Chamber Addresses Extraordinary Financial Privacy Concerns, Proposes Solutions in Response to Treasury

Chamber submits comments to FinCEN on Proposed Rule on Digital Assets

March 31, 2021

On Monday, we filed our response to FinCEN’s Notice of Proposed Rulemaking (NPRM) “Requirements for Certain Transactions Involving Convertible Virtual Currency or Digital Assets.”  This supplemental letter is in response to a series of NPRM’s on self-hosted wallets, including those published on December 23, 2020; January 15, 2021; and January 28, 2021.

As we highlighted in an earlier blog on this proposal, it is critical to highlight the unprecedented scope of information FinCEN would collect regarding nearly every convertible virtual currency (CVC) transaction.

The proposed verification requirements would create a new standard for this technology that rises above existing know-your-customer (KYC) obligations. Providing this level of detailed information about non-customers (the counterparties to transactions) to the government for lawful transactions would erode financial privacy for lawful transactions of all amounts – even those not conducted through banks or MSBs and its repercussions cannot be understated.

Building on our initial comments, filed January 4, our supplemental letter enhances our original points and addresses the additional information that FinCEN provided through its somewhat extraordinary series of NPRMs over a short period.  Here, we honed in on some of the specific proposals, including:

  1. A recordkeeping requirement for banks and MSBs for transactions of $3,000 and above, which included verification of customers and counterparties to the transaction; and
  2. A reporting requirement for transactions of $10,000 and above to include customer and counterparty information on a new “Value Transaction Report,” which requires personally identifiable information and publicly available information on a blockchain. The proposal also included a new “Foreign Jurisdictions List” of countries with which U.S. entities are prohibited from engaging in virtual currency transactions.

By combining information contained in CVC transaction reports, including personally identifiable information and a blockchain address of the customer and all counterparties, the government will be able to track every transaction those wallet owners make, past, present, or future, at any transaction level and at any time.  

To spell this out more clearly, this means that a counterparty to a transaction, who never had an account relationship with the bank or MSB, will have its entire wallet history and future transactions exposed to both that financial institution and the government.  This is an extraordinary expansion of the amount of information provided to third parties about non-customers.

While there are good reasons to report certain transactions to the government, such as when suspicious or illegal activity is detected, enabling such granular tracking of individuals’ lawful, everyday financial activities is beyond common principles of government oversight.

The Chamber believes that the very significant compliance and privacy questions raised by this proposed rule, as well as potential for much broader implications for people and businesses, demand significantly more evaluation and time for comment from multiple stakeholders.

As a result, we made the following Recommendations:

Recordkeeping Requirement.

    • We are supportive of a recordkeeping requirement for transactions above $3,000 that is limited to bank and money services businesses (MSB) customers only and does not include collecting counterparty information.
    • Compliance with this requirement should become effective at least 180 days after the final rule’s issuance due to the process for implementing the required changes.

Reporting Requirement.

    • The recently enacted Anti-Money Laundering Act of 2020 requires FinCEN to review as part of a year-long study requirements for currency transaction reports (CTRs) and suspicious activity reports (SARs). The proposed Value Transaction Reports for transactions at or exceeding $10,000 should be delayed until after FinCEN completes its study to reduce unnecessarily burdensome requirements.

Implications for Self-Hosted Wallets.

      • Self-hosted wallets play a critical role across the blockchain and digital asset industry. Thus, FinCEN should exempt from the final rule decentralized finance (DeFi), consider the privacy implications for including LTDA within the rule’s scope, and contemplate how the rule will harm financial inclusion efforts through de-risking caused by the disincentivization and stigmatization of self-hosted wallet use.

Towards a Risk-Based Approach.

      • FinCEN should promote a risk-based approach generally, and specifically with respect to anonymity-enhanced cryptocurrencies.

We are grateful for the tireless effort and countless hours expended by our Members in addressing these extraordinary proposals, as well as our counsel at Steptoe – Jason Weinstein, Alan Cohn, Shannen Coffin, and Evan Abrams.

Read the Chamber’s comment letter to FinCEN here.