For the last few weeks, the blockchain community had been waiting for the new regulations that were rumored to be proposed imminently. There were widespread speculations about their nature and effect on blockchain’s future. A lot of worse case ideas were being heard, including those hinting at an end to private custody or sort of a blanket wallet ban. They were finally proposed on 19-Dec by and analysts are noting that they unlikely to hamper the coming bull run or have much negative effect.
The U.S. Secretary of the Treasury Mr Steven Mnuchin announced that the Treasury’s bureau of Financial Crimes Enforcement Network (FinCEN) has put forward recommendations for digital currencies, in support of the financial intelligence and a more transparent environment, without causing any significant harm to the innovation that drives the field.
It must be noted that FinCEN will seek comments and feedback from the public before moving onto implementing them and the public has until 4-Jan to do so. There are to significant things that it does. First, it asks the banks and money service businesses (MSBs) “to submit reports, keep records and verify the identity of it’s customers”. Second, it declares the ‘convertible virtual currency” and “digital assets with legal tender status” as monetary instruments.
Most exchanges still require their users to adhere to Know Your Customer (KYC)/Anti Money Laundering (AML) regulations by verifying their ID, if they exceed certain deposit/withdrawal thresholds or if they would like to process more activity through the platform. The new rules aren’t so different, except they add another verification checkpoint, by requiring users to identity themselves again by linking ID to their non custodial wallet – a fancy term for wallets with user controlled private keys for transactions exceeding $3K+.
If the new regulations are adopted, they would require exchanges and other financial institutions dealing with cryptocurrencies to report more to the Govt and record all transactions back to the user controlled wallet. The declared intent is to avoid such kind of transactions ability to bypass the “Bank Secrecy Act” and to be used for illicit purposes.
However, not much would change for crypto community that transfers between two non-custodial wallets are still unregulated (also, there’s not much practical way of doing so), even if users have to withdraw to a non-registered wallet, they can first transfer to a registered one. But, this is likely to increase compliance costs for exchanges and financial institutions dealing with crypto and are likely to increase adoption of DeFi services.