to grow and thrive in a fair and responsible way.
Lau: It's an important role you play in an increasingly impactful and relevant one. Perianne Boring, thank you so much for sharing with us exactly what's happening in the space right now from a U.S. regulatory point of view, but also a global one. Truly appreciate you being on the show.
Boring: Thanks, Angie.
Lau: And thank you, everyone, for joining us on this latest episode of Word on the Block. I'm Angie Lau, Forkast.News Editor-in-Chief. Until the next time.