The crypto wallet rule proposed by FinCEN could penalize DeFi

The crypto wallet rule proposed by FinCEN could penalize DeFi - DeFiA proposal from the US Financial Crimes Enforcement Network (FinCEN) would require cryptocurrency exchanges to collect personal information from clients who transfer a total of $ 3.000 per day to "non-hosted" wallets such as Bitcoin Pro. While for transfers of over $ 10.000 per day, exchanges should submit a Currency Transaction Report (CTR) to FinCEN.

One final law before Biden takes office

The proposed legislation, published in the federal register on 23 December, has sparked a rapid and widespread reaction from the sector. Comments are allowed by January 4, reducing what would normally be a period of months for public comments to just two weeks.

The controversial rule is said to be a personal project of Treasury Secretary Steven Mnuchin, said Jeremy Allaire, CEO of the USDC co-issuer stablecoin Circle. It appears the law has been set up to ensure it is implemented before President-elect Joe Biden takes office next month, said Nick Neuman, CEO of bitcoin's self-storage company Casa.

All of this reduces the time exchanges have to determine whether or not to change their internal processes to stay in compliance, said Amy Davine Kim, chief policy officer of the Digital Chamber of Commerce advocacy group.

An ill-defined proposal

According to several observers, many key details of the proposed legislation have been poorly defined. Perhaps the most glaring omission is the term “non-hosted wallet” which isn't actually defined in the proposed rule, both Kim and Andrew Jacobson Associate Seward & Kissel said.

The actual reporting requirements are also unclear, Allaire said. Although names and addresses must be registered and submitted, the legislation does not specify whether IP or blockchain addresses are also required.

Nor does it clarify whether financial institutions should collect this information from counterparties, or whether customers can simply submit this information, Kim said. “Finally, how would the CTR aggregation requirements be handled for clients using multiple portfolios? The CTR requirement applies to the client, not the wallet, ”he said.

"Break" with the DeFi

One area that appears to be concerned is decentralized finance (DeFi). Many people have reported that the biggest - and least clear - impact of the proposed law would be on DeFi projects.

For one thing, many DeFi projects rely on smart contracts to store or deposit funds. Furthermore, smart contract-based platforms do not have physical addresses, nor do they necessarily operate under the control of a real company.

It is not clear how such DeFi platforms would be treated under the rule proposed by FinCEN. This could throw an entire segment of the blockchain industry into a legal gray area, Kim said.

"The Treasury should not impose a rule that could have a deleterious impact on this promising development area that does not understand the benefits for innovation," he said. "It could create a situation where the only way to use DeFi protocols would be outside the United States."