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FinCEN Overreach: Crypto Wallets, and Our Rights to Privacy and Property

Our financial sovereignty and rights to privacy and digital property are soon to be impacted by government regulation.

Our crypto wallets, the mainstay of our ability to transact in crypto, has been specifically targeted by the Financial Crimes Enforcement Agency (FinCEN). In FinCEN’s proposal brought forth in December of 2020, crypto wallets will be required to adhere to the same know your customer (KYC) and anti-money laundering (AML) regulations that banks and money services businesses (MSBs) must adhere to. 

There has been an outcry of public responses to the proposal, with more than 720 comments currently registered. The interested parties generally contend that the proposals are an overreach, and that there will be dire consequences to the nascent industry if allowed to move forward as proposed. Bobby Franklin, President and CEO of NVCA (Nation’s Venture Capital Association) declared in a letter of response, “Blockchain technology is still in its infancy but has the potential to rearchitect how the internet works, an area the U.S. should support and allow its best innovators and brightest minds to explore fully to ensure we remain the global leader in internet technology.” 

By forcing crypto wallets to abide by the same regulations money service businesses must follow, as mandated by the Bank Secrecy Act (BSA), FinCEN is essentially forcing us to give up our fourth amendment’s rights as related to our right to privacy, as wells as our safeguards against illegal search and seizure. Surfing the internet and accessing online marketplaces with our digital crypto wallets should be as comfortable as going to a neighborhood store. In such everyday transactions, we would feel violated if anyone forced their way into viewing the contents of our wallets without permission.

In its nascent stage, crypto wallets are still a place for innovation. Not only are crypto wallets essential in peer-to-peer transactions over the blockchain, but there are also other use cases for them as well. One example is having crypto memorabilia in our crypto wallets, also known as Non-Fungible-Tokens (NFTs). NFTs can be stored both securely and privately in our crypto wallets… just like you may store your own personal currency in the form of cash and some personal items in a traditional wallet, or a purse.

It’s easy for us to understand digital cash, as we use digital money every day in the form of credit cards. Fungible-Tokens (NFTs) are not as readily understandable, but essentially, you can think of an NFT as an experienceable object or event that can be tokenized/digitized on the blockchain. 

For example, a piece of music produced by an artist can be made into a non-fungible-token (NFT) through any number of services that provide applications to create them. The NFT, in this case, may be a music file that can then be stored in a crypto wallet as personal property, gifted, shared or traded as seen fit.  But most importantly, since NFTs are memorialized on the blockchain, in essence they are copyrighted material, properties that we have ownership of.

The main point is that these items are our property, and our property is protected by the fourth amendment. No one, including institutions should have free access to view and regulate these properties. This is a line that shouldn’t be crossed, and when it is… surveillance becomes authoritarian.

What FinCEN is proposing is that any MSB (Money Services Business), such as a bank, brokerage firm, crypto exchange, essentially any business that is providing custody of crypto for a client, must verify the identity of any customer and file a report with FinCEN on transactions over $10,000; the rule also states that banks must verify the identity of individuals and keep records of individuals who make a transaction of over $3000. Not only do they want to know the identity of who is sending the money, but they also want to know who is receiving it. Based on the way that transactions happen on a blockchain, this would require that the contents of our wallets will become known, as they will be tracking both the delivery and the receipt of such transactions.

The proposal distinguishes “hosted” crypto wallets from “unhosted” crypto wallets.  A hosted crypto wallet is a wallet that a money service business, such as a crypto exchange, holds on our behalf. An “unhosted” wallet is a wallet stored on our own personal devices, such as our desktop, cellphone or hardware wallet. 

The reason this distinguishment is important, is because the proposal mandates that the MSBs must receive KYC information on even “unhosted” wallets that the money is exchanged into.  These “unhosted” wallets are owned and operated by us, not an MSB. We are not bankers or MSBs, so why would our personal wallets have to follow the same record keeping and filing regulations as hosted wallets with an MSB or exchange?

This would mean that if I wished to send money from Coinbase, which custodies crypto on their exchange, to someone who is selling me a watch… I cannot complete this transaction until the identity information of the person receiving the funds are collected. Imagine if every time we went to a local merchant IRL to buy something, we were made to get a copy of their photo ID and keep an official record in case we needed to report the information—this would seem extremely awkward, yet this is what is being proposed.

Matt Corallo, an early developer of Bitcoin, addresses the issue in his public response. His example shows the absurdity of what the new requirement would entail: “The proposed regulation makes it impractical to publicly accept donations. Charities and those working for the public benefit wishing to accept cryptocurrency commonly publish public key information (in the form of cryptocurrency addresses) which allows anyone to send them funds. Once published, they have no ability to prevent a third party from sending them funds, without any further interaction. Under the proposed regulations, no charity wishing to use MSB-hosted wallets to accept donations will be able to do so.”

In essence, the rule would deter charities from collecting donations in the form of crypto as they would have to collect a person’s identity in an official manner to remain compliant.  He also later points out that individuals do not necessarily hold wallets. Wallets could be in the name of a foundation, or a group, or even an electronic entity.

The Chamber of Digital Commerce (not to be confused with the government agency “Chamber of Commerce”) also issued a public response. They state: “The proposed verification requirements would create a new standard for this technology that rises above existing 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.” 

This level of monitoring is treating each digital wallet holder as if they were a bank; yet our crypto wallets are not FDIC insured, which raises flags that this is indeed going too far.

There may be hope for a sweeping revision of the current proposal. Beginning on April 11th FinCEN will now be headed by Michael Mosier, former CTO of Chainanalysis. He will be replacing Kenneth A. Blanco, the publisher of the contested proposal in its current state. In a webchat Michael Mosier describes his role as the new FinCEN director and he reminds us of the threats posed to the US by bad actors, but it is unclear how much he will adhere to the current proposals once he takes over.

Though we live in a world where it seems reasonable that we must give up some privacy for safety from nefarious actors on the world stage, let’s also be mindful that our first financial systems were peer-to-peer.  Originally, we bartered with our aboriginal neighbors, swapped clam shells for meat, or even notched up a tally stick for trade with our ancient ancestors. Oversight, surveillance, and even tax collectors didn’t come at the people’s request (think of feudal lords collecting taxes on behalf of the king, leaving the serfs with just the minimal amounts to survive on).  

We founded our democracy in protest and dumped proverbial tea into the salty waters of Boston in retaliation of kingly overreach. Now, when we have a groundbreaking technology through blockchain technology that brings everyday exchange back to its harmonious roots, we are told that for our own safety, our transactions must be stringently surveilled as if each of us are a bank… that is lest we succumb to the chimera of the supposed detriment being mongered. This proposal has the mindset of an us/them; we/they; protector and protected polarization written all over it… in its current form, it’s more likely to harm us by stifling our civil liberties, rather than safeguard us from the alleged beast lurking in our crypto wallets. 

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