FinCEN’s recent proposal for special measures is raising serious concerns in the cryptocurrency community. The proposal aims to broaden the definition of “mixing” and requires regulated entities to submit reports on any transactions related to mixing within 30 days. The definitions provided in the proposal are incredibly broad, encompassing activities like pooling funds, using programmatic codes, splitting funds, exchanging between cryptocurrencies, and facilitating user-initiated delays. If enacted, this proposal would allow FinCEN to capture almost any blockchain activity and require regulated businesses to act as an outsourced chain analytics service for the government. The proposal also lacks exemptions for private individuals seeking financial privacy. It is clear that this is a preparation for an enforcement crackdown and a call for serious consideration and action within the Bitcoin community.
Definition of Mixing
Mixing refers to several activities that involve the obscuration or combination of funds in the context of cryptocurrencies. These activities include:
Pooling or aggregating funds
This entails combining funds from multiple sources such as persons, wallets, addresses, or accounts. It encompasses various activities beyond traditional custodial mixing services, including Lightning channels, multisig wallets, and combining funds from different exchanges.
Using programmatic or algorithmic code
This involves utilizing code to coordinate, manage, or manipulate the structure of a transaction. It encompasses a wide range of activities such as the Lightning Network and Coinjoins. Essentially, any Bitcoin software that handles making and signing transactions falls under this definition.
Splitting funds for transmittal and transmitting
This refers to splitting funds into multiple transactions and transmitting them independently. Distinguishing between legitimate independent transactions and those split for obfuscation purposes can be challenging.
Creating and using single-use wallets, addresses, or accounts
This encompasses the practice of using wallets, addresses, or accounts that are meant to be used only once. It includes actions like withdrawing from an exchange with a unique address each time. The proposal raises questions about whether such actions constitute mixing.
Exchanging between types of cryptocurrencies or other digital assets
This refers to the exchange of different cryptocurrencies or digital assets. It includes activities like trading non-fungible tokens (NFTs), utility tokens, and other types of digital assets.
Facilitating user-initiated delays in transactional activity
This involves introducing delays in transactional activity as initiated by the user. It includes actions like timelocks in Lightning, rate-limited multisig setups, and scheduled withdrawals.
Exemptions for Regulated Businesses
Regulated businesses and institutions covered by the proposed rules may be granted exemptions for their internal processes. These exemptions are meant to ensure that the proposed rules do not hinder the normal operations of regulated entities. However, these businesses are still required to maintain the necessary records and provide them to law enforcement when necessary. If a business is unsure whether a certain activity falls under the definition of mixing and the exemption, they must default to maintaining the required records.
Information Required to be Reported
If the proposed rules are enacted, regulated businesses would be required to report specific information to the government for every transaction involving mixing activity. The information includes:
- Amount of cryptocurrency transferred, both in native units and the USD value at the time
- Cryptocurrency involved in the transaction
- Mixer protocol, service, or tool used (if known)
- Addresses associated with the mixer used
- Addresses associated with the user who mixed
- Transaction ID (TXID) of the relevant transaction
- Date of the transaction
- IP addresses associated with the transaction
- A narrative explaining the context and transaction details
Private Information to be Collected
In addition to the transaction details, private information about the user involved in the transaction would also be collected and reported to the government. This information includes:
- User’s full name
- User’s date of birth
- User’s full address
- User’s email address
- User’s IRS Taxpayer Identification Number (TIN) or foreign equivalent
Scope and Implications of the Proposed Rules
The scope of the proposed rules is incredibly broad, potentially capturing a wide range of blockchain activities under the definition of mixing. This would require regulated businesses to act as outsourced chain analytics service, tagging, cataloging, and reporting information to the government. The proposed rules derive their authority from the Secretary of the Treasury under the Banking Secrecy Act and can be enforced by FinCEN. However, the lack of data to assess the legitimate uses of mixing raises concerns about the reasoning behind these rules.
The overbroad scope of the proposed rules could have significant implications, including:
- Forcing regulated businesses to assume the role of chain analytics service
- Strengthening the authority of FinCEN under the Banking Secrecy Act
- Inability to assess the legitimate uses of mixing due to a lack of data
- Preparation for potential enforcement crackdown
- The need to design Bitcoin with unfriendly jurisdictions in mind
- Fight against the overreach of the proposed rules
The proposed rules by FinCEN regarding the regulation of mixing activities in the cryptocurrency space require serious consideration. The broad definitions of mixing and the extensive information and private data collection raise concerns about privacy and the role of regulated businesses as de facto chain analytics service providers. It is crucial to examine the potential implications of the proposed rules and actively oppose them, highlighting the importance of protecting financial privacy and fighting against overbroad regulations.