On October 23, 2023, the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) released a Notice of Proposed Rulemaking (proposed rule) addressing “mixing transactions” that involve convertible virtual currency (CVC). The proposed rule would require “covered financial institutions” to report certain information about CVC mixing transactions and maintain records of those transactions.
CVC is currency that lacks legal tender status (i.e., the status afforded U.S. Dollars or Mexican Pesos), and mixing means facilitating transactions that are designed to obfuscate the “source, destination, or amount involved” in the transaction. CVC mixers anonymize transactions using a variety of methods, including but not limited to pooling or aggregating funds, transmitting currency through a series of separate transactions, or using code to change the structure of a transaction. FinCEN is concerned that CVC mixing makes transactions untraceable by law enforcement and that illicit activity linked to CVC mixing is on the rise.
The legal authority for this FinCEN proposed rule is Section 311 of the USA PATRIOT ACT (Section 311), which was enacted after the September 11 terror attacks. Through authority delegated to FinCEN by the Secretary of the Treasury,1 Section 311 authorizes FinCEN to require domestic financial institutions and domestic financial agencies to take certain “special measures” upon a finding that “one or more classes of transactions within or involving a jurisdiction outside of the United States is of primary money laundering concern.”
Most prior uses of Section 311 authority address countries (e.g., North Korea) or legal entities of concern (e.g., certain banks that have facilitated illicit activity). This is FinCEN’s first ever use of Section 311 to target a class of transactions. According to FinCEN, the enhanced anonymity that CVC mixers provide makes them “ripe for abuse” by illicit foreign actors, such as North Korea, Russian ransomware hackers, and buyers and sellers on darknet markets. As such, FinCEN has identified CVC mixing as a class of transactions that is of “primary money laundering concern.”
The proposed rule would apply to “covered transactions,” which are transactions that a “covered financial institution knows, suspects, or has reason to suspect involves CVC mixing within or involving a jurisdiction outside the United States.” The term “covered financial institution” includes, among others, banks, broker-dealers, and money services businesses (including money transmitters).
If the proposed rule is adopted, all covered financial institutions will be required to report to FinCEN particular information within 30 days of detecting a covered transaction. Specifically, covered financial institutions will be required to report the following information about the CVC transaction: i) the amount of CVC and its USD equivalent; ii) the CVC type; iii) the CVC mixer used, if known; iv) the CVC wallet address of the CVC mixer and the customer; v) the transaction hash; vi) date of transaction; vii) the IP address and time stamps; and viii) a narrative description. The covered financial institution will be required to report the following information about the customer: i) name; ii) date of birth; iii) address; iv) email address; v) phone number; and vi) IRS or foreign tax ID number (if not available, a government issued photo identification number).
FinCEN’s proposed rule serves as a reminder that U.S. regulatory agencies are increasingly concerned about the use of crypto assets and how they can be used by illicit actors and pose a threat to national security. As a prior reflection of this concern, in August 2022, the State Department’s Office of Foreign Assets Control added Tornado Cash to the Specially Designated National list (a primary U.S. government sanctions list), on the grounds that Tornado Cash’s mixer enabled illicit activities and sanctions evasion. More recently, Treasury released its Illicit Finance Risk Assessment of Decentralized Finance, which emphasized that even ostensibly decentralized financial platforms have anti-money laundering compliance obligations.
The comment period for this proposed rule closes on January 1, 2024.
For more information about this proposed rule or crypto asset regulation more generally, please reach out to any member of Wilson Sonsini’s national security practice or fintech and financial services practice.
