One essential trait of cryptocurrencies that make them fundamentally different from the conventional banking system is the ability for users to have custody over their own crypto-assets. There is no ability to “freeze” funds or censor transfer of them if you have control of your own private key. There is no third party that can come in and seize your funds or stop you from using them in any way you see fit. Put shortly: your keys, your funds.
In effect, when you own bitcoin or other cryptocurrencies, you control your own part in a distributed ledger rather than being a manipulable data point in the centralized ledger of a bank.
You express the degree of privacy you want and the level of security you need to conduct transactions. You can choose to have a trusted third party custody your assets for you (and in so doing, be able to identify who you are in exchange for easy access to your funds) or you can choose to have your cryptocurrencies in your own wallet, run on open source code that seek neither to identify you or to sell you anything.
Yet recent proposed regulations in the United States may lead to this critical trait, the ability to choose different transactions and ways of dealing with cryptocurrencies and their wallet holders, to be under threat.
FinCEN (Financial Crimes Enforcement Network), a portion of the Treasury Department which is responsible for enforcing transparency requirements around financial flows and the Bank Secrecy Act, is looking to impose regulations that force regulated entities to keep records on identity when they’re looking to transact in cryptocurrencies — specifically a $3,000 threshold for when there is a transaction with an “unhosted” wallet — a wallet of somebody who hasn’t gone through formal KYC/AML and which isn’t hosted on an exchange or bank, and which is oftentimes in self-custody.
Cryptocurrency exchanges and banks that want to deal in cryptocurrency will have to create the technical capability to verify the identity of those behind certain wallets — a difficult task in a realm of financial privacy where preventing wallet reuse might among other things, stop the spread of public keys and strengthen the chain against theoretical future attacks such as large quantum computers being able to double-spend. There are also possible significant implications when it comes to certain decentralized exchanges.
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Tying together people’s identities when they express a higher desire for privacy (as is the case with end-to-end encryption) ends up amounting to a sort of warrentless surveillance that runs directly counter to the tenets of financial liberty and privacy of cryptocurrencies.
In effect, if the proposed rule is implemented fully, this may have the effect of significantly burdening the self-custody of cryptocurrencies as well as banks that want to get into cryptocurrency or cryptocurrency exchanges.
The petition to extend the comment period on this proposed rule, had an original goal of 2500 signatures, but is now above that and seeking 5,000 signatures as of the time of publishing. It is being started by the Chamber of Digital Commerce, a cryptoassets trade association with members including leading cryptocurrency exchanges and certain banks.
Part of the urgency stems from the shortness of the comment period. Usually, comment periods can extend up to 90 days, with a norm of 30 days, and a period that can stretch up to 60 days when there is a significant issue at hand. FinCEN has proposed a 15-day comment period, and stacked many of those days during the holidays — making it very difficult to get any significant replies.
An extension of the comment period would allow organization such as the Electronic Frontier Foundation and Coin Center to conduct deeper diligence beyond their initial thoughts, and provide well-thought out comments as to how this rule may create unintended effects that significantly damper cryptocurrencies and their ability to create consensual, financial flows.
FinCEN claimed the shortness of the proposed comment rule was because of a number of reasons, from the foreign affairs implications of the rule, to its previous engagement with cryptocurrency industry executives — yet it’s not so clear, beyond the transition to a new Administration, why there is such urgency in the first place.
The proposed rule from FinCEN aims to be one of the Trump Administration’s final actions on cryptocurrencies. The Trump Administration has not been very favorable to cryptocurrencies in many instances, from tax regulations/rulings, to President Trump tweeting about he was not a “fan of bitcoin”.
Extending the comment period to between thirty to ninety days would potentially place the rule-making process in the hands of the new Administration — which while inclined to more banking regulations and conventional financial constraints, may not have the exact same aggressive view towards cryptocurrencies as the current administration or may not have the same rules.
While banks are given sometimes years to comment and consider similar issues, this particular issue is being rushed through in order to give the current administration its own space to create rules that may never be reversed in the short time before it no longer has any power — and which may have effect for years or perhaps even decades, constraining innovation that is yet to come and freedom that is already here.
The proposed FinCEN rule is a potential bridge to the dystopian society previewed in Hong Kong and Nigeria: places where cash in the former or bitcoin in the latter are the only options for peoples who are subjected to a ruling political class in control with access to monitor and censor whichever financial flows they see fit. It deserves more consideration than a last-ditch attempt to make rules from an outgoing Administration.