The Financial Crimes Enforcement Network (FinCEN) is preparing to impose a new reporting plan on financial institutions. This plan will cover convertible virtual currency (CVC) transactions involving mixing and is open to public input until January 22.
The proposed plan has not garnered much attention, due to the assumption among many that it only targets a small range of services. The terminology used, namely “mixers” and “mixing”, which have pre-existing definitions in the blockchain ecosystem, may have contributed to this oversight. Traditionally, mixing services linked to notorious activities such as ransomware, hacking, and terrorism were the focus, leading to a narrow interpretation of the proposed rules. However, this underestimation of the rule might need some reconsideration due to its potential for greater impact.
FinCEN’s proposed rule introduces a broader definition of mixing and mixers. This could result in rules that focus not only on transactions involving traditional mixers like Tornado Cash, but also potentially innocuous blockchain transactions, like merely converting one form of CVC to another. The extent of monitoring and reporting envisaged by FinCEN’s proposal could disrupt the sector. If implemented as proposed, we believe it would fundamentally alter the privacy equation and perceptions surrounding CVC. This would likely result in certain CVC customers being de-risked by exchanges and wallet providers, who fall under the proposed rule.
This comprehensive reporting requirement would compel financial institutions to report any transactions they know, suspect, or have reasons to suspect involve “CVC mixing within or involving a jurisdiction outside of the United States”. The definition of CVC mixing within the proposal is broad and doesn’t necessarily require malicious intent to apply.
This new interpretation of CVC mixing encompasses several types of transactions. For instance, any service allowing users to exchange one form of CVC for another could be viewed as a form of mixing. Such a broad interpretation infers that even common practice such as the pooling of CVC from multiple users into a single wallet could be seen as mixing.
If the proposed rules are adopted, financial institutions would need to file comprehensive reports detailing all transactions involved, potentially including a large number of transactions that wouldn’t typically fall under the traditional definition of CVC mixing.
The proposed reporting regime could potentially be cumbersome and cause financial institutions to de-risk entire categories of otherwise legitimate customers due to vast and challenging monitoring and reporting obligations. It also raises questions regarding the application of the “within or involving a jurisdiction outside of the United States” criteria and how FinCEN, law enforcement, and others would maintain and access the collected data.
In conclusion, the proposed FinCEN rule, if accepted as is, stands to significantly change how financial institutions perceive, manage, and report on CVC and associated transactions. Moreover, the legal community is certain to follow the developments closely, in anticipation of how it might affect the broader landscape of financial regulation and digital currencies.