On Friday the US Treasury published its semi-annual regulatory agenda. It includes two issues affecting cryptocurrency that may be related. In late 2020 the Financial Crimes Enforcement Network (FinCEN) proposed a controversial rule change requiring additional AML reporting for transactions of more than $10,000 involving self hosted wallets. According to the agenda, FinCEN withdrew this proposal in April.
However, it’s possible there is another replacement proposal coming. To introduce the self-hosted wallet change, the 2020 proposal planned to amend the definition of monetary instruments to include cryptocurrency.
This is precisely the subject of the second agenda item, a proposal by the Federal Reserve and FinCEN .
They aim to expand the definition of “money” in the Bank Secrecy Act (BSA), the primary US legislation for anti money laundering to include cryptocurrency and certain other digital assets. Despite its name, the BSA applies to banks and money service businesses such as crypto exchanges.
The purpose of the change is to:
“ensure that the rules apply to domestic and cross-border transactions involving convertible virtual currency, which is a medium of exchange (such as cryptocurrency) that either has an equivalent value as currency, or acts as a substitute for currency, but lacks legal tender status. The Agencies further intend that the revised proposal will clarify that these rules apply to domestic and cross-border transactions involving digital assets that have legal tender status.”
Given the brevity of the synopsis, they didn’t specifically mention self-hosted wallets. Yet.
A public request for comment is planned for 2025.
Other plans relating to self hosted crypto
Meanwhile, last year Senator Elizabeth Warren introduced a sweeping Bill that would extensively expand AML procedures for cryptocurrencies. Apart from money services businesses, it would include wallet providers, miners and validators.
While it would be a very unpopular move, it wouldn’t be that hard for the largest self-hosted cryptocurrency wallet to comply. Metamask, with over 30 million monthly users, funnels most transactions to the blockchain via a centralized backend solution, Infura, owned by the same entity Consensys.
The precise nature of any regulatory proposals remains to be seen. Based on the previous iteration, some experts concluded it might cover transactions between self hosted wallets.
This would take matters a step further than Europe. When the EU recently passed new AML legislation, it explicitly excluded self hosted wallet providers. Travel rule legislation passed last year also excluded P2P transactions. Transactions between a self-hosted wallet and a crypto exchange are subject to AML.
However, the European Banking Authority issued rules that classify transactions with self-hosted wallets as high risk, alongside transactions with mixers, DeFi platforms and crypto ATMs. That will probably trigger the dreaded enhanced due diligence protocols, which is financially akin to a cavity search.
