Leading firms and personalities in the crypto sector have come out to express opposition to proposed regulation for the crypto sector. The Financial Crimes Enforcement Network published the proposal on December 23, 2020.
Details Of The Proposal
Under the proposal, banks and money service businesses would need to submit reports, keep records, and adhere to strict KYC and AML rules relating to crypto transactions. The proposal calls for any firm under US jurisdiction to adhere to these requirements in line with the Bank Secrecy Act.
Under the rules, banks and MSBs would have to collect details such as the name and address of any unhosted wallet counterparties. The clause would be triggered for any transaction exceeding $3000 or a group of transactions exceeding $10,000 in 24 hours.
FinCEN describes a hosted wallet as a wallet hosted by an institution such as a wallet at an online exchange. In contrast, an unhosted wallet is a wallet where the customer holds the funds in the personal wallet and has control of the private key.
According to the proposal, the reason for the legislation is illicit finance. Consequently, FinCEN is proposing to address the threat by creating new reporting requirements. The rules would be similar to the reporting requirements of the fiat currency system.
In short, FinCEN wants more oversight over crypto transactions to ensure they are not used to finance terror, illegal arms sales, drug cartels, hackers, and other illegal activities. FinCEN gives an example of ransomware hackers as some of the nefarious actors that would necessitate the legislation. The regulator estimated that around 11.9% of the crypto market is connected to illicit activity.
Opposition From The Crypto Community
While the proposal by FinCEN seems reasonable on the surface, several stakeholders in the crypto market are opposed to it. Critics of the proposal agree with the $10,000 reporting requirement. However, they are opposed to the $3000 recordkeeping requirement. They argue that it creates double standards since it only applies to crypto transactions. According to critics, bank customers can still write checks to non-customers without the same reporting requirements.
One of the most renowned personalities to speak up on the issue is Jack Dorsey, the Twitter CEO. In a recently published letter, Dorsey argues that the reporting requirement would only drive crypto users away from regulated entities. He said the friction created by these requirements would force crypto users to use non-custodial services outside of the jurisdiction of the US. Consequently, it would make it harder for FinCEN to track illicit uses of crypto.
a16z, the crypto investment arm of Andreessen Horowitz also published a statement criticizing the proposal. In the statement, a16z argues that the reporting requirements do not apply to any other sector in the financial sector. Besides that, the statement claims that the proposal violates the Fourth Amendment since it expands the reach of the Bank Secrecy Act beyond its intended limits. As a result, it was akin to subjecting US citizens to unreasonable search and seizure, which is prohibited by the Fourth Amendment.
What The Future Holds
The proposal comes in the final days of the Trump administration. Officials of the next administration are the ones who will determine whether it becomes law. For now, there is still time for players in the crypto community to submit their suggestions regarding various aspects of the proposal.
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