Crypto Platforms Push Back Against Treasury’s Mixing Rules

The US Treasury Department’s proposal to require crypto platforms to report all transactions involving crypto mixers has faced strong opposition from the crypto industry, which argues that the rules are ineffective, burdensome, and vague.

What are crypto mixers and why are they controversial?

Crypto mixers are services that allow users to mix their crypto assets with those of other users, in order to enhance their privacy and anonymity. Crypto mixers can be used for legitimate purposes, such as protecting personal data, avoiding censorship, and supporting innovation. However, they can also be used for illicit purposes, such as laundering money, evading taxes, and financing terrorism.

The US Treasury’s Financial Crimes Enforcement Network (FinCEN) has proposed to designate crypto mixers as a “primary money laundering concern” and to require domestic financial institutions and agencies to implement recordkeeping and reporting requirements for transactions involving crypto mixers. FinCEN claims that this would enhance transparency and deter illicit crypto finance, citing examples of terrorist groups that have benefited from anonymous crypto funds, such as North Korean hackers and Russia-based ransomware attackers.

How did the crypto industry respond to the proposal?

The crypto industry has criticized the proposal, stating that it fails to address the existing regulatory gaps while imposing unnecessary burdens on crypto platforms. Coinbase, one of the largest and most regulated crypto exchanges in the US, submitted a comment to FinCEN, arguing that the proposal was overly broad, inefficient, and invasive.

Coinbase pointed out that regulated platforms already comply with recordkeeping and reporting rules for suspicious activities and illicit crypto mixing, and that the proposal would lead to bulk reporting of data of little help to law enforcement. Coinbase also expressed concerns about the privacy and security risks associated with mandatory reporting, as well as the lack of a monetary threshold for recordkeeping and reporting, which would result in the reporting of non-suspicious transactions.

Coinbase’s chief legal officer, Paul Grewal, emphasized the need for a more targeted approach, stating that a data dump without a monetary threshold would be a waste of time and resources. He suggested that specific guidance would be more effective than mandatory bulk reporting rules, as has been done in other areas by the Treasury.

Other crypto firms, such as Paradigm, Consensys, and the Blockchain Association, also filed comments on FinCEN’s proposal, echoing Coinbase’s arguments and urging the Treasury to revisit its proposed requirements.

What are the implications of the proposal for the crypto industry and users?

If FinCEN’s new rules are implemented, they would have significant implications for the crypto industry and users, especially for those who value privacy and innovation. The rules would affect both dedicated tumblers, such as Tornado Cash, and service providers that utilize basic privacy protocols, such as Bitcoin’s CoinJoin.

The rules would also create compliance challenges and costs for crypto platforms, which would have to collect, store, and report large amounts of data on crypto mixing transactions. Moreover, the rules would create privacy and security risks for crypto users, who would have to disclose sensitive information to third parties, potentially exposing them to hacking, identity theft, and surveillance.

The rules could also stifle innovation and adoption in the crypto space, as they could discourage users from using crypto mixers for legitimate purposes, and deter developers from creating new privacy-enhancing solutions.