The U.S. Treasury Department’s proposed rules which would require users to comply with KYC requirements if they seek to send their crypto to a private wallet could end up being ineffective, according to blockchain analytics firm Elliptic.
In its published response to the rule, Elliptic said that the rules could “adversely impact” the effectiveness of existing Anti-Money Laundering and Countering the Financing of Terrorism (AML/CFT) regulations.
Earlier this month, the Treasury Department released an advanced notice of proposed rulemaking which laid out that users of centralized cryptocurrency exchanges who wish to move their holdings onto their own private wallet, or to someone else’s, would have to provide detailed personal information for transactions greater than $3,000. The exchanges would be required to report either individual or groups of transactions that add up to more than $10,000 as well.
According to the Financial Crimes Enforcement Network’s (FinCEN) announcement, the general public will have until Jan. 4, 2021, to provide comments or feedback on the rules.
In its response to the rule, Elliptic said that the rules overstate the risks proposed by unhosted wallets since transactions involving cryptocurrencies can already be traced by analysing the associated blockchain ledger.
Such analytics are already used by law enforcement to track criminal activity, and therefore according to Elliptic, the new rules would only add on documentation cost for information that can be accessed using existing means.
The proposed rules have also been met with concerted pushback even before their release. Regulatory experts have indicated that the rules could have widespread repercussions, including issues that could be faced by decentralised finance (DeFi) projects.
Some of the concerns raised regarding the law also have to do with how it doesn’t clearly define terms like unhosted wallets, or state whether financial institutions must collect such information from counterparties.
Data cited by Elliptic in its response notes that less than 10% of illicit-origin funds remain in unhosted wallets, and the vast majority of them are “simply dormant.” Elliptic noted that since crooked actors are also entirely dependent on their ability to cash-out and convert to fiat, information about such funds is shared with the FinCEN using suspicious activity reports (SAR) and therefore the new rules just add more document work.
Elliptic, in its response, also said that the Treasury’s 15-day comment period for this rule is “unjustifiably short,” and asks that the department should extend the period to 90 days.
Arguing that the proposed requirements are disproportionate vis-a-vis physical cash, Elliptic said that rules “would impose an unjustified tax,” on financial innovation. In its recommendations to the FinCEN, the firm also argued that rules proposed counterparty recordkeeping requirements should also be removed.