custodian wallets, fincen wallet regulation, hosted wallets, self-hosted wallets, Steven Mnuchin, unhosted wallets, us crypto regulation, us cryptocurrency regulation, wallet regulation, wallet rules

The Financial Crimes Enforcement Network (FinCEN), a bureau of the U.S. Treasury Department, has unveiled its proposed rules on transactions involving cryptocurrency wallets. Experts in the crypto community have weighed in on what the new proposed regulation means, what crypto owners should do, and which wallets are affected.

FinCEN’s New Rules for Crypto Wallets

The U.S. Department of the Treasury announced Friday that the Financial Crimes Enforcement Network (FinCEN) has proposed new rules “aimed at closing anti-money laundering regulatory gaps for certain convertible virtual currency [CVC] and digital asset transactions.†The announcement came several weeks after Treasury Secretary Steven Mnuchin was rumored to be rushing out regulations for self-hosted crypto wallets before Trump’s term expires.

Mnuchin tweeted Friday:

In its proposal, FinCEN explained that it “assesses that there are significant national security imperatives that necessitate an efficient process for proposal and implementation of this rule.â€

The bureau of the U.S. Treasury Department added that “U.S. authorities have found that malign actors are increasingly using CVC to facilitate international terrorist financing, weapons proliferation, sanctions evasion, and transnational money laundering,†among other things, including ransomware attacks.

Crypto Experts Break Down the Proposed Wallet Rules

A slew of people in the crypto community have been commenting on the proposed rules on social media. Anderson Kill partner Preston Byrne noted that “FinCEN calls wallets managed by a service like Coinbase’s ‘hosted.’ It does not use the term ‘self-hosted’ but rather the term ‘unhosted’ to refer to bitcoiners’ DIY wallets and your nodes at home.â€

Lawyer Jake Chervinsky explained in some detail that “The rule would impose new obligations on virtual asset service providers (VASPs) like exchanges & custodians,†elaborating:

In contrast, he described that “Before now, the Travel Rule only imposed these record-keeping & reporting requirements on transactions from VASP-to-VASP.†However, “Today’s proposal follows a global trend of extending AML regulation to transactions from VASP-to-wallet, as we’ve seen from Switzerland, France, & others.â€

While emphasizing the challenges VASPs would face to comply with FinCEN’s proposal, Chervinsky also pointed out that the new rule “is vague & ambiguous.†He said it raises questions such as “How exactly can a VASP obtain the name & physical address of the owner of a non-custodial wallet? How does someone prove that they ‘own’ a private key? What about non-custodial smart contracts — who owns them?†The Treasury Department provided a list of what information must be collected here.

Lawyer Justin Winston Ono Wales shared his initial thoughts, recommending:

Square Crypto’s Matt Corallo believes that “this kind of thing ends up going horribly wrong left and right. So much KYC/AML stuff only effects people who accidentally get screwed and not actually criminals.â€

He further opined: “the text is already vague and it all depends on how it’s enforced and how brokerages/exchanges respond. If it’s left vague and exchanges are concerned, there’s little reason they wouldn’t just turn off withdraws to non-exchanges – few customers would care.â€

FinCEN Pulling ‘Midnight Rulemaking’

FinCEN is asking for public comments which must be submitted before Jan. 4. However, Chervinsky explained that “Regular order calls for an agency to accept public comment for at least 60 days for ‘significant’ rules.â€

He pointed out that “FinCEN is giving us 15. At the end of December. With one month left before a new president is sworn in. There’s a name for this: ‘midnight rulemaking.’†The lawyer continued:

In his opinion, “Courts don’t take kindly to this. Midnight rules are often struck down.â€

A Boost for Self-Hosted Wallets: New Rules Hurt Exchanges and Hosted Wallets

Famous speaker and author Andrea Antonopoulos responded to FinCEN’s proposal with a series of tweets. Firstly, he pointed out that “The big bait and switch that FinCEN pulled was to unveil new policy on ‘regulated institutions’ but tell everyone that they regulated ‘unhosted wallets,’ which… they didn’t.â€

In fact, he said, “FinCEN just announced their DEX and privacy coin stimulus plan. Bullish.†He added, “Tightening the regulations on cryptocurrency exchanges will push more people into self-custody.â€

The bottom line on the rule proposed, he explained, is “If you try to make payments from a regulated exchange they will require additional verification and will report your transactions to the government,†asserting:

He emphasized that the new rule “hurts exchanges and hosted wallets because they have to do more compliance work and make users jump through more hoops. It makes their ‘product’ look less functional than a wallet you control … because it is less functional.†He reiterated that “By regulating the main thing they can regulate, which is regulated institutions – they are inadvertently making those less appealing to use and pushing more and more people to decentralized alternatives and self-custody.â€

Moreover, he warned: “This year it will be $3k. Next year they will lower it even as it’s eroded by inflation. Eventually, all transactions will need reporting and control.â€

Antonopoulos proceeded to remind everyone:

Pro-Bitcoin US Senator and Other Lawmakers Fight for Better Crypto Regulation

Several lawmakers have expressed concerns over new crypto wallet regulations when it was rumored that the Treasury Department was planning to restrict the use of self-hosted wallets.

Hours before FinCEN unveiled its proposal, pro-bitcoin U.S. Senator-elect from Wyoming Cynthia Lummis expressed her concerns in a series of tweets. While mostly addressing rules “governing self-hosted digital asset wallets and the Bank Secrecy Act (BSA),†she urged the Treasury Department to “immediately begin a transparent process to engage with Congress and industry, building a consensus to drive America forward.†The Senator-elect noted that “America is in a battle for competitiveness with China and Russia for the future of finance,†adding:

Lummis explained that “A hallmark feature†of bitcoin is the ability to conduct transactions without an intermediary. She concluded: “This promotes financial inclusion and freedom. A rule adopted at this juncture would be a solution in search of a problem. More pressing BSA-related issues exist.â€

What do you think about the US’ new proposed crypto wallet rules? Let us know in the comments section below.

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