Crypto “Know Your Customer” Hurdles Maybe Increasing

In late December 2020 the  U.S. Treasury Department issued a rule making proposal  introducing  key Know Your Customer (“KYC”) regulations that will affect certain crypto users.  The proposal if it becomes law, will require  U.S. crypto users transferring any of their holdings from a central exchange to a personal wallet to comply with certain KYC requirements.  This is a big change that would involve users having to  provide personal information about their wallet ownership to the centralized exchange. 

For individuals use to dealing with banks and stock exchanges these requirements are standard practice.  But for those in the crypto world this proposed rulemaking strips away some valued anonymity and adds a new massive layer of compliance cost onto the crypto exchange business model.

The U.S. Treasury Department  proposed  new KYC requirements related to  cryptocurrency transfers are designed to put a check on  possible illicit use of digital assets.

The official press release states that cryptocurrency exchanges will be required to verify the identity of  wallet users in cases where the transaction amount exceeds  $3,000. The new regulations also state that for the transactions which are above $10,000, the cryptocurrency exchange will have to submit the information regarding the same to the Financial Crimes Enforcement Network (FinCEN). The information will include the purpose of transaction, name and address of the individual in question.

The U.S. Treasury stated this proposed rulemaking decision has been taken to combat the concerns of digital assets being used for terrorist funding. The official notice imparts:

“U.S. authorities have found that malign actors are increasingly using Convertible Virtual Currency (“CVC”) to facilitate international terrorist financing, weapons proliferation, sanctions evasion, and transnational money laundering, as well as to buy and sell controlled substances, stolen and fraudulent identification documents and access devices, counterfeit goods, malware and other computer hacking tools, firearms, and toxic chemicals.”

Outgoing Secretary of the U.S. Treasury Department,  Steven Mnuchin, commented on this new regulatory proposal stating,  “This rule addresses substantial national security concerns in the convertible virtual currency (CVC) market, and aims to close the gaps that malign actors seek to exploit in the recordkeeping and reporting regime. The rule, which applies to financial institutions and is consistent with existing requirements, is intended to protect national security, assist law enforcement and increase transparency while minimizing the impact on responsible innovation.”

This move may benefit and accelerate institutional investors jumping into crypto, as some institutional money is clamouring for more regulatory oversight of crypto.  Under the proposed rules and regulations of the cryptocurrency exchanges and personal wallet users, the crypto exchanges and banking industry will more closely align from a government-imposed compliance perspective.

The U.S. Treasury Department states it is aiming to close loopholes with the newly proposed rules regarding digital asset transactions. These rules are also found to comply with the last year’s Financial Action Task Force (FATF) guidelines which states that the member nations must implement KYC rules for Virtual Asset Service Providers (“VASP’s”).

The crypto community was not too thrilled with the proposed rulemaking and increased KYC regulation.  The general feeling amongst crypto enthusiasts is that the proposed regulation may impede the growth of digital currencies, and the sharing of identities and blockchain addresses may have some significant privacy implications. 

Stay tuned as new Biden appointees weigh in on the issues.