The U.S. Financial Enforcement Crimes Network (FinCEN) has released a rulemaking proposal that places identification requirements and amount restrictions for transactions involving self-hosted crypto wallets. CEOs of crypto exchanges and advocacy groups have already criticized the rule, claiming that it would throttle innovation in the nascent industry and place onerous requirements on their businesses.

Self-hosted or unhosted wallets are not provided by a financial institution or crypto service, residing instead on a user's computer or offline. While crypto exchanges are required to verify customer identity and store records for their wallet services under the Banking Secrecy Act (BSA), self-hosted wallets largely function outside the scope of this act. Such wallets are considered the prime conduits for illicit activities and money laundering using cryptocurrencies. According to FinCEN, approximately $119 billion in suspicious activity related to cryptocurrencies was reported last year.

Key Takeaways

  • The financial crime watchdog FinCEN's new rulemaking proposal for transactions involving self-hosted wallets requires crypto businesses to identify customers and store records for transactions over a certain amount.
  • The proposal also prohibits structuring, or the practice of breaking down a large financial transaction into several smaller ones.
  • Critics of the proposal say it infringes on citizens' civil liberties.

What Are the Rule's Details?

FinCEN's proposed rule would place similar restrictions on self-hosted crypto wallets as those required by BSA. The rule is titled Requirements for Certain Transactions Involving Convertible Virtual Currency or Digital Assets, and it is similar to the so-called Travel Rule implemented by the Financial Action Task Force (FATF). It requires banks and financial institutions to collect user identification information and report details for transactions over certain amounts involving self-hosted wallets.

The rule requires crypto businesses and banks to report customer coordinates and identification to the agency for transactions greater than $10,000 with unhosted wallets. It also requires crypto exchanges and services to store records and customer identification information for transactions that are over $3,000 and less than $10,000 between crypto exchanges and unhosted wallets.

FinCEN has also taken aim at structuring – a tactic used to disguise large cryptocurrency transactions by breaking them down into several small ones between unhosted wallets and crypto exchanges. To prevent this practice, FinCEN is proposing that crypto businesses store records of such transactions and not allow them to exceed $10,000 within a single given day.

A Surveillance State?

Critics of the rule say that it infringes on civil liberties because it disallows anonymous transactions using self-hosted wallets. Marta Belcher, a civil rights activist, raised the specter of a surveillance state in an interview with Coindesk. "There are photos from the Hong Kong protests of long lines at the subway stations as protestors waited to purchase tickets with cash so that their electronic purchases would not place them at the scene of the protest. These photos underscore that a cashless society is a surveillance society; that is why the ability to import the anonymity of cash to the digital world is so important for civil liberties," she told the publication. Others, including Coinbase CEO Brian Armstrong, have already added to growing chorus against it.

To be sure, their fears, at least in the context of the United States, may be unfounded for the time being. In its proposal, the agency stated that, if enacted, the rule would be applicable to wallets not subject to the Banking Secrecy Act (BSA) and located in a foreign jurisdiction. The initial foreign jurisdiction list consists of Burma, Iran, and North Korea, according to the agency.