Industry professionals weigh on rumors of new Crypto Wallet ledgers

Recent rumors of US regulation of private and self-hosted crypto wallets have compelling context.

For example, the proposal submitted last month by US authorities to lower the anti-money laundering (AML) threshold for cross-border transactions (its consultation ends today, Friday), appears to support the hypothesis that outgoing Treasury Secretary Steven Mnuchin is rapidly doing. more rules on encryption.

The Financial Crimes Enforcement Network (FinCEN) and Federal Reserve’s proposed rule change would reduce the $ 3,000 to $ 250 threshold for AML compliance for any transfer – in cryptocurrency or fiat – going outside the United States

User privacy concerns in relation to this proposed change are nothing compared to the total fear created by the CEO of Coinbase Brian Armstrong’s tweets on the threat to self-custody wallets, a central principle of cryptography.

It is worth pointing out that the $ 250 threshold regulatory proposal notice only received a response period of 30 days, when the industry would normally be given 60 or 90 days. Another interesting rumor is that these stronger rule changes come directly from political appointees, rather than long-term career people at FinCEN or the political side.

“Many of the people at FinCEN are career people who will be at FinCEN in 10 years and have a slow and steady process that works really well for them,” said Justin Newton, CEO of Netki, a technical solution for AML cryptocurrency. “Mnuchin has until January 20 to get things done he wants.”

Read More: Coinbase CEO: Trump Administration May “precipitate” burdensome crypto wallet rules

This is confirmed by the brisk 30-day response period to the recent travel rule change, Newton said, which “could be because they are trying to do it before Mnuchin leaves.”

Another Travel Rule solution builder, Joseph Weinberg, co-founder of Shyft Network, said the industry and its various regulators are in an “educational phase” and considerations about non-hosted wallets should be carefully measured.

“It would surprise me if something came up very quickly,” Weinberg said. “A big knee-jerk reaction is not something that should happen because people are realizing that if we work together we can solve these problems. There are several ways to tackle this problem rather than launching an 80s version of SWIFT in cryptocurrency to figure it out in a year. “

It is important to be clear about what regulators likely mean when they talk about non-hosted or self-hosted portfolios and how this relates to the global recommendations of the Financial Action Task Force (FATF). This involves building a compliance bridge between portfolios hosted by a virtual resource service provider (VASP) and a private or non-hosted wallet. (Technically speaking this is not the same as the Travel Rule, where there are VASPs at either end of the transaction.)

Read more: Why FinCEN wants details on all cross-border transactions over $ 250

Adding a due diligence requirement around non-hosted portfolios is somewhat equivalent to sanctions screening in the traditional financial world, Netki’s Newton said. “It doesn’t matter if the other end of a transaction is a bank, a VASP, the corner store or Uncle Bob, the penalties apply to every transaction that occurs,” he said.

Another point to note is that the US, if it were to enact self-hosted wallet regulation, would not be the first country to do so. In Switzerland, the Financial Market Supervisory Authority (FINMA) introduced guidelines in January 2020 that require exchanges to implement travel rules requirements on transactions over $ 1,000 and where ownership of unsecured portfolios must be proven .

The issue of private portfolios has been at the forefront of the FATF agenda this year, with a substantial link to the private sector through its Virtual Asset Contact Group (VACG), said Malcolm Wright, chairman of the advisory board of the Global Digital Finance global trading group. Meanwhile, the US has long been one of the first to adopt cryptocurrency legislation which provided critical steps for the maturity of the industry, he said.

“If the rumors Brian Armstrong reported are true, we hope the administration engages with the industry, as the FATF has done through the VACG to ensure that the impact and form of any proposal is fair rather than predictive to responsible innovators, “Wright said.

Read more: All global crypto exchanges must now share customer data, FATF rules

Some sections of the 12-month review provided by the FATF this summer (paragraphs 53 and 54) hinted at the path to take with regard to non-hosted portfolios. Additionally, the Financial Service Agency of Japan (JFSA) which leads the FATF working group on virtual assets has discussed the issue of the lack of identity information on unsecured wallets, said Dave Jevans, CEO of blockchain analytics firm CipherTrace.

CipherTrace has met FinCEN, Treasury, and FATF since 2019 on virtual asset recommendations and travel rules in particular, Jevans said.

“There has been talk of this in the last 2 weeks,” he said. “Our opinion is that forcing a” Swiss + “model is a bad idea. This is where VASPs cannot send or receive funds from unsecured portfolios without some form of KYC declaration. This makes it harder for people to manage their money and send money to businesses or family members. It’s a short-sighted move that won’t stop the criminals, since they’ll simply use layering techniques to get around these controls. “

In summary, Siân Jones, partner of XReg Consulting and the driving force behind a FATF-compliant messaging standard for cryptocurrencies, said the rumors about US regulations were “entirely plausible”.

“The United States is the loudest around the FATF table,” Jones said. “Most of the rules are led by the United States, which is pushing hard for a fairly rigid regime. Policy makers, largely the same people, are also pushing for this sort of thing. They keep saying: “if we are not satisfied, we can ban it”. And I’m the only country that really speaks in these terms. “

Jones emphasized the linguistic nuance, whereby FATF refers to “non-hosted wallets”, while everyone in the industry calls them “self-hosted wallets”.

“I think in itself that’s a pretty revealing point,” Jones said. “For politicians, they see it as unhosted, unchecked and unregulated stuff; that’s where the “a” comes from. People in the industry see it as self-control, and therefore very different. “

The Treasury Department did not respond to requests for comment at press time. A FATF representative said he did not comment on the rumors.