US Treasury proposes verifying users of Bitcoin wallets

The Financial Crimes Enforcement Network (FinCEN) of the U.S. Treasury published a proposal regulating cryptocurrency transactions conducted through users’ own wallets.

They could be subjected to the same requirements that already apply to transactions conducted by exchange users and other cryptocurrency services.

If approved, when withdrawing cryptocurrency to a user-owned wallet from a centralized exchange, the recipient’s identity would need to be verified, and the exchange would be required to retain that data.

Heightened identification requirements FinCEN proposes applying to outgoing transactions of $3,000 or more. For transactions over $10,000, companies would be required to notify the agency directly. The regulator intends to ensure there is no way to circumvent the rule by breaking a transaction into multiple smaller parts.

Public comments will be collected by January 4, 2021.

According to the well-known expert Andreas Antonopoulos, this would hit exchanges and custodial wallets, which would have to do extra work and push users to take more steps.

“You will have to prove that the address belongs to you in order to withdraw to it. This year the threshold will be $3,000. Next year they will lower the threshold, even after adjusting for inflation. Over time all transactions will be controlled. Not your keys – not your coins, additional barriers. Your keys – your coins,” he wrote.

This will encourage users to withdraw immediately upon exchanging and often, as any money they let accumulate in a hosted wallet because less liquid and more bureaucratically bound.

Not your keys, not your coins, your barriers to use.

Your keys, your coins, not your red tape.

— Andreas ☮ ? ⚛ ⚖ ? ? ? ? ? ? (@aantonop) December 18, 2020

“This is fairly stupid, but meaningless. This will give them the ability to assemble a huge database of wallet owners, without relying on Chainalysis data, which are always probabilistic. Now the government will have a verified list of wallet owners,” commented The Block analyst Larry Cermak.

He called this an obvious attack on users’ privacy, but noted that the proposal is not compatible with DeFi services and other protocols that cannot be subjected to KYC.

“I think users will withdraw cryptocurrency to an identified wallet, after which they will route it through Tornado Cash or another mixer, until that is banned as well,” added Cermak.

It’s clearly an attack on users’ privacy though and isn’t compatible at all with DeFi and other protocols that you can’t KYC. What I imagine will start happening is one tx to KYC’d wallet and then one tx to Tornado Cash or other mixer to break the link. Until that gets banned too

— Larry Cermak (@lawmaster) December 18, 2020

Earlier, Coinbase CEO Brian Armstrong said in November that U.S. authorities were prepared to take such a step and were preparing the crypto industry for a ‘farewell gift’ before Donald Trump left office.

In his view, if such a proposal is adopted, users will turn to unregulated platforms, and the situation could threaten the United States’ status as a financial centre.

Last week, Circle CEO Jeremy Allaire, in his address to the U.S. Treasury, stated the need to collaborate with blockchain industry representatives in developing regulatory requirements.

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