Mnuchin’s Requirements for Transactions Involving Cryptocurrency
By: Joshua Davis
Tags: Self Hosted Wallets, Fincen, Regulation, Cryptocurrency, Steve Mnuchin

Secretary Mnuchin’s Crypto Wallet Legislation

Regulation 1506-AB47 requires financial institutions to verify the identities of recipients and senders for transactions involving self-hosted crypto wallets or wallets that are not provided by a financial institution or service. Examples of such wallets include hardware wallets or a wallet running on a user’s computer.

Brian Armstrong, CEO of cryptocurrency exchange Coinbase, had tweeted about the regulation last week. He stated that it could have “unintended side effects” and that it would “kill many of the emerging use cases” for cryptocurrencies. Four US congressmen urged the Treasury Department to consult with Congress stating:

“Before Treasury issues midnight rules on the regulation of self-hosted wallets, Secretary Mnuchin should come to the Peoples’ House and speak to representatives about what his regulations would do. Over-regulating self-hosted wallets will crush a nascent industry and leave the Unites States behind the rest of the world when it comes to harnessing the power of blockchain and cryptocurrency. “The wrong regulations will violate the financial privacy of users and send a message to the world that you shouldn’t build businesses or try new use cases for blockchain in the United States. I hope Treasury will carefully consider any action it takes on self-hosted wallets. I look forward to working with Secretary Mnuchin on this important issue for U.S. financial technology.”

My comment on the proposed legislation to regulate self-hosted wallets

Concerning the effect of expanding the scope on the definition of “monetary instruments” in the BSA, FinCEN requests comment on the following question from financial institutions and members of the public. I’d like to focus on just one of their questions in this post:

(18) Describe the costs from complying with the proposed recordkeeping and verification requirements.

The potential cost of complying with the proposed recordkeeping requirement is equivalent to nothing less than America giving up the dominant lead in the blockchain technology space. The 2008 financial crisis had its foundations in opaque financial institutions that had tremendous counterparty risk on their balance sheets. Blockchains, on the contrary, promote a transparent financial system. Such a system seeks to eliminate counterparty risk by eliminating the need to rely on third-party custodians to hold funds. This regulation would effectively seek to prevent funds from moving between exchanges like Coinbase to smart contracts. Smart contracts, which are free from third-party custodians, are the key technological innovation that would allow America to maintain its dominance in the blockchain space.

Smart contracts have no physical address or location. They are lines of code that effectively function as a means to escrow funds that are released at a future time contingent on receiving appropriate instructions. These instructions are usually tied to the fulfillment of predetermined contractual obligations. If this regulation requires that recipients of funds have a physical name and address, then this regulation would effectively prohibit Coinbase account holders from purchasing cryptocurrency for the express purpose of sending funds directly to a smart contract address.

This would completely prohibit Coinbase customers from participating in peer-to-peer insurance smart contract communities. Applications that use smart contract mutuals that were previously designed to be fully compliant with state and local insurance laws would now be out of compliance. This regulation would criminalize the intent behind eliminating third-party custodians of funds, which have been the driving force of innovation in the blockchain space.

The impact that such a change would have is likely to be profound. Participation in peer-to-peer insurance mutuals would be virtually criminalized. This rule is effectively the government telling the citizens how they should spend their money. If peer-to-peer mutuals in other countries effectively outcompete traditional insurance providers, then those citizens will benefit from a regulatory regime that permitted greater innovation. Americans will be forced to pay an effective obsolescence tax as innovation drives down the cost of financial products for other countries. In the future Americans should know that higher insurance premiums came as a result of a regulatory regime that stifled innovation. This would tragically result in American consumers having fewer choices and less freedom when seeking competitive providers for financial products such as insurance.

If you want to understand how peer-to-peer insurance works you can read any of these articles:

If you want to understand how smart contracts retain regulatory compliance you can read more here:

This technology allows for new types of financial products described here:

In closing, I hope you have carefully considered the costs of complying with the proposed recordkeeping and verification requirements. The costs are nothing less than our ability to compete with other nations in blockchain markets for financial products such as insurance. This regulation would effectively erode our first-mover advantage. It would allow countries such as China to out-innovate American companies with financial applications such as WeChat and AliPay. In this way, it would undermine US fintech developers and allow China to overtake the United States in the market for decentralized financial products and services.

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