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News Report

Unhosted Wallets Rule Will be Considered in 2022, Says U.S. Treasury

2 mins
Updated by Ryan James

In Brief

  • The Treasury department’s Semiannual Agenda and Regulatory Plan of the U.S. Department of the Treasury may review two critical rules pertaining to crypto.
  • The rules would see a loss of privacy on transactions involving unhosted wallets.
  • For review also is a clarification on the definition of money.
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Crypto advocates are not happy about a rule that is set to be reviewed this year by the Treasury department, as the battle intensifies between the government’s desire to prevent money laundering and terrorist financing, and the crypto industry’s desire to avoid surveillance.

The mandate for crypto exchanges to collect names and addresses of customers wanting to transfer crypto holdings to private wallets may yet see the light of day in the U.S. This rule was contained in the Semiannual Agenda and Regulatory Plan of the U.S. Department of the Treasury, which contains the most crucial regulations expected to be issued.

The rule, first proposed in 2020 by the U.S. money-laundering watchdog Financial Crimes Enforcement Network (FinCEN), may be under consideration again. Initially, some industry proponents argued that certain wallets might not be under the control of individuals, while others argued that this rule might force individuals into an onerous undertaking to ensure compliance.

The rule was first promoted by the Treasury Secretary at the time, Steven Mnuchin. First, it appeared on the Treasury’s website, with a 15-day comment window. This was extended to another 15 days, and then 60 days by FinCEN.

Clarity on the new rules

FinCEN initially separated the rule into two separate issues. The first rule would compel transactions to unhosted wallets exceeding $10K to be subject to currency transaction reports, much like banks do for transactions exceeding $10K. The second rule was a personal data rule, which compels banks to record a customer’s details and counterparty if they take part in any transaction over $3K involving an unhosted wallet. This came about because the Financial Action Task Force argued that unhosted wallets make possible unregulated peer-to-peer transactions between people, which could veil illicit streams of digital currencies from authorities. FinCEN received thousands of comments from the industry and may need to extend the comment period further for this rule. The rule is expected to be finalized by September 2022, although this may change with the number of comments received.

What is money?

FinCEN and the Federal Reserve are also looking to “clarify the meaning of money,” under the Bank Secrecy Act to ensure that cryptocurrencies follow the same rules as fiat.

“The Agencies intend that the revised proposal will 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,” said the document.

It remains unlikely that the crypto industry would welcome surveillance by the government. However, the rate at which crypto is expanding may be its Achilles heel.

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