Mnuchin's Crypto Wallet Legislation Meets Opposition

Lawmakers and crypto businesses are mobilizing against new regulation

A group of Republican lawmakers has written a letter to Treasury Secretary Steven Mnuchin expressing concern about his department's plan to impose a new regulation on the cryptocurrency industry. The regulation, which is rumored to be in the works but has not been confirmed by the department, requires financial institutions to verify identities of recipients and senders for transactions involving self-hosted crypto wallets or wallets that are not provided by a financial institution or service. Examples of such wallets include hardware wallets or a wallet running on a user's computer.

Brian Armstrong, CEO of cryptocurrency exchange Coinbase, had tweeted about the regulation last week, claiming that it could have "unintended side effects" and "kill many of the emerging use cases" for cryptocurrencies. The letter from four representatives – Rep. Warren Davidson (R-Ohio), Rep. Tom Emmer (R-Minnesota), Rep. Ted Budd (R-North Carolina), and Rep. Scott Perry (R-Pennsylvania) – urges the Treasury department to consult with Congress and industry stakeholders "before taking any decisive action."

Key Takeaways

  • Four Republican lawmakers have written to Treasury Secretary Steven Mnuchin urging the department to consider stakeholders and the industry before proposing legislation that requires crypto businesses to identify users of self-hosted wallets in their transactions.
  • The lawmakers and crypto businesses claim that the regulation will compromise individual privacy and add to the administrative burden.
  • The battle between the government and the crypto community has been brewing for some time now.

The regulation is similar to the so-called Travel Rule, which requires financial services organizations to identify information for transacting parties at both ends, of the Financial Action Task Force (FATF). While the rule does not specify actions to be taken in case of self-hosted wallets, countries like Switzerland and the Netherlands have imposed it on self-hosted wallets as well.

How Do Self-Hosted Wallets Affect Crypto Legislation?

At the heart of objections to the rumored legislation are concerns related to the concept of individual liberty and privacy. Cryptocurrency exchanges and other crypto services platforms already collect identification information for account users on their platform. This practice enables law enforcement to determine a transaction's details based on the blockchain address, thereby compromising user sovereignty – long considered a central tenet of cryptocurrencies.

Self-hosted wallets are generally considered a more secure and private version of other wallets because a user cannot be identified on the basis of their blockchain address alone. In some instances, such as crypto hardware wallets, they are even disconnected from the internet. "The contemplated regulation would not meaningfully support law enforcement, while it would raise privacy concerns and place impractical regulatory burdens on digital asset users and companies," wrote the lawmakers.

Opponents of the rumored legislation are pointing to the additional paperwork and administrative burden the regulation would place on companies providing crypto-related services. Armstrong from Coinbase also said that providing identification information can be impossible in some cases where crypto technology, such as decentralized finance (DeFi), is used to provide services to the unbanked.

Online publication Coindesk has pointed out that the crypto community has been mobilizing against the rumored regulation for some time now. Jai Ramaswamy, former anti-money laundering chief at the Department of Justice (DoJ), wrote about perils of regulations against unhosted wallets recently. The Blockchain Association, an advocacy group, published a policymaker's guide to self-hosted wallets last month.