There has been talk over the past month about the possibility of the Trump administration issuing certain requirements relating to crypto-wallets.  Just the rumors led to pushback.  On November 25, 2020, for example, Coinbase CEO Brian Armstrong tweeted explanations of why he believed this was a bad idea and how the additional friction of such reporting requirements would kill many of the emerging use cases for crypto.   He added, “Just like the U.S. benefited enormously by embracing the open internet, it should embrace the open crypto networks and allow U.S. citizens to move their own money freely in the emerging cryptoeconomy.”

On December 9, 2020, a group of republican House members wrote to Treasury Secretary Mnuchin and urged him to consult with Congress before issuing new regulations.  They said, “Over-regulating self-hosted wallets will crush a nascent industry and leave the United States behind the rest of the world when it comes to harnessing the power of blockchain and cryptocurrency.”

Nevertheless, On December 18, 2020, the Financial Crimes Enforcement Network (FinCEN) issued a notice of proposed rulemaking that included the new regulations. The proposal sets forth requirements for certain transactions involving convertible virtual currency (CVC) or digital assets with legal tender status (LTDA).  Banks and money services businesses (MSBs) would be required to submit reports, keep records, and verify the identity of customers in relation to transactions above certain thresholds involving CVC/LTDA wallets not hosted by a financial institution (also known as “unhosted wallets”) or CVC/LTDA wallets hosted by a financial institution in certain jurisdictions identified by FinCEN.

Pursuant to the proposed rule, banks and MSBs will have 15 days from the date on which a reportable transaction occurs to file a report with FinCEN. Further, the proposed rule would require banks and MSBs to keep records of a customer’s CVC or LTDA transactions and counterparties, including verifying the identity of their customers, if a counterparty uses an unhosted or otherwise covered wallet and the transaction is greater than $3,000.

This includes collecting the following:

  1. The name and address of the financial institution’s customer;
  2. The type of CVC or LTDA used in the transaction;
  3. The amount of CVC or LTDA in the transaction;
  4. The time of the transaction;
  5. The assessed value of the transaction, in U.S. Dollars, based on the prevailing exchange rate at the time of the transaction;
  6. Any payment instructions received from the financial institution’s customer;
  7. The name and physical address of each counterparty to the transaction of the financial institution’s customer;
  8. Other counterparty information the Secretary may prescribe as mandatory on the reporting form for transactions subject to reporting pursuant to § 1010.316(b);
  9. Any other information that uniquely identifies the transaction, the accounts, and, to the extent reasonably available, the parties involved; and,
  10. Any form relating to the transaction that is completed or signed by the financial institution’s customer.

FinCEN explained that the rule was necessary for national security in that it “aims to close the gaps that malign actors seek to exploit in the recordkeeping and reporting regime.”  FinCEN said the reporting would allow law enforcement agencies to protect national security by more quickly and accurately tracking money flows to identify and stop terrorist attacks, drug and human trafficking, and cybercrime.

The comment period for responding is 15 days from the date of publication in the Federal Register (scheduled for December 23).  Some have commented that this is an insufficient period in light of the holidays and the increased surge of the pandemic.  In asking that the comment period be extended to 60 days, Coinbase went so far as to say ” There is no emergency here; there is only an outgoing administration attempting to bypass the required consultation with the public to finalize a rushed rule before their time in office is done.”

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David Zaslowsky has a degree in computer science and, before going to Yale Law School, was a computer programmer. He is currently the Chairman of the Litigation Department of the firm’s New York office. His practice focuses on international litigation and arbitration. He has been involved in cases in trial and appellate courts across the United States and before arbitral institutions around the world. Many of David’s cases, including some patent cases, have related to technology. Since 2008, David has been included in Chambers for his expertise in international arbitration.