The Financial Crimes Enforcement Network (FinCEN) has extended the commenting period by 60 days for a controversial proposed rule that requires cryptocurrency businesses and banks to record and store customer identification details for self-hosted wallets. The agency proposed the Requirements for Certain Transactions Involving Convertible Virtual Currency or Digital Assets rule last month, and its commenting period ended Jan. 15. FinCEN extended the commenting period by 15 days for reporting requirements and another 45 days for a requirement on record-keeping and counterparty reporting.

Key Takeaways

  • FinCEN has extended the commenting period for a controversial proposed rule that requires crypto businesses to maintain a record of transactions with self-hosted or private wallets.
  • The rule generated considerable pushback from the crypto community, which claims that it could throttle innovation and have legal and business implications for the nascent sector.

A Controversial Rule

The FinCEN rule requires crypto businesses and exchanges to maintain a record of transactions with self-hosted wallets for amounts over $3,000 and submit a currency transaction report (CTR) to the agency for amounts over $10,000.

From the time that it was first proposed, the rule generated criticism and pushback from the crypto community. Civil rights lawyers claimed that it infringed on personal liberty because it required disclosure of transaction details for self-hosted wallets, or wallets that are not connected to the internet and reside on an individual's computer or offline.

On the other hand, crypto businesses claimed that it would increase the costs and effort required to maintain and track their transactions with private wallets.

That the rule was being rushed through its commenting period also did not help matters, leading to suspicions that the intent was to finalize it before the next administration took over. Legislators weighed in and asked Treasury Secretary Steven Mnuchin, who is widely believed to be responsible for the rule, to consider industry feedback before finalizing the rule.

A Variety of Comments  

In its initial iteration, the rule has already attracted over 7,500 comments from a wide variety of commenters, highlighting the problematic aspects, technical and legal, of such a rule's implementation. The submission by Dr. Neha Narula, director of the Digital Currency Initiative (DCI) at the Massachusetts Institute of Technology, and Patrick Murck, an affiliate at the Berkman Klein Center at Harvard University, highlighted how smart contracts can be used to escrow and subsequently transfer cryptocurrencies without a proper recipient.

"The proposed rule as written would prohibit MSBs (Money Services Businesses) from supporting this entire class of customer transactions. This would make transacting with CVCs and LTDAs less secure and greatly inhibit the innovation and growth of this exciting new technology," they wrote, adding that "disparate treatment" of digital and analog dollars will weaken future U.S. central bank digital currencies (CBDCs) in comparison to other nations' CBDC projects. "The rule could further hem in the design and innovation of blockchain-based or cryptographic 'digital dollars' (whether issued by the Federal Reserve or private actors) at a time when development in these approaches is nascent, potentially putting the future dollar at a competitive disadvantage as compared to other sovereign money."

Others wrote about the implications of sharing sensitive customer data with FinCEN in light of recent hacks at government agencies. "A number of preliminary discussions with potential and actual customers indicate that they are seriously concerned about providing detailed information to FinCEN, citing recent security breaches at FinCEN as risks," wrote Kristin Boggiano, co-founder and president at CrossTower, a global digital asset infrastructure platform.