Some Cryptocurrency Trader Disclosure Required in Proposed Rules

The Treasury Department unveiled a plan Friday to require some cryptocurrency traders to provide information about their identities in an effort to curb the anonymous transfer of assets by criminals using the new technology.

The proposed regulations, coming as the price of bitcoin hovers near a record high, seek to deliver on a longstanding goal of U.S. policy makers: to hold entities that transact in cryptocurrencies to the same standards required of traditional financial institutions.

The proposals would focus on a type of tool known as unhosted wallets, which allow the owner of a unique digital key to store cryptocurrencies, such as bitcoin and ethereum, and transact with others directly—without going through a financial institution.

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Unhosted wallets, typically taking the form of a thumb drive or software on a user’s computer or cellphone, allow access to the distributed ledger known as blockchain, where cryptocurrency transactions are recorded and visible to others.

Unlike popular cryptocurrency trading platforms such as Coinbase and Gemini, which are required to gather information about their customers’ identities, unhosted wallets aren’t typically associated with a person’s name, address or phone number. This feature makes cryptocurrency networks attractive compared with the banking system in the eyes of criminals and money launderers, according to authorities.

Cryptocurrency advocates said the ability to conduct peer-to-peer transactions without an intermediary is essential to the assets’ appeal. They have long worried that increased regulations of unhosted wallets could reduce the appeal of cryptocurrencies to some users and potentially reduce their market value.

In a notice of proposed rule making issued Friday, the Treasury Department said banks and cryptocurrency trading platforms would have to keep records of a customer’s cryptocurrency transactions and counterparties—including verification of their identities—for any transactions exceeding $3,000. That threshold is consistent with a banking regulation known as the travel rule, which requires financial institutions to share certain information when transmitting money between one another.

In addition, banks and trading platforms would have to report any cryptocurrency transactions that involve unhosted wallets and exceed $10,000 to the Financial Crimes Enforcement Network, or FinCEN, within 15 days.

“The goal of what we’ve just released is really to increase transparency and reduce anonymity in the cryptocurrency space, and that’s because anonymity provides cover for lots of criminal and illicit activity,” a senior Treasury official said on a call with reporters.

It is unclear whether the Treasury Department will have time to finalize a rule before President-elect

Joe Biden

takes office Jan. 20 because Friday’s proposal comes with a 15-day period for public comment.

The prospect of delayed implementation was seen as a victory in Washington’s small but vocal community of cryptocurrency advocates and lobbyists, several members of which described a frantic campaign in recent weeks to water down or postpone the new regulations.

Multiple industry officials said the Treasury Department submitted an interim final rule to the government office that handles executive-branch regulations last week. Had a rule been finalized—as Treasury Secretary

Steven Mnuchin

had planned—cryptocurrency platforms and trading enthusiasts would have had little time to comply, much less to soften the requirements.

“We gathered everyone that had any contacts in government and did good old-fashioned lobbying of the Hill, of Treasury and of the agencies to try to walk them off of that,” said Kristin Smith, executive director of the Blockchain Association, an industry lobbying group.

‘It appears that the Treasury Department’s latest rule on self-hosted wallets could have unintended consequences.’

— Michelle Bond, Association for Digital Asset Markets

One outcome of the campaign was a letter to Mr. Mnuchin signed by four Republican congressmen: Reps. Warren Davidson of Ohio,

Tom Emmer

of Minnesota,

Ted Budd

of North Carolina and Scott Perry of Pennsylvania. They urged him “to consult with Congress and industry stakeholders before taking any decisive action.”

Proponents of lighter regulations say unhosted wallets are key to enabling the peer-to-peer transactions that make cryptocurrencies such as bitcoin popular. They also say that criminals can often be identified and caught when they exchange cryptocurrency for fiat currency and that the proposed rules could further discourage them from interacting with trading platforms that comply with U.S. regulations and cooperate with law enforcement.

“While we are still reviewing the proposal, it appears that the Treasury Department’s latest rule on self-hosted wallets could have unintended consequences, including forcing American companies offshore…and reducing our global leadership position in digital assets,” said Michelle Bond, chief executive of the Association for Digital Asset Markets, a trade group.

The senior Treasury official declined to comment on the downgrade of an interim final rule to a proposal but said Mr. Mnuchin and officials at FinCEN have had meetings with industry officials over the past year as it has prepared the new regulations.

“We think we have a very good sense of the industry’s views here and potential impacts but nonetheless do want to have a notice-and-comment period,” the official said. “There is a possibility it gets finalized, but again, a decision will be made after the notice-and-comment period.”

Write to Paul Kiernan at [email protected]

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