The U.S. Treasury Department’s Financial Crimes Enforcement Network recently published a proposal regarding the commingling of what they call “convertible virtual currencies,” or CVCs.
Cryptocurrency transactions can be “blended” through certain services in an attempt to hide their origins and quantities from any form of surveillance.
The proposal is not a bill, explains Rebecca Rettig, chief legal and policy officer at Polygon Labs, but is a set of rules that the regulator has proposed. The rules are intended to combat money laundering and tackle the embezzlement of illicit financial flows through crypto-mix mechanisms.
But the risks of such a proposal could outweigh the benefits, Rettig says. Now, she explains on the Empire podcast (Spotify/Apple), the Treasury Department is “looking for feedback.”
“They will process all comments,” she explains. “They will have to take it into account. They have certain balancing factors, right? Benefits versus risks.”
The rules ask U.S.-based financial institutions and agencies “to implement record keeping and reporting requirements,” Rettig says, regarding crypto transactions involving commingling.
“At first glance,” says Rettig, “that’s not surprising, right?”
But the real problem, Rettig says, is the scope of the proposal’s definition of “mixing.” As it stands now, it could “include all smart contract-based applications, certainly DeFi apps, but probably even apps coming out of DeFi.”
“That is really problematic,” she says.
A “full frontal attack” from regulators
Jake Chervinsky, in his new role as Chief Legal Officer at venture fund Variant, says the crypto industry is facing a “macro challenge.”
“Regulators want to identify the parties that carry out transactions. They want full insight and supervision of the financial system.” Crypto mixers, Chervinsky explains, are a tool people can use for privacy, “so the government can’t monitor their transactions.”
“What we’re seeing is a kind of frontal attack by regulators, especially anti-money laundering regulators,” he says, to figure out “who are the people who are conducting transactions” and how “this kind of technology to circumvent.”
“How do they prevent people from using them – to make them as inliquid and as difficult as possible for people to protect their privacy?” he asks. One answer is to criminalize technology, he explains, as evidenced by the sanctions against Tornado Cash.
Read more: Tornado Cash arrests fuel privacy debate
Since the Patriot Act, which has been in place for more than two decades, Chervinsky says the Treasury Department has been able to identify key concerns about money laundering. “They can indicate an institution, a jurisdiction, a type of account – or a flow of transactions.”
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Chervinksy notes that the department has never before designated a transaction category. “This is a new move that takes the Treasury Department one step further in its pursuit of crypto than they have ever done in any other type of context.”
“What it says is, ‘Hey, you’ve been overseeing financial institutions, do you really want to touch these things?’ he says. “Because if you don’t paint within the lines, you could get into trouble with us.”
“And that is really a signal for them to simply delete these things. And that is often how the government works.”
Chervinsky explains that the definition of CVC mixing is “much broader than something like Tornado Cash or any other privacy-preserving protocol. It basically covers everything in DeFi.”
Rettig says “the industry needs to come together” and comment on the proposal. FinCEN “is asking for examples of legitimate business purposes for mixing,” she says. “They specifically asked for it.”
“They need this to counterbalance the harm they would do by implementing this rule against mixers’ legitimate business purposes,” she said.
“We need to talk very publicly and then present to FinCEN all the legitimate ways in which mixers are important for preserving privacy.”