Recent rumors about US regulation of private, self-hosted crypto wallets have compelling context.
For example, last month's proposal by the US authorities to lower the anti-money laundering (AML) threshold for cross-border transactions (consultation ends today, Friday) seems to support the hypothesis that outgoing Treasury Secretary Steven Mnuchin is quick to put forward More rules around crypto.
The Financial Crimes Enforcement Network (FinCEN) and the Federal Reserve's proposed rule change would lower the anti-money laundering compliance threshold for transfers – in crypto or fiat – outside the US from $ 3,000 to $ 250.
User privacy concerns related to this proposed change are nothing compared to the direct fear that Brian Armstrong's tweets from Coinbase CEO about the threat to self-managed wallets, a core tenet of crypto.
Reduced response time
It should be noted that the announcement of the proposed $ 250 threshold rule setting only received a 30 day response time when the industry would normally be given 60 or 90 days. Another interesting rumor is that these stronger rule changes come directly from political representatives and not from long-term careers at FinCEN or on the political side.
"A lot of the people at FinCEN are career people who will be at FinCEN in 10 years and they have a slow and steady process that works really well for them," said Justin Newton, CEO of Netki, a tech solution for crypto AML -Conformity. "Mnuchin has until January 20th to do the things he wants to do."
Read more: Coinbase CEO: Trump Administration Can "Throw Out" Annoying Crypto Wallet Rules
That is borne out by the brisk 30-day deadline to respond to the recent change to the travel rule, Newton said. "This could be because they are trying to get this done before Mnuchin leaves."
Joseph Weinberg, co-founder of the Shyft network, said the industry and its various regulators are in an "educational stage" and that considerations about non-hosted wallets should be carefully considered.
"I would be surprised if something came out very quickly," said Weinberg. "A big knee-jerk reaction shouldn't happen because people are realizing that if we work together, we can solve these problems. There are several ways to achieve this other than just a 1980s SWIFT version on Crypto too throw to find out in a year. "
Self hosted crypto wallets
It's important to be clear about what regulators are likely to mean when they talk about non-hosted or self-hosted wallets, and how that relates to the global recommendations of the Financial Action Task Force (FATF). This includes creating a compliance bridge between wallets hosted by a Virtual Asset Service Provider (VASP) and a non-hosted or private wallet. (Technically, this is not the same as the travel rule, which has VASPs at both ends of the transaction.)
Read more: Why FinCEN wants details on all cross-border transactions over $ 250
Adding due diligence to non-hosted wallets is in some ways equivalent to reviewing sanctions 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. Sanctions apply to any transaction," he said.
Another point to note is that if the US were to enact a self-hosted wallet regulation, it wouldn't be the first country to do so. In Switzerland, the Financial Market Authority (FINMA) introduced guidelines in January 2020, according to which the exchange must implement the requirements for travel rules for transactions over USD 1,000 and for which proof of possession of wallets without a custodian bank must be provided.
Right for FATF?
The topic of private purses was high on the FATF agenda this year. A significant connection has been made with the private sector through the Virtual Asset Contact Group (VACG), said Malcolm Wright, advisory board chairman for industry trading group Global Digital Finance. Meanwhile, the U.S. has long been an early adopter of cryptocurrency legislation, which has taken fundamental steps for the industry to mature, he said.
“If the rumors that Brian Armstrong has reported are true, we hope the administration is looking into the industry, as the FATF has done through the VACG, to ensure the impact and shape of proposals for responsible innovators are more appropriate than preventive. ”Wright said.
Read more: All global crypto exchanges must now share customer data and FATF rules
Certain sections of the FATF's 12-month review this summer (paragraphs 53 and 54) indicated the way forward in terms of non-hosted wallets. In addition, the Japanese Financial Services Agency (JFSA), which leads the FATF working group on virtual assets, has been discussing the issue of lack of identity information in unstuck wallets, said Dave Jevans, CEO of blockchain analytics firm CipherTrace.
CipherTrace has been meeting with FinCEN, Treasury and FATF since 2019 on the recommendations for virtual assets and specifically the travel rules, Jevans said.
"It has been talked about for the past two weeks," he said. “We think it's a bad idea to enforce a Swiss + model. Here, VASPs cannot send or receive funds from purses that are not in custody without some form of KYC declaration. This makes it more difficult for people to manage their own money and send money to businesses or families. It's a short-sighted move that won't stop criminals as they simply use shift techniques to bypass these controls. "
In summary, Siân Jones, partner at XReg Consulting and the driving force behind a FATF-compliant messaging standard for crypto, said that the rumored US regulations were "completely plausible".
"The US is the loudest at the FATF table," said Jones. “Much of the rules are dictated by the US, which has advocated a pretty strict regime. The policymakers there, mostly the same people, are pushing for such things as well. They still say, "If we are not satisfied with this, we can ban it." And they are the only country that really speaks in those terms. "
Jones pointed out the nuance of language that FATF calls "non-hosted wallets" when everyone in the industry calls them "self-hosted wallets".
"I think that itself is a pretty telling point," said Jones. “For policy makers, they see this as unhosted, uncontrolled, and unregulated. This is where the "Un" comes from. People in the industry see this as a matter of ownership and therefore very differently. "
Finance has not returned any requests for comment as of press time. A FATF representative said he did not comment on rumors.