FinCEN’s Stand Against Cryptocurrency Mixers as a Key Money Laundering Concern
The Financial Crimes Enforcement Network (FinCEN) of the US Department of the Treasury is introducing new regulations that will require US financial institutions to track and report transactions associated with cryptocurrency mixing services (Convertible Virtual Currency Mixing).
Under the new rule, FinCEN will exercise its authorities under Section 311 of the Patriot Act to classify transactions involving cryptocurrency mixers and mixing services as a “primary money laundering concern.” This empowers FinCEN to impose special measures on financial institutions regulated by the Bank Secrecy Act (BSA) beyond the existing anti-money laundering requirements already mandated by the BSA.
The rule defines a “CVC mixer” as “any person, group, service, code, tool, or function that facilitates CVC mixing,” with a permissible exception for “internal protocols or processes for executing transactions by banks, broker-dealers, or money service businesses” provided these financial institutions maintain records of the source and destination of CVC transactions and provide such records to the government upon request.
Financial institutions regulated by the BSA are required to report transactions resembling Suspicious Activity Reports (SARs) involving mixer or mixing service transactions.
The rule necessitates financial institutions to report:
- Transaction details within 30 calendar days from detecting a mixer or mixing service transaction, including:
- Transferred CVC amount
- CVC type
- Used mixer
- Wallet address associated with the mixer and client
- Transaction hash
- Transaction date
- IP address and timestamps related to the transaction
- Description of “observable activity,” a summary of “investigative steps taken,” and provision of other information “as deemed by the financial institution to assist in ongoing investigations.”
- Customer information held by the financial institution, including:
- Full name
- Date of birth
- Email address
- Phone number
- IRS or foreign taxpayer identification number (or, if none exists, a state-issued photo ID).
FinCEN aims to aggregate data from reporting institutions to catalog the “size, scale, and methodologies of CVC mixers.”
What Concerns the Treasury about Cryptomixers?
The department believes that the risks associated with mixing cryptocurrency transactions far outweigh their benefits. In formulating the proposed rule, FinCEN had to assess the money laundering and terrorist financing risks that mixing might pose to the US financial system, while also considering and weighing any legitimate uses. Following the assessment, FinCEN acknowledged that “there are legitimate reasons why responsible individuals might want to conduct financial transactions in a secure and confidential manner given the volume of information available on public blockchains.” FinCEN also recognized that “besides illegal purposes, CVC mixing may be used for legitimate purposes such as enhancing privacy for those living under repressive regimes or wishing to transact lawfully anonymously.”
However, FinCEN concluded that “CVC mixing poses a significant money laundering risk as it conceals information from responsible third parties such as financial institutions and law enforcement.”
The department assumes that law-abiding users have no reason to fear that their personal information will be disclosed to law enforcement in an insecure manner, thus asserting that the reporting requirement won’t hinder the lawful use of mixers by clients seeking privacy protection.