Friday, May 27, 2022

Trump and Mnuchin’s sneak attack on financial privacy

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Hello and welcome back!

This assumes, of course, that you are one of those lucky enough to have had a real winter break, a moment of rest as we have left behind the most trying year in living memory. That was not the case for many of our readers, however, thanks to an 11-hour regulatory push by Trump’s Treasury Department to deeply undermine the entire cryptocurrency industry.

The Treasury’s Financial Crimes Enforcement Network (FinCEN) has announced plans to radically revamp the reporting requirements for anyone selling or transferring virtual currency. Under the proposed new rule, which is part of efforts to fight money laundering and financial crime, entities such as Coinbase are expected to comply with new and extended requirements for reporting certain transactions and details about FinCEN participants. This would include any transfer over $ 10,000, as per current bank requirements. More troublingly, this would include anyone receiving a transfer greater than $ 3,000, if it is transferred to a private cryptocurrency wallet (i.e. not hosted by an exchange or other financial institution).

In other words, the new rule would require companies to collect information about people who are not their customers and who may never have interacted with the company at all. It is unclear how they or their clients could force fund recipients to disclose this information, creating a massive obstacle to their primary function of moving assets. This is just one of the many issues with the substance of the rule.

Content aside, the timing of the notice elicited justified outrage from affected businesses. Not only was it announced on December 18, just as much of the professional world went into hibernation, but the comment period was set at just 15 days after publication. The normal comment period for rule making is 30 days or more, which leaves the distinct impression that someone was trying to downplay the advice of … well, the advice.

So instead of enjoying Kwanzaa / Christmas / Solstice / a high-profile televised marathon, employees at businesses from Square to Kraken to Fidelity had to scramble to file comments with the Treasury on the new rule. Industry comments (many of them collected here) are essentially uniform in their opposition. In his comment letter, Union Square Ventures said the new rule “would impose onerous and unprecedented onerous reporting and record-keeping requirements on certain cryptocurrency transactions.” Kathryn Haun, partner of Andreessen Horowitz, even argues that the regulations violate the Administrative Procedures Act because it is too broad, and promises that in the event of taxation, “a16z intends to join others to challenge it in court.”

CoinCenter, a nonprofit advocate for digital currency, unboxes wider negative consequences of such a rule. The group’s research director, Peter Van Valkenburgh, admits that the $ 10,000 reporting requirement is at least “technologically neutral.” But the $ 3,000 threshold for reporting transactions to private wallets, he argues, places a burden on emerging technology not shared by legacy systems (no parallel rule exists for banks), and without any reasonable justification.

In addition, the proposed rule would be the continuation of an approach to financial crime that already appears to be broken. As the Paradise Papers pointed out in 2017, bank reporting obligations have not ended criminal money transfers and may even have made them worse by providing banks plausible denial.

This makes the imposition of civil liberties of the proposed rule difficult to justify. Valkenburgh describes FinCEN’s reporting requirements in general as “a form of warrantless search and seizure of private financial records”. The Digital Civil Liberties Group Fight for the Future argues that “most people buy cryptocurrency through an exchange before transferring it to a personal wallet. This rule change therefore imposes strict financial oversight on people who participate in the crypto-economy for legitimate purposes, while having little or no impact on bad actors.

And it’s not just a one-off tax. Blockchain analytics companies like Chainalysis can track crypto transaction sequences on almost any public blockchain, meaning that once a single wallet is tied to an identity, all subsequent transactions of this portfolio can be linked to an individual.

In addition, there is growing concern that FinCEN records constitute a rich repository of personal data, mainly on fully honest traders. This concern is expected to be even greater after the SolarWinds hack, in which Russian actors compromise the treasury department to an as yet unknown degree.

Fred Wilson, Union Square Ventures partner wrote Tuesday that the whole package is “no way to regulate an issue at the very heart of a new open financial system which is about to open up access and massively reduce the cost of financial services for all”. That’s a pretty bullish assessment of the crypto industry, which has so far had a fairly limited impact on the financial lives of ordinary people.

And little surprise – USV’s investment portfolio includes lots of crypto companies. Among them, Coinbase, for whom the new rule would be expensive, even devastating. Even leaving aside personal freedom and privacy, these burdens on innovation make FinCEN’s new rule a potential giveaway for China, which grows hard on its own, decidedly not free vision of digital currency as a route of geopolitical influence. It would, at the very least, be a fitting final act for a Trump administration whose bad choices already have disastrously undermined America’s position in the 21st the most vital struggle of the century against autocracy.

There is some good news. In typical haphazard style, the Trump administration appears to have extended the comment period by two days, at the last second and without clear public notification. The new deadline is tomorrow midnight, January 7th. Interested parties can submit your comments here.

And for those who feel passionate about this issue: CoinCenter sells some shirts that you might like who help support their work.

David Z. Morris

@davidzmorris

david.morris@fortune.com



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