U.S. Treasury Department on Track to Regulate Unhosted Wallets

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The U.S. Trea­sury Depart­ment is pro­gress­ing toward address­ing the anonymi­ty of unhost­ed cryp­to wal­lets as part of Joe Biden’s wider strat­e­gy to tack­le illic­it finance involv­ing dig­i­tal assets.

Fol­low­ing two rules pro­posed by the Finan­cial Crimes Enforce­ment Net­work (Fin­CEN) in 2020 that enforce trans­ac­tion report­ing on unhost­ed wal­let trans­ac­tions exceed­ing $10,000, while also com­pelling banks to col­lect infor­ma­tion on a cus­tomer and their coun­ter­par­ty for any trans­ac­tion exceed­ing $3,000 involv­ing an unhost­ed wal­let, U.S. Deputy Trea­sury Sec­re­tary Wal­ly Adeye­mo affirmed that the gov­ern­ment agency has made progress.

Speak­ing at Con­sen­sus 2022, Adeye­mo confirmed:

“…we are work­ing to address the unique risks asso­ci­at­ed with unhost­ed wallets…Fundamentally, finan­cial insti­tu­tions need to know who they are trans­act­ing and doing busi­ness with to make sure they are not mak­ing pay­ments to crim­i­nals, sanc­tioned enti­ties, or oth­ers. When it comes to unhost­ed wal­lets, we are work­ing to pro­vide them the infor­ma­tion they need to avoid facil­i­tat­ing these kinds of illic­it payments.”

Increased scruti­ny of unhost­ed wal­lets emerged after sanc­tions were imposed on the Russ­ian Fed­er­a­tion fol­low­ing its inva­sion of Ukraine. How­ev­er, evi­dence is scant that Rus­sians used cryp­to to skirt such sanctions.

Treasury Dept: Travel Rule will not infringe on privacy

With­out going into details, Adeye­mo went on to describe the Trav­el Rule, which would expose the real iden­ti­ties of senders and receivers of cryp­tocur­ren­cy funds to all finan­cial insti­tu­tions involved in a trans­ac­tion, to safe­guard nation­al secu­ri­ty and enforce the Bank Secre­cy Act. 

To address con­cerns about pri­va­cy infringe­ments, Adeye­mo said that the agency is deter­mined to draft reg­u­la­tions ben­e­fit­ting the broad­er goal of nation­al secu­ri­ty while allow­ing inno­va­tion in pay­ment technologies.

“America’s inter­na­tion­al posi­tion and abil­i­ty to safe­guard our nation­al secu­ri­ty rests in no small part on our glob­al finan­cial lead­er­ship. We in gov­ern­ment know as you do that the future of the glob­al finan­cial sys­tem is increas­ing­ly digital.”

Regulatory push is coming from many directions

The response from the Trea­sury Depart­ment fol­lows an exec­u­tive order issued by U.S. Pres­i­dent Joe Biden for mul­ti­ple gov­ern­ment agen­cies to research cryp­tocur­ren­cies. These agen­cies include the Trea­sury Depart­ment, the Secu­ri­ties and Exchange Com­mis­sion, and the Office of the Comp­trol­ler of the Currency.

Sec­tion 7 of the Exec­u­tive Order address­es risks asso­ci­at­ed with cyber­crime involv­ing cryp­tocur­ren­cies and tasks the Sec­re­tary of the Trea­sury and six oth­er gov­ern­ment offi­cials with sub­mit­ting sup­ple­men­tal annex­es to the pres­i­dent, describ­ing their views on “illic­it finance risks posed by dig­i­tal assets, includ­ing cryp­tocur­ren­cies, sta­ble­coins, CBD­Cs, and trends in the use of dig­i­tal assets by illic­it actors” with­in 90 days of their sub­mis­sions to anoth­er agency, the Con­gress of the Nation­al Strat­e­gy for Com­bat­ing Ter­ror­ist and Oth­er Illic­it Financing.

With­in 120 days of sub­mis­sion to the Con­gress of the Nation­al Strat­e­gy for Com­bat­ing Ter­ror­ist and Oth­er Illic­it Financ­ing, the Trea­sury Sec­re­tary and oth­ers would need to sub­mit a coor­di­nat­ed inter­a­gency plan for mit­i­gat­ing the risks of illic­it finance.

The Trea­sury Depart­ment joins Sen­a­tor Cyn­thia Lum­mis (R‑Wyo) and Sen­a­tor Kirsten Gilli­brand (D‑NY) who released draft reg­u­la­tions ear­li­er this week. While recent­ly intro­duced, the new bill won’t real­ly come into effect until at least 2023, as upcom­ing mide­term elec­tions are of pri­or­i­ty. In its cur­rent form, the bill explains what types of sta­ble­coins would be allowed, which cryp­tocur­ren­cies fall under the juris­dic­tion of the CFTC, and which fall under the purview of the SEC.

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