R.I.P. Unhosted Wallet Rule

In 2020, the Financial Crimes Enforcement Network proposed imposing know-your-customer requirements on unhosted wallets, drawing immense backlash from the crypto industry. This week, the Treasury Department formally withdrew the proposal.

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Know your receivers

The narrative

A 2020 proposal by the U.S. Treasury Department that raised quite a bit of consternation appears to be finally dead (after years of being mostly dead).

Why it matters

Anyone involved in the policy or policy-adjacent crypto space in 2020 will remember this proposal. Seemingly the entire U.S. crypto industry banded together to file thousands of comments urging the Financial Crimes Enforcement Network and Treasury Department not to impose strict know-your-customer requirements on smart contracts or individuals maintaining their own wallets.

Breaking it down

In the closing days of the Donald Trump presidency, the U.S. Treasury Department – through the Financial Crimes Enforcement Network, its financial crimes watchdog – issued a proposal for imposing know-your-customer requirements on unhosted wallets. This proposal was seen as being technically impossible to comply with for most wallets, given they aren’t companies or entities and therefore don’t normally record that type of personal data.

At the time, the proposal drew a huge amount of backlash. Lawmakers (including from the then-president’s own party), company leaders and lobbyist groups all pushed back against the proposal, which was spearheaded by then-Treasury Secretary Steven Mnuchin. Legal experts noted that the proposal’s reporting requirements and definitions were too vague to be practically useful. It was also unclear how exactly exchanges or other entities might be able to implement the proposed rules.

The industry scored a major victory against the proposal after an initial comment period was extended by 15 days, ensuring that President Joe Biden would be in office and Trump/Mnuchin would not be.

The rule kind of popped its head up here and there, but was never seriously considered again. Finally on Aug. 19, 2024, the entire proposal was officially withdrawn.

Michael Mosier, the former acting director of FinCEN, told CoinDesk the withdrawal, “shows that public servants see value in first collaboratively engaging risk/opportunity through innovation and empowerment around the financial equivalent of mobile phones, rather than rushing to limit people to landlines, switchboard operators, mailed checks, and everyone’s home address in a public phone book to keep them ‘safe.’

Another proposal from FinCEN – also from the tail end of 2020 – remains alive. This proposal would implement the Travel Rule, a Financial Action Task Force regime that looks to take on money laundering via crypto by having financial institutions report personal information for the senders and receivers of transactions over a certain limit.

The original 2020 proposal set the limit at $250, well below the $3,000 threshold currently set for similar financial reporting, but this week’s notice did not mention any adjustment to the threshold.

In a tweet, Mosier said the inclusion only tells the White House Office of Management and Budget that Treasury may take action on this proposal.

“Items can be on there for many years but not move,” he said.

Stories you may have missed

On reporting

There was a fair amount of chatter on X (formerly known as the bird site, the hell site or Twitter) about a report that Vice President Kamala Harris was considering current Securities and Exchange Commission Chair Gary Gensler to be her Treasury Secretary if she wins the presidential election. This report went viral on crypto social media.

I reached out to a number of individuals who regularly engage with Senate staffers or work with lawmakers, all of whom said the story was false.

Sheila Warren, from the Crypto Council for Innovation, and Caitlin Long, of Custodia Bank, both also confirmed that this story does not appear to be real.

My colleague Ben Schiller took a look at this story in Tuesday’s The Node newsletter, but I also wanted to deconstruct this a little, given the sheer amount of attention it received from individuals who believe it confirmed their worst fears about Harris.

One of the named sources in the article was Congressman Tom Emmer, currently the House Majority Whip, but the article specifically refers to a previous interview he gave to the Reporter. In that interview, the Reporter said, “Emmer criticized the current Biden-Harris administration for being staffed with left-wing activists, and warned that some of those staffers might enter a potential Harris administration. Emmer pointed to Gary Gensler, the Chair of the U.S. Securities and Exchange Commission (SEC).”

Staffers with Emmer’s office did not return requests for comment by press time on whether they’d heard something concrete to form the basis for his previous remarks.

Another named source was Katie Biber, the chief legal officer at Paradigm. Here too, the basis appears to be a past tweet, where Biber referred to a hypothetical about the political makeup of the SEC (which is composed of five commissioners) in a thread that didn’t touch on the Treasury Department at all.

An outside spokesperson for Paradigm said the company declined to comment.

Now, the reason I’m bringing this up at all is because of the sheer amount of attention it received from people in the industry who claim to abide by the “don’t trust, verify” motto – but appear ready to believe anything they see with no questions asked.

The law of whatevers suggests that it’s always possible this story is true – but the evidence isn’t there yet.

This week

17:30 UTC (1:30 p.m. EDT) Bitcoin Fog’s Roman Sterlingov was set to be sentenced after his previous conviction on money laundering charges, though this appears to have been pushed. A court report suggested he spend 20 years behind bars. Prosecutors asked for 30, while Sterlingov’s defense asked for a shorter sentence.

Elsewhere:

(Politico) Ron Conway, a billionaire and Dem donor, is parting ways with Fairshake, the crypto super PAC, and its major organizers after it announced $12 million would go to support Bernie Moreno (R), who’s running for Senate in Ohio in an attempt to unseat Sherrod Brown (D).
(NBC) Republican lawmakers are also upset at Fairshake for committing $6 million to Democrats Ruben Gallego (Arizona) and Elissa Slotkin (Michigan).
(Public Citizen) A new report from Public Citizen says crypto companies have spent nearly half of the corporate funds donated so far in the 2024 election, with $129 million spent across the past six years – or roughly $1 out of every $6 spent by corporations since the 2010 Citizens United Supreme Court ruling.

If you’ve got thoughts or questions on what I should discuss next week or any other feedback you’d like to share, feel free to email me at nik@coindesk.com or find me on Twitter @nikhileshde.

You can also join the group conversation on Telegram.

Edited by Stephen Alpher.