The Unhosted Crypto Wallet Rule Is Back

    The US federal government may reconsider a controversial planned rule that would impose know-your-customer requirements on unhosted or self-hosted cryptocurrency wallets.

    The Financial Crimes Enforcement Network (FinCEN), the US money-laundering watchdog, first proposed the rule at the end of 2020. If passed, cryptocurrency exchanges would be compelled to collect names, addresses, and other personal information from anyone wishing to move cryptocurrency to their own personal wallets.

    Wallets not complying with rules

    Because certain wallets are not managed by humans and hence are not attached to this personal information, industry proponents are afraid that the standards will be impossible for them to follow. Others were afraid that the rule would be too difficult for people to comply with.

    Rather than FinCEN, then-Treasury Secretary Steven Mnuchin was the driving force behind the rule. The plan was first made public on Treasury’s website, not FinCEN’s. When the public consultation was extended, the watchdog merely posted the proposed regulation.

    The Treasury Department, which is currently led by Secretary Janet Yellen, said the rule could be included in the semiannual regulatory agenda, which will be officially posted in the Federal Register on January 31. The agenda defines the Treasury Department’s priorities, but it does not guarantee that the rules will be enacted, or that they’ll be adopted in their current form. Rather, the program is a mechanism for Treasury to communicate what it will be working on for the next 6 months.

    Split rule

    The proposed rule had an extremely short 15-day public consultation, which sparked even more debate among business supporters. Typically, comment periods range from 30 to 90 days, while some regulations may have comment periods of up to 120 days. FinCEN twice prolonged the comment time in public notices, the first for additional 15 days and the second for another 60 days.

    FinCEN considered the rule’s requirements as two separate concerns during the first extension. One of these sections attempted to impose CTR requirements on crypto transfers to non-hosted wallets. CTRs are currently filed by financial institutions for consumers who transact $10,000 or more in a single day. Customers sending more than $3,000 in crypto every day to private wallets would be subject to the personal data rule, often known as the competitor data collecting rule.

    This second rule sparked an outcry from the business, with thousands of comments filed in response. Before adopting the competitor data collection rule, FinCEN may need to open a new public consultation to address these responses. A representative for FinCEN did not immediately respond to a request for comments as to whether the department is considering the entire regulation or individual components. A connection on the Federal Register website, on the other hand, takes you to the initial proposed rule from December 23, 2020.

    Defining ‘money’

    The Federal Reserve and FinCEN both intend to “clarify the concept of ‘money'” as it applies to digital assets under the Bank Secrecy Act (BSA), guaranteeing that digital asset transfers are subject to the same BSA restrictions as to their fiat counterparts.

    “The Agencies aim that the revised proposal guarantee that the law applies to internal and cross-border transactions convertible crypto money, which is a means of exchange (such as cryptocurrency) which has an equivalent value to currency or acts as a substitute for currency but does not have legal tender status,” according to the document. Furthermore, any digital asset trades with “legal tender status” will be subject to the BSA requirements, according to the document.

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