The U.S. Financial Crimes Enforcement Network (FinCEN)

The U.S. Financial Crimes Enforcement Network (FinCEN) has issued a proposed rule that would impose reporting requirements on transactions conducted by banks or money transmitters in “self-hosted or private wallets.”

What is KYC ?

KYC is an abbreviation that stands for “Know Your Customer” – it represents the process of a company verifying the identity of its customers to prevent money laundering, identity theft, financial fraud and terrorist financing. This process involves verifying your identity and address using government-issued documents (ID card or passport).

What is a self-hosted wallet ?

Self-hosted wallets (wallets that are not hosted by a financial institution) play an important role in the digital asset ecosystem. These self-hosted digital wallets are not unlike the leather wallet in your purse or pocket: they help you store the various tools and assets you use in the digital world, similar to how a leather wallet stores your money, credit cards or driver’s license.

Digital wallets are usually “hosted” on an exchange like Coinbase, eToro, Gemini, Bittrex and others, meaning that these companies help manage the wallet, provide you with storage and other services.  If you want to use something from your digital wallet, you just ask them to do it for you.  A standalone wallet is similar to the wallet you put in your pocket or purse to carry your money and spend it wherever you want, whether that’s at a coffee shop, home store, Overstock or another online retailer.

Some policymakers, such as the Financial Action Task Force (FATF), an intergovernmental organization that makes recommendations to combat money laundering around the world, have expressed concern about self-directed wallets and have even proposed banning them altogether.

FinCEN proposes new rules

The proposed rule, titled “Requirements for Certain Transactions in Convertible Virtual Currencies or Digital Assets,” if adopted, would subject self-managed wallets to stricter anti-money laundering rules, making anonymous transactions a thing of the past.

FinCEN proposes to define these wallets as “wallets that are not subject to the Bank Secrecy Act and that are held at a financial institution in a foreign jurisdiction designated by FinCEN.”

The rule requires enhanced know-your-customer (KYC) requirements for withdrawals over $3,000. For transactions over $10,000, firms would have to report to FinCEN. This would require banks and MSBs to file information about a customer’s transaction and their counterparty, including names and physical addresses to verify the identity of both parties.

To ensure that no one operates anonymously, FinCEN has also proposed a “structuring” rule that would break large transactions into smaller ones to avoid the reporting requirement.

The proposed new rule is consistent with the Financial Action Task Force’s anti-money laundering rule, which requires exchanges to share information about the identity of the originator and recipient of a trade for exchange transactions of $10,000 or more. U.S. securities exchanges are working to address the problems caused by this rule. The proposal is scheduled to be released on December 23.