Coinbase Criticizes Proposed US Treasury Rule on Cryptocurrency Mixing

Coinbase Criticizes US Treasury's Proposed Cryptocurrency Mixing Rule, Citing Failure to Address Regulatory Loopholes

Coinbase criticizes US Treasury’s plan to make crypto platforms report all mixing activities

Ruholamin Haqshanas Last updated: January 22, 2024 23:22 EST | 2 min read

Source: AdobeStock/monticellllo

Coinbase has recently criticized the proposed rulemaking by the US Treasury on cryptocurrency mixing. The popular exchange platform argues that the proposed rule fails to effectively address regulatory gaps and burdens crypto platforms unnecessarily. In a comment submitted to the Treasury Department’s Financial Crimes Enforcement Network (FinCEN), Coinbase stated that regulated platforms already comply with recordkeeping and reporting rules for suspicious activities and illicit crypto mixing.

The proposed requirement for crypto platforms to report all crypto mixing activities, even those with legitimate purposes, was deemed inefficient by Coinbase. The company expressed concerns about the excessive utilization of resources by such reporting. Coinbase’s comment also highlighted the absence of a monetary threshold for recordkeeping and reporting, asserting that this approach would result in bulk reporting of non-suspicious transactions.

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Treasury Needs a More Targeted Approach

In a post on X (formerly Twitter), Paul Grewal, Chief Legal Officer of Coinbase, emphasized the need for a more targeted approach. Grewal stated that a data dump without a monetary threshold would be a waste of time and resources. He suggested that specific guidance would be more effective than mandatory bulk reporting rules, as has been done in other areas by the Treasury.

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The proposed rulemaking by FinCEN, announced in October, aims to enhance transparency surrounding crypto mixing activities. While acknowledging that crypto mixing can be used for legitimate and innovative purposes, FinCEN expressed concerns about its potential use for money laundering by illicit actors, including North Korean hackers and Russia-based ransomware attackers.

To address the issues raised, Coinbase proposed that FinCEN introduce a threshold to eliminate the bulk reporting of small transactions. Additionally, Coinbase recommended focusing on recordkeeping instead of reporting to mitigate privacy and security risks associated with mandatory reporting.

FinCEN’s Mixing Rulemaking Could Impact Bitcoin’s CoinJoin Services

If FinCEN’s new rules are implemented, they would classify the mixing of convertible virtual currencies as a “primary money laundering concern,” affecting both dedicated tumblers like Tornado Cash and service providers utilizing basic privacy protocols.

FinCEN’s proposal comes amid increasing concern that malicious actors are exploiting crypto-mixing services to launder illicit funds. The proposed rules would require financial institutions to maintain records and reports related to transactions involving digital asset tumblers. Essentially, this means that operators of crypto tumblers would be subject to know-your-customer (KYC), anti-money laundering (AML), and combating the financing of terrorism (CFT) requirements.

FinCEN’s rulemaking is grounded in Section 311 of the USA Patriot Act, which empowers the Treasury Secretary to identify and take special measures against entities classified as “primary money laundering concerns.” These measures could include prohibiting correspondent or payable-through accounts, verifying the purpose and source of funds for payments, imposing recordkeeping and reporting requirements, and mandating beneficial ownership disclosures.

It is worth noting that Tornado Cash was sanctioned by the Office of Foreign Asset Control (OFAC) in August last year.

Q&A: 1. What are the concerns raised by Coinbase regarding the proposed US Treasury rule on cryptocurrency mixing? – Coinbase argues that the rule fails to address regulatory gaps and places unnecessary burdens on crypto platforms. – The requirement for reporting all crypto mixing activities, even those with legitimate purposes, is deemed inefficient. – Coinbase is concerned about the excessive utilization of resources for such reporting. – The absence of a monetary threshold for recordkeeping and reporting is highlighted as a concern.

2. What alternative approach does Coinbase suggest?
   • Coinbase suggests a more targeted approach with specific guidance, which has been effective in other areas regulated by the Treasury.
   • Introducing a monetary threshold would avoid the bulk reporting of small transactions.
   • Coinbase recommends focusing on recordkeeping instead of mandatory reporting to mitigate privacy and security risks.
3. How could FinCEN’s proposed rules impact Bitcoin’s CoinJoin services?
   • The proposed rules would classify the mixing of convertible virtual currencies as a “primary money laundering concern.”
   • Dedicated tumblers like Tornado Cash and service providers using basic privacy protocols would be affected.
   • Operators of crypto tumblers would be subject to KYC, AML, and CFT requirements.

For more information on this topic, you can visit the following sources:

1. Coinbase Response to NPRM re. Mixing
2. FinCEN Proposes New Rules to Enhance Transparency Surrounding Cryptocurrency Mixing
3. Coinbase’s Chief Legal Officer Paul Grewal’s tweet
4. Sanctioned by the Office of Foreign Asset Control (OFAC)

Don’t forget to share this article on social media to spread awareness and engage in the conversation surrounding cryptocurrency mixing and the proposed US Treasury rule. Let us know your thoughts and opinions!

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