FinCEN Rule Proposal

FinCEN just published a proposal for a new rule.

It requires regulated exchanges to keep records on who owns the address some bitcoin is first moved to from the exchange for transactions over $10,000 in value.

The EU has floated similar ideas in Recital 9 of the 2018 money laundering Directive. It reads:

“The anonymity of virtual currencies allows their potential misuse for criminal purposes. The inclusion of providers engaged in exchange services between virtual currencies and fiat currencies and custodian wallet providers will not entirely address the issue of anonymity attached to virtual currency transactions, as a large part of the virtual currency environment will remain anonymous because users can also transact without such providers. To combat the risks related to the anonymity, national Financial Intelligence Units (FIUs) should be able to obtain information allowing them to associate virtual currency addresses to the identity of the owner of virtual currency. In addition, the possibility to allow users to self-declare to designated authorities on a voluntary basis should be further assessed.”

If this new FinCEN proposal leads to exchanges requiring information on who owns a withdrawal address, this may lead to an automatic voluntary self-declaration. All users would need to do is nothing. If they withdraw their bitcoins to an address they control themselves, the information would already be accessible to law enforcement.

As long as they don’t move the bitcoins to another address. Which of course they could do without any reporting requirement under that FinCEN proposal. And then move it again a couple of times, with no third party knowing if the addresses in question are controlled by the user or someone else.

If you don’t mind giving law enforcement access to that information, doing nothing would make your bitcoin holdings on that address “white bitcoins” (as defined in an earlier post in 2013). This may become useful for the holder down the road.

Imagine for example the highly theoretical case that some user sells the bitcoins they bought in 2021 a couple of years later at a measly price of only $77,000 (instead of waiting for Bitcoin to flip gold). Imagine further that they actually declare the income from the price increase and pay relevant taxes.

Such a user would be able to point to the official record to show exactly at what price they bought in.

And anyway, if you are just buying and hodling, there is not much downside to having the withdrawal address accessible to law enforcement. If you are buying from a regulated exchange, the buying transaction is in the record anyway and can be traced to the buyer.

Published by kflenz

Professor at Aoyama Gakuin University, Tokyo. Author of Lenz Blog (since 2003, lenzblog.com).

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