Concerns Over FinCEN’s Crackdown on Crypto Mixers
In an op-ed on Bloomberg Law, fintech compliance lawyers Steven Merriman and Jim Vivenzio of Perkins Coie expressed concerns about the Financial Crimes Enforcement Network’s (FinCEN) latest move to crack down on crypto mixers. FinCEN is proposing new compliance measures for financial institutions, specifically targeting transactions involving “convertible virtual currency (CVC) mixing.”
Broadening the Definition of Mixing and Mixers
Merriman and Vivenzio argue that FinCEN’s proposal broadens the definition of “mixing” and “mixers,” potentially encompassing not only traditional mixing services like Tornado Cash but also innocent blockchain transactions such as converting one form of crypto to another.
“The amount of monitoring and reporting contemplated by FinCEN’s proposal could be disruptive.” – Steven Merriman and Jim Vivenzio
While FinCEN’s focus is on illicit finance risks associated with crypto mixers, the lawyers believe the proposed reporting requirements go beyond these operations. Banks may need to report transactions involving crypto mixing features within or outside the U.S., which includes activities like pooling, algorithmic manipulation, splitting, using single-use wallets, exchanging between types of CVC, and facilitating delays.
“For example, FinCEN calls out facilitating ‘exchanging between types of CVC or other digital assets’ as a form of mixing… including centralized exchanges, decentralized exchanges, and non-fungible token marketplaces.” – Steven Merriman and Jim Vivenzio
Implications for Due Diligence and Suspicious Activity Reporting
The lawyers argue that designating a broad class of transactions as a “primary money laundering concern” increases regulatory expectations for due diligence and raises the likelihood of additional criteria for Suspicious Activity Reporting. FinCEN is accepting public comments on the proposal until Jan. 22.
Treasury’s Approach to Decentralized Finance and Mixing Protocols
Blockchain forensic firm TRM Labs analysts predict that the U.S. Treasury Department will further sanction decentralized finance in 2024, specifically targeting mixing protocols. They suggest that this approach may set a precedent for the entire crypto industry, as the regulator focuses on particular blockchain nodes or networks rather than designated persons’ property or interests in property.
In late November 2023, it was reported that the Treasury aims to expand its regulatory power by introducing a “secondary sanctions regime.” This regime would control companies or individuals within the U.S. financial system to prevent any business with sanctioned targets in the crypto market.
Hot Take: FinCEN’s Proposed Crackdown Raises Concerns About Overreach
FinCEN’s latest move to crack down on crypto mixers has raised concerns about potential overreach and unintended consequences. While the focus is on combating illicit finance risks, the broad definition of mixing and mixers outlined in the proposal could impact innocent blockchain transactions and various activities involving convertible virtual currencies (CVC).
The proposed compliance measures would require financial institutions to monitor and report a wide range of activities, including exchanging between types of CVC or other digital assets. This could disrupt the operations of centralized exchanges, decentralized exchanges, and non-fungible token marketplaces.
The designation of a broad class of transactions as a primary money laundering concern raises expectations for due diligence by regulators and increases the likelihood of additional criteria for Suspicious Activity Reporting. It remains to be seen how these proposals will evolve and whether they strike the right balance between combating illicit finance and supporting innovation in the crypto industry.
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