Why Is the Proposed FinCEN Rule for Unhosted Wallets Being Pushed So Quickly?

Jeremy Allaire of Circle Pay and Kristin Smith of the Blockchain Association explain the impact of and motivation behind Treasury Secretary Steve Mnuchin’s proposed FinCEN rule that targets “unhosted” wallets. In this episode, they cover:

• what the new FinCEN rule says, and how it would impact unhosted or self-hosted wallets, as well as crypto businesses
• why they believe this is really politically motivated and unilateral midnight rule making by Secretary Mnuchin 
• what other bureaucrats and policymakers think should be done instead 
• whether the rule only affects businesses rather than individuals 
• what information will be recorded according to the rule
• ways to circumvent compliance 
• how the rule affects DeFi and Web3
• the procedural hurdles Mnuchin took to propose the rule, and what they recommend the crypto community to do try to stop the implementation of the rule 
• how the rule comports with European GDPR regulations 
• which government entities will be tasked with making the regulatory changes the space needs 
• why President-Elect Joe Biden’s administration may be more favorable for the space

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1inch: http://1inch.exchange 

Episode links: 

Jeremy Allaire: https://twitter.com/jerallaire 

Kristin Smith: https://twitter.com/kmsmithdc

Circle: https://www.circle.com/en/

The Blockchain Association: https://theblockchainassociation.org

Stories on proposed rule: 

Effect on DeFi: https://twitter.com/jerallaire/status/1340060806088671232?s=20 https://twitter.com/jchervinsky/status/1340050400871911424?s=20

Coin Center response: https://www.coincenter.org/a-midnight-rule-for-cryptocurrency-transaction-reports/

Brian Armstrong’s earlier tweet thread: https://twitter.com/brian_armstrong/status/1331745196887867393

Collins Belton’s tweet thread: https://twitter.com/collins_belton/status/1340051986008350721?s=20

Transcript:

Laura Shin:

Hi, everyone. Welcome to Unchained, your no-hype resource for all things crypto. I’m your host, Laura Shin, a journalist with over two decades of experience. I started covering crypto five years ago, and as a senior editor at Forbes, was the first…was the first mainstream media reporter to cover cryptocurrency full-time. Subscribe to Unchained on YouTube, where you can watch the videos of me and my guests. Go to YouTube.com/c/UnchainedPodcast and subscribe today.

Laura Shin:

Today’s topic is the recently-proposed FinCEN rule around crypto transactions related to un-hosted wallets, self-hosted wallets, or just plain wallets, whatever you want to call them. Here to discuss are Jeremy Allaire, founder and CEO of Circle, and Kristin Smith, executive director of the Blockchain Association. Welcome, Jeremy and Kristin.

Kristin Smith:

Thanks for having us.

Jeremy Allaire:

Thank you.

Laura Shin:

Because this involves news, I’m just going to let the audience know upfront that we are recording Saturday morning, the day after the proposed rule was published. First, can you guys explain what this rule is?

Jeremy Allaire:

Basically, the rule as proposed, and we’ll come back to the fact that this is a proposed rule versus a final rule, which has been a huge battle, and Kristin has been at the front lines of that, which we’ll talk about, but the proposed rule is really around transaction reporting for individuals that use a custodial wallet, or an exchange, or, it’s technically in the rule, a money-service business, or a bank.

So, a regulated financial institution in the United States, and any transaction that involves, you know, essentially sending or receiving funds from a crypto wallet that is not associated with another regulated financial institution, or money-service business, whether internationally or the US. And it essentially says that if an individual is sending greater than 3,000 dollars, you know, over a crypto network, then you need to actually record their full KYC information.

You need to receive the name and address of the recipient, and then keep that record, and then if it’s greater than 10,000 dollars, let’s say you’re sending, you know, these days, half a Bitcoin to someone, to another Bitcoin wallet that either you control or is someone else, you also need to collect that name and address of the recipient, and you need to report it, all that information, to FinCEN, essentially to the federal government and law enforcement in the federal government.

And so, there’s essentially a data feed that gets sent to the US government with all transactions above 10,000 dollars with, you know, that collected information, and then they can go on and monitor that freely, and track your blockchain activity.

Kristin Smith:

It’s bad.

Laura Shin:

And why do you say that?

Kristin Smith:

Well, listen, I think there are a couple of reasons it’s problematic. One, and as proposed, all of the comments for this rule are due on January 4, which isn’t a lot of time, given that we’ve got, you know, Christmas, and New Year’s, and a couple things coming out. It’s going to be a pretty intense couple of weeks to get that, because there are a lot of questions about how you would actually go around collecting this information, and you know, it’s not that our exchanges can’t get out there and do this type of work.

But it is a huge burden to just turn on a dime, especially, there’s no proposed, you know, implementation period here. It would take a long time to do this. And so, so, yeah, but I think more problematically, and I’ll let Jeremy go into this, is that not every self-hosted wallet has a name and a physical address, right? If you’re working with a Smart contract, you know, this is going to prohibit or prevent crypto from going from an exchange wallet into smart contracts, and that’s the whole point of everything that we’re all building here, is to get more services that are built on top of smart contracts. But I’ll let Jeremy talk more about that.

Jeremy Allaire:

I mean, I think there’s so many issues with the proposed rule. There are so many issues with the process by which this is happening. This is, you know, a midnight rulemaking attempt. This is extremely unilateral from the secretary of treasury himself, despite significant objections throughout the government, including from within law enforcement, to this.

So, this is a highly politically-motivated individual who wants to jam this through, and is doing everything in his power to do that, despite many, many good actors in the federal government who, I think, realize that something like this should not be just jammed through, and requires really careful review, deliberation, and planning, and thinking. So, we’ll come back to that, maybe, but I do want to say, you know, when you look at blockchains, like, the fundamental innovation today is this infrastructure where you can actually have programmable money.

The breakthroughs that are happening, this is what motivated me to get in the industry, you know, almost eight years ago, was this idea that you could have money as a data type on the internet, and you could program it, and you could create contracts around it, and that those could be enforced by code, and work globally and interoperably, and that that would eventually allow for financial-services innovation, and access to that financial-services innovation globally as well.

Really profound stuff, and you know, this rule basically just completely ignores the fact that that even exists. It completely ignores the fact that, you know, innovation in open finance is built on this idea of Smart contracts that, whether they’re providing lending markets, or they’re providing other forms of economic arrangements, are executing in code, and that individuals, for the first time ever, have the ability to access and interact with those.

That’s a huge breakthrough, and I think we, you know, there’s obviously, like, the full decentralization movement, which says, well, the whole point is to get outside of regulated intermediaries, and as long as we have access to this outside of regulated intermediaries, it’s fine. It doesn’t matter. But I think we want a world where, you know, financial institutions are able to offer, whether it’s a business or a consumer, are able to offer people access to this, offer access to these services around the world.

I think we want that world, and you know, effectively, this rule, it says nothing to this issue, and the reality is that individuals and businesses are going to want to be able to transact with smart contracts. It’s sort of like, duh. Like, that’s so much, and you know, so, this is essentially, I think, really, really limiting. By saying nothing to that issue, it raises very significant questions about how a Coinbase, if you’re on Coinbase.com, can you actually interact with a Smart contract?

You know, what is staking? Is staking interacting with a Smart contract? What are all these things? What can a consumer-facing or a business-facing institution do? So, that’s a major issue, and I think coming back to the procedural question, you know, what we ought to do is say, okay, we have these kind of concerns, and I think they are legitimate concerns, money-laundering and financial crime is legitimate, and we can talk about that.

But you know, you don’t jam it through over the holidays without any consideration, without any thinking, without any industry engagement, and the rule says, yeah, we had an hour meeting in March with a few people from exchanges, and last year we went to California for a day. Big (curse word) deal. I mean, that is not industry engagement. So, the reality here is that we need industry to be able to work on this, and in a really material way, and not just this jammed-through kind of situation.

Laura Shin:

So, let’s parse out a bunch of what you just spoke about. I’m so curious about what you said about how this isn’t even a unilateral motion from the government, that, you know, Treasury Secretary Steve Mnuchin apparently is the one individual you implied that’s really driving this, and that actual people who work in this area, in law enforcement, are opposed. Why is he so driven to do this? What is his perception about what’s happening in the crypto industry that makes him feel that this is the right way to go?

Kristin Smith:

Yeah, so, we started to get wind that Secretary Mnuchin had serious concerns with Bitcoin, really, and crypto in general, but he really does not like Bitcoin. We started getting a sense of this over the summer, around the same time that we, the FATF released their report that had some suggested policy tools that policy-makers could use if they had concerns about self-hosted wallets.

And what we were hearing at the time was very concerning, because, you know, we would hear stories about how he wants to just ban Bitcoin entirely, that he doesn’t like permission-less networks, that he doesn’t want any of this stuff, he wants to go after it. And you know, that’s when, at the Blockchain Association, prior to this, we had never been concerned about Bank Secrecy Act issues. We thought that the guidance that FinCEN had put out in 2014, and again in, or 2013, I guess, and again in 2019, was very reasonable, and we didn’t have any issues with the policy.

But when we started hearing that Mnuchin was so fired up about this, we decided that, okay, if something’s going to be coming, we need to get into this. And so, we worked with our membership, and drafted a report called “Self-Hosted Wallets and the Future of Free Societies,” and…

Laura Shin:

Was this the one that we went over in the episode with Jake?

Kristin Smith:

Yes.

Laura Shin:

Okay, so, yeah, that episode will be in the show notes for people. It was with Jake Chervinsky of Compound.

Kristin Smith:

Yes, and so, we released that in November, and what had always kind of been going on in the back of my mind is, like, okay, they’re going to kick off and notice the proposed rule-making that is going to go after self-hosted wallets. They know you can’t actually ban Bitcoin and you can’t actually prevent permission-less networks from existing, but they’re going to try to go at the interaction between the regulated world and the less-regulated world.

And so, you know, we wrote this report, and we sent it around to folks in government, and very quickly heard back from FinCEN that this was very timely, and that they wanted to meet as soon as possible. And so, we did some large meetings there with folks from treasury and folks from FinCEN. We also did some meetings on the Hill, but all of this is to say that the reason we wanted to lay the foundation is, we always envisioned this would be a long battle, right, because you typically have a notice of proposed rule-making.

There’s a 30, 60, sometimes even 90-day comment period. There’s often follow-on comment periods, and it’s a very open process, and it allows for a lot of dialogue back and forth. But what we learned a couple weeks ago is that this was actually being floated as an interim final rule, and an interim final rule goes into effect immediately. There’s often a comment period associated with it, but you know, and then it becomes a final, final rule. Only in government can you have a final, final rule, but the interim final rule would go into effect immediately.

And the reason that they were using to bypass the regular process is that there’s kind of this public-interest exception to going through the process, but the reason they said this was that, well, the money-launderers will move their money around, and they will be able to, like, get around the rule if we give them any advance notice. So, all of that is to say that the real time…

Jeremy Allaire:

Has nothing to do with January 20.

Kristin Smith:

Yes…

Jeremy Allaire:

It has nothing to do with Mnuchin is actually being booted out of power, and that he’s trying to get done something that he personally thinks needs to happen. Like, let’s talk honestly about this. This is a bunch of BS.

Kristin Smith:

Yes, but the motivation for this is that he doesn’t like this stuff, and he doesn’t understand this stuff. There is no, like, we have tried to game out every possible angle here. There’s no, like, I want to, you know, leave and make a bunch of money in traditional banking. I mean, the guy’s already worth hundreds of millions of dollars. This isn’t, like, a career play. He isn’t beholden to any interest. He just fundamentally, at his core, believes that this stuff is bad.

Jeremy Allaire:

I have a story about that, and I think it’s relevant. So, almost a year ago, in January, at Davos, there was a closed session, closed-door meeting, where, you know, a small number of people from the crypto industry, and folks like David Marcus, myself, and others, but basically, like, the heads of the leading financial institutions in the world, major central bank heads, the heads of the BIS, the SWIFT, I mean, a lot of people, and it was meant to be a dialogue on what kind of governance do we need around digital currency, what should this look like.

And Mnuchin was brought in, and he sat at the front of the room, and people kind of got called on to give their perspective on things, and he got up, and he basically just mocked Bitcoin. I mean, he essentially just started by saying, you can buy Bitcoin, you can do whatever the hell you want with it. I think it’s, you know, basically this is complete trash, and you might as well just buy a bushel of bananas. I mean, he literally kind of went off on this personal rant about, you know, how stupid he thought Bitcoin was, and if you want to do that, fine, basically, kind of mockingly.

But if you want to do that, you know, and you want to, like, transfer that and control it yourself, no way, basically over my dead body. And so, I think there’s a mixture of a personal sentiment that he thinks he just, I think there’s, you know, I’ve seen this for eight years. Like, people who come out of the traditional financial system have an enormous amount of cognitive dissonance about open finance, about the idea of digital money that exists outside the realm of the government or corporations.

And I think he’s one of those people who is just, it sort of violates his frame of reference for how the world works, and it makes him angry, and I think he felt like he was very much on a personal mission on this issue. And so, that was the first time I really saw that, and obviously we’re sort of seeing that play out in the twilight of the administration.

Kristin Smith:

Yeah, and I think, I was going to say, going back to your original question, though, Laura, he’s alone on this. He’s a hundred-percent alone. We have law enforcement agencies that don’t think that this is going to be a useful rule. We have FinCEN itself that, yes, the rule came from FinCEN, but they’re very smart people at FinCEN that understand crypto, and they understand that this is going to be very problematic for all the innovation that’s going on.

But they’re at the direction of the treasury secretary on this. So, we have, you know, staff-level people at the White House that have been helping to push back on this. So, we have members of Congress that are wanting to push back on this, and even folks, I’ve heard, you know, that work for the secretary directly don’t think this is the right approach, but he is on a personal mission. And the logistics, by the way, of getting a rule out the door are incredibly complicated, and what he has done to get this posted as quickly as he has is, like, really quite remarkable.

You know, it’s like, where there’s a will, there’s a way, and even though there’s all this opposition against it, he has taken a personal-level interest in ushering this through at the last minute, hard to stop.

Laura Shin:

Fascinating. One thing that I’m curious about, though, is, you know, as you mentioned earlier, FinCEN did release guidance twice that the industry largely felt was pretty sensible. So, I was curious, at this point in time, what do the people who don’t think that this is a good rule, you know, in FinCEN or just pretty much any of the law enforcement or other people in government that you mentioned, what do they think should be done? Like, do they have any kind of proposals on their wish list?

Kristin Smith:

Yeah, no, I mean, I think that, you know, so, the way this has played out over the past couple weeks is, there was a big stakeholder meeting, because, with different leaders at these various agencies, and everyone does agree that there, something needs to be done in general about concerns of illicit finance. I mean, it’s hard to not have that position, especially when you’re, you know, sitting in government. There were a lot of concerns around the process at the time.

I think the smarter way, and those that are more informed understand that blockchains are actually a little bit different than cash. I know we, like, love to, like, make the comparison, and it’s useful in certain circumstances, but they’re actually really cool, amazing tools that are used every day. We have Chainalysis, and Elliptic, and CipherTrace, that are all out there, working with law enforcement, working with companies to help track down and figure out, you know, who the bad guys are and where the illicit financial activity is going.

And that is, like, very cool and different than how you would go and chase down the bad guys in the traditional world, and in the traditional financial services world. And so, the right way to have this is to have a conversation, is what else could we be doing, how can we use the unique characteristics of the blockchain to help us find these transactions that are bad and the people who are associated with them, as opposed to taking a, you know, regime that is meant for an old system and trying to apply it on top of crypto.

And I think there are lots of people that are very interested and open to have that conversation, but they want to have that conversation first, before, you know, crafting this midnight rule and cramming it down at the very last minute.

Laura Shin:

And one other thing that I really wanted to ask about a little bit further is, I actually already engaged in a little bit of a Twitter debate about this with Ari Paul, but I actually, I think the point I was arguing was wrong, and he was right. He was saying that actually, this doesn’t really affect people who already primarily transact in wallets, or even people who would choose to do so, which I actually, honestly, at this point in time do think probably is the description of the majority of people who operate in DeFi at the moment, that they’re not doing it from a business, that they’re doing it from their own personal wallet.

So, if, you know, in the future, people have to on-ramp through something like Coinbase, but then transfer, for under 3,000 or 10,000 or whatever to their own personal wallet, and then engage in DeFi from there, like, what is the problem? You know, because, like, my sense earlier, even, also from the FinCEN guidance, was that in a way, that that guidance would probably just drive more people to interact from their own wallets.

And I understand, you know, that raises maybe some security issues if you’re using huge amounts of money, but for most average people, it’s just going to be how they’re going to interact.

Jeremy Allaire:

Yeah.

Laura Shin:

And a lot of people kind of like that idea, that’s how most people would interact. So, Ari was saying this is really going to affect businesses more than individuals. That’s what his point was.

Jeremy Allaire:

Right. I read his threads, and I think he makes some very strong points, and I agree with most of it, and just to maybe reiterate how that translates is, you know, I go to an exchange, I go to, I work with a custodian, I’m getting some USDC, or Bitcoin, or whatever I’m doing, and in this new rule, let’s say I want to take 15,000 dollars and move it so I can use that and put it into DeFi, or a DEX, or whatever it is. Yeah, I need to say I’m putting this in a self-hosted wallet.

It’s my wallet. You have my name and address. That’s what I’m doing, and you know, I can imagine a user interface where there’s essentially, like, the service identifies, okay, you’re not sending to another VASP. You’re sending to an unknown wallet, a checkbox that says “This is my wallet,” and you know, it goes, and then you go and interact with DeFi. Right, so, at a practical level, I think that is, you know, that is accurate. Now, here’s the difference, here’s the challenge.

Under this rule, this rule will mean that, effectively, the record of you as an individual doing that and the blockchain address, those just get sent in a data feed to the federal government and law enforcement, and they can do whatever they want with it. And so, whether you’re transacting with another person using an un-hosted wallet or your own on your own account, so to speak, now, basically, I mean, we know how all this works. The data feed goes to the government, and you know, they’re quite capable of writing software.

And so, you can imagine, okay, well, now we have this data feed, and now we can basically have surveillance downstream over every transaction on chain tied to a specific identity, and tied to that. Now, in the traditional financial system, there’s nothing equivalent to that. You know, you actually, the government needs a subpoena to get that information, unless the financial institution deems that the person is doing something suspicious, where they have reason to believe that there’s money-laundering, or financial crime, or some other action.

If they do, then they have to report it to the government. Now, anyone who transacts above 10,000 dollars is presumed to be a money-launderer, and are now under full surveillance and monitoring. They can be, without consent, and that is what this rule does. When you take cash out of the bank, you take 10,000 dollars cash out of the bank, that does get reported, but you know, there’s not someone looking over your shoulder everywhere you go and seeing what you did.

So, there’s a huge difference, and as we move into a world of, you know, “digital money” on internets, on blockchains, this is a small step towards radically higher levels of surveillance, and it is different than the way it works in the existing banking system. And so, while it might feel good to say, well, I can just put it in my self-hosted wallet and then I can do what I want. Well, you’ve also, you’ve done that, and your blockchain addresses and your downstream transaction activity are now under surveillance, without you knowing or being able to do anything about it.

Laura Shin:

And just remind me also, what is the information that is required to be reported? It’s, what, identity…yeah, can you just list all the things?

Jeremy Allaire:

Yeah. Do you want to talk about that, Kristin?

Kristin Smith:

Yeah. Well, no, for the self-hosted wallet, the customer registered with the exchange, there’s information reporting about that, but the identity of the self-hosted wallet, the self-hosted wallet address has to have a name and physical address. The physical address is kind of a particularly complicated one for some of the DeFi stuff, but…

Jeremy Allaire:

I mean, the real question is, and the rule does not specifically say that the CTR, what is the…

Laura Shin:

Currency transaction report.

Jeremy Allaire:

…kind of currency transaction report, yeah, does the CTR include blockchain address, or wallet address? Now, like, they, SARs for virtual currency exchangers…

Laura Shin:

Suspicious activity report.

Jeremy Allaire:

…yeah, sorry, suspicious activity reports that are filed do require inclusion of blockchain addresses. And so, that’s certainly an open clarification, but I think if in fact the CTRs do include your wallet address, that is an enormous amount of, you know, sort of oversight that becomes possible.

Laura Shin:

Then, someone else also said something like, and I don’t know if this is true, that then if you interact with somebody, then the exchange also will need to know their entire transaction history, or something like that, if you’re transacting above a certain amount?

Jeremy Allaire:

Go ahead, Kristin.

Kristin Smith:

I don’t think you need the whole transaction history.

Jeremy Allaire:

No. No, you need to, the money service business or bank who’s providing, you know, interaction with blockchains is required to keep those records for a statutory five years, basically. So, for, you know, transactions of 3,000 dollars, you need to essentially internally log what is, like, your own CTR. You need to track that, so that that is on record, in the event that you got a subpoena, those records would be available to the government over a statutory period of five years.

Laura Shin:

One other thing that I want to ask about this was just that, so, FinCEN also is going to try to propose these rules around structuring, which is, you know, ways in which users might try to break these larger transactions that would trip these requirements into smaller ones so they don’t have to report.

But then, I actually tried to glance through the document to figure out how they’re going to do that, and it just looks like all they’re saying is, like, it’s prohibited. Do you get a sense of what that would look like, or how they would prevent that?

Jeremy Allaire:

I mean, my take on that is, so, as a financial institution, we are required to have AML programs, and monitoring to identify structuring activity and report it. I think, it’s not entirely clear how that translates in this proposed rule. I think effectively, what I think it says is if your internal systems that are designed to identify structuring identify structuring, then you need to presumably either freeze the transaction or close the account, or, again, the details are not there, but it’s essentially to have a more intense intervention than just I’m seeing structuring and I’m filing a SAR.

Laura Shin:

Okay. So, in a moment we’re going to talk a little bit more about the impact of this, and also what the industry plans to do about it, but first a quick word from the sponsors who make this show possible.

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Laura Shin:

Back to my conversation with Jeremy and Kristin. So, okay, so, now I feel like I have a better understanding of what’s included in the rule, but is there anything else that we should let people know about, like what it is, you know, the content of this proposed rule before we move on to other topics?

Kristin Smith:

I think we got all the high-level points.

Laura Shin:

Well, one thing that I was wondering, because, you know, we did talk about DeFi, but I also wondered how this rule could affect the wider world of DApps in general, or Web3, like, if you had some 10,000-dollar CryptoKitty or something you wanted to buy from somebody, how would that affect things? Like, would you need to get the KYC from that person, or, like, I don’t know how this would impact…

Jeremy Allaire:

I think, you know, this gets back to your comments about your thread with Ari Paul, right, which is basically, if you’re using a DApp, you’re using that through a non-custodial wallet, because that’s how Web3 works, and if you’re transacting with an NFT exchange, that NFT exchange is something you’re connecting to through a non-custodial wallet as well.

And so, you know, effectively, what that would look like is, I move 10,000 dollars of USDC, or Ether, or Bitcoin, or whatever it is, and I’m interacting with the marketplace, and I want to transact for an NFT, and I’m doing that on a permission-less infrastructure, and then I take possession of that, et cetera. That activity is sort of in that kind of parallel permission-less blockchain world. Now, if a custodial service wanted to allow you to, you know, buy an NFT from a marketplace, and the custodial service is interacting directly with the Smart contracts, that’s where it starts to get complicated.

This gets back to the whole Smart contract discussion. Like, there are lots and lots of services now, where it’s a custodial service that itself, behind the scenes, is, you know, putting stablecoins up into DeFi contracts, or is putting Ethereum up into DeFi contracts on your behalf, and interacting with Smart contracts to give you access to it, where you don’t actually need to do self-custody, et cetera. That set of activities, there’s a giant question mark about that.

Like, is that even legally possible, because there is no way for that exchange or that custodial service to know the name and address of the Smart contract. Like, what’s the name and address of Compound protocol? You know, it just doesn’t work. This is, again, back to the rule-making, why if this was serious in terms of process, like, we would take the time to think about, okay, how do financial intermediaries deal with DeFi in the context of these financial crime concerns, and like, let’s think that through, and frankly, give the industry time.

In my letter to the senior staff, including Secretary Mnuchin, I specifically believe that there are ways for decentralized identity, and identity protocols, and other things to be layered on this in a way where you can both have financial privacy and you can have accountability in record-keeping, and that is compatible with, you know, this emerging world of Smart contracts. But it’s going to take a year or two to figure that out. And so, the right thing in my mind is, create the space, try and work with industry to figure it out, don’t just jam it through. So, I think that’s really where the big question marks are.

Laura Shin:

All right. So, let’s talk a little bit about this process. You know, as you guys mentioned earlier, the comment period for this proposed rule is only 15 days. A normal length of time is more like, minimum, 30, or more often something like 60 days. Coin Center even published something where they talked about how there’s this one proposed rule for the banking industry that’s been under consideration for six years. So, yeah, like, has a 15-day comment period ever happened before? Like, is this…?

Kristin Smith:

Not out of FinCEN. They have never done a 15-day comment period. So, I mean, I know this sounds crazy, we’re actually grateful to have these 15 days, because as I mentioned before, there was going to be zero days. So, you know, this is at least something, but it’s a very inconvenient time, and…the good news is, it could be the grounds for an Administrative Procedure Act case against them for not taking enough time and allowing enough time for this to happen.

So, we’ve been working with Jake Chervinsky, who is, you know, one of our, he chairs our DeFi working group at the Blockchain Association. We’ve been working with the team at Kirkland & Ellis, including Paul Clement, who’s a former solicitor general, to try to figure out what is the best sort of legal strategy. So, you know, going forward, we’re going to obviously comment on the letter, and work through Christmas, and probably not go skiing as many days as I had hoped, because we’re going to have to be figuring out how best to respond to this.

But simultaneously, we’re also coming up with a legal strategy to figure out how to push back on this and prevent it from going into effect, because we do think that the process here has not been followed. I mean, it very clearly hasn’t been followed, and that, you know, that they shouldn’t be allowed to move forward with such a short timeframe.

Jeremy Allaire:

I would add one thing to that, just, and this is almost, a little bit of a call to action, which is, you know, I think there are probably 30 to 40 million people in the United States who are interacting with digital currency, and who probably care a lot about this, and that’s a huge number of people that are impacted. So, the impact is broad, but the call to action is really people who care about this need to be submitting their own comments, but also, you know, reaching out to Congress, reaching out to their representative elected officials, and making it clear that they feel very strongly that this is not a fair review process, and that this deserves a review not just on this administrative level, but frankly, this is something that Congress has not even had an opportunity to look at.

And so, I think, you know, people need to get out there and apply as much pressure as possible so that there is a more extensive review period on this, so that some of the issues that we’ve identified here can be thought through.

Kristin Smith:

There’s also an interesting timeframe ahead of us. I mean, as we mentioned before, I think Mnuchin is going to do everything he can to make this rule final prior to inauguration day on January 20. But if we could succeed in extending the comment period, or extending the period of time where FinCEN has to review all of the comments to get to January 21, I think this would be a totally different ballgame. I think we would be able to work with the new administration, and start over on something like this.

And so, going back to Jeremy’s call for action, every, you know, sort of unique argument that is brought forth has to be addressed as part of the regulatory process. And so, you know, we highly encourage people to comment, and that will lengthen the time needed in order for FinCEN to meet all of the requirements before making the rule final. So, getting a lot of comments in is going to be important.

Laura Shin:

It sort of reminds me of a common tactic in crypto, which is, you know, the denial-of-service attack.

Kristin Smith:

Yeah.

Laura Shin:

But anyway, yeah, one thing that I was curious about is, so, you mentioned this Administrative Procedure Act, and legal action. I don’t know what that looks like. Would that mean, like, a literal lawsuit against this, or…?

Kristin Smith:

Yeah. So, there’s a couple ways we could do it, and we’re evaluating, but one way to stop this thing from going into effect is to sue the government, and say that you can’t put this out there. And so, yeah, we’re looking to do that, and that would probably be in the form of a preliminary injunction at the time that a final rule comes out, but we’re looking at all of the different options that are there right now.

The other option we have, because if the rule does become final, it does become quite difficult to undo the rule, right, once it’s final, you can’t just…but if it’s in this proposal stage, I think, like you said, the Coin Center folks had mentioned, some of these rule-makings go on for years, and sometimes they get pulled, or they get, you know, they get stopped along the way. And so, if we can keep the rule-making open to get to the next administration, that’s our best chance, but if it does go final, we have the lawsuit route that I mentioned.

And we also have something called the Congressional Review Act, which is a tool that Congress has to undo regulations that they don’t like. That would be a fairly heavy lift, to get the votes to essentially undo this rule, but it’s not necessarily impossible. So, we’re looking at a legislative strategy on that side, and then we’re also looking at, you know, working through the courts in order to get this thing slowed down before it goes into effect.

Laura Shin:

And then…

Jeremy Allaire:

I wanted to add…sorry, go ahead.

Laura Shin:

No, go ahead, Jeremy.

Jeremy Allaire:

I wanted to add one thought here as well, which is somewhat tangential, which is, essentially, you know, I don’t want everyone to be all doom and gloom here, because I think, you know, you’ve actually seen, a week or so ago, obviously, there was some heightened concerns about an outright ban, or more aggressive measures, which were in fact being contemplated, and the market obviously reacted to that. I think, you know, gradually, there is so much interest in the market right now, it’s obviously grown.

But even, you know, specifically after 5 p.m. yesterday, when the details of this rule were published, the market is up, and I think, you know, I’m very close to some of the biggest market-makers in the world, and I think people have kind of shrugged it off, and I think they shrugged it off for two reasons. I think one is, the perception is, you know, if you refer to the Ari Paul thread as well, as sort of like, okay, well, DeFi can go on, people can continue to utilize permission-less infrastructure.

Yeah, there’s some hassle around it, et cetera, but this does not somehow, you know, kind of destroy the ability to use permission-less blockchains, right? So, I think that’s one piece. I think the other piece, which is actually more subtle, is that, you know, I have been, obviously, trying to work with mainstream financial institutions to work with the crypto industry for a very long time, and the number-one issue that has always been limiting financial institutions, banks specifically, of getting involved is the compliance teams.

The compliance officers basically say, there’s no way for us to have a way to keep track of what people are doing with permission-less blockchains, and therefore it’s impossible for us to meet our BSA obligations. So, we have to stay completely away from this. As the OCC has basically said, hey, you guys can get into crypto, you guys can keep crypto on your balance sheet, you can provide custodial services, you can support stablecoins, stablecoin networks. As that has happened, that’s been a really positive thing.

You’re seeing institutional participation that’s meaningful, that’s coming into the market right now, and you’re seeing more and more banks saying, hey, how do we get into this? The PayPal announcement is another example. This issue, and having some resolution around this issue, I believe, will lead to massive-scale financial institution participation in these markets, because they will finally, at some level, the compliance departments will say okay. Compliance departments don’t like gray area. They don’t like not having rules.

They like rules. If they have a rule, then they know what they need to follow. And so, this, in some ways, answers that question which has been looming over this industry for seven or eight years. And so, you can decide whether you think that’s a good thing or a bad thing, to have more banks involved in crypto, but I think that some resolution of this issue, whether it’s this specific rule as it’s proposed now, or some more extensive period, where the industry can work on it and address some of the issues that we’ve identified, will lead to the mainstreaming of crypto in a larger way, and I want to make sure that that’s not lost on people as well.

Laura Shin:

Yeah, although I think what’s fascinating to me about this is that, so, I totally get the point that you’re making, and I do agree that it will lead to that, just having more clarity. However, it goes also back to what we were saying, you know, was my debate with Ari Paul, where I do think that the rules the way they’re written now will actually cut off certain revenue streams and lines of business for some of these bigger companies.

You know, like, I don’t know how this would affect, yeah, like, different things, like staking, or any services they may want to offer, and yield farming whatever it is. So, in that regard, I feel like it disadvantages less technical people, like, people like me who, you know, it’s not like I interact with…

Jeremy Allaire:

Totally agree.

Laura Shin:

…MetaMask all the time, and then the one time I did, for the first time in a long time, I literally lost 500 dollars in, like, five minutes. It was terrible. Like, and I haven’t used MetaMask since, I was, like, so burned. So, I feel like this drives the thing where, like, it opens up crypto only to more technical people, and not to everyday people.

Jeremy Allaire:

Yeah, I think that’s a risk, and I think, like, worst-case scenario, this thing gets jammed through, there’s no way to stop it, it goes into effect, there’s some period of time. The next step is, we need additional guidance. We need additional clarification. We need additional amendments. We need to work on that issue so that, you know, mainstream financial institutions that want to tap decentralized networks for services and provide those as value to their users have the ability to do so, and do so in in a really clear way. So, we have to continue to fight for that.

Laura Shin:

And so, just to go back to Kristin’s points earlier, about the Biden administration, Jeremy, you did say on CNBC that you expected the Biden administration to ultimately be positive toward crypto. I don’t know in the context of your comments, did you mean, like, around this type of issue, or, you know, why did you say that and why did you…and what do you think their attitude would be in the short term if the rule-making does go past the Trump administration?

Jeremy Allaire:

Well, I mean, I would say a couple things. I mean, I think there’s obviously, you know, career civil servants that work in agencies, there’s a tremendous number of people who work in the treasury department, in the OCC, in FinCEN, in law enforcement, in other key agencies who are getting more and more educated on crypto, thanks to Kristin and team, and you know, a broader, just general awareness in the space.

And I think there’s just so much more understanding now than there’s ever been, and there’s a real recognition that this is very significant and important infrastructure. And so, I just think at the federal government level, there is just in general a more constructive view on all of this, and I think that’s getting more and more heightened as this, you know, grows around the world. I think specifically with the Biden administration, my view is that there’s going to be a major focus in the Biden administration on, you know, American competitiveness in critical industries and infrastructure areas.

I think that the approach that the Biden administration will take is not going to be one of, you know, the standing up massive federal government initiatives. It’s going to be to tap American entrepreneurship. It’s going to be to tap the great, you know, technology capabilities, the great private firms, to do that in a way where the public sector and the private sector work closely together to advance those things, and blockchains and what they enable is clearly a category, and digital currency is clearly a category where the United States needs to have a leadership position, not just in this sort of US/China thing, which people tend to over-dramatize, I think.

But I think just in general, you know, this is, I always use the 1996 metaphor, and I think it’s very apt. You know, we might have a Netscape moment with Coinbase’s IPO, which is similar to back then, but I think very specifically, people are seeing that the global economic system and the financial infrastructure is going to get rebuilt in the image of the internet, and on this, and we got to get it right.

And so, I think that this is just a time, it happens to be when Biden and team are coming to power, and I likewise, I think that in general we’ll want to kind of govern from the middle, and try to, you know, approach this in a bipartisan manner. There are, I think this is an industry that has, you know, people on every which way of the political spectrum, who are interested in seeing it move forward, and I think that that will contribute to general engagement and support.

Laura Shin:

And so, just so I understand how this will work if indeed the rule-making does go into the Biden administration, do you expect at that point, then it would be kind of more the, you know, career-level, just bureaucrats who will carry the ball forward, and then therefore will institute, like, a more typical process? Is that your sense of what would happen, or, you know, because I also, like, I mean, not that I’ve looked into this, but I feel like the Biden administration probably has a lot of priorities when it comes, and I don’t know how high this is going to rank. So, I just wonder, is it going to languish, or…?

Kristin Smith:

You know, there could be a number of things. At the very least, I think we can expect it to slow down. At the very best, maybe it gets pulled entirely, and then the conversation can start, you know, anew with folks in the administration. You know, FinCEN is one of those agencies that it is all career people, so the team that’s in place now will continue to be there, you know, going in post-January 20. And so, yeah, so, we’re hopeful that, the problem we have now is that we have a treasury secretary who’s, for whatever reason, made this his number-one priority.

I don’t think this is going to be Yellen’s number-one priority out of the gate, and this will be, yeah, sort of reverted to the normal process where we have really well-educated, talented people in government that are trying to think creatively about these issues, and those are the ones that we want to be engaging with on these conversations, not treasury secretaries that are difficult to get in front of.

Laura Shin:

So, one other thing is that, you know, pretty much this whole conversation has been pretty focused domestically, but Collins Belton, who’s another lawyer in the crypto space, told me that he thinks this breaks down GDPR compliance in the EU, and he just was super-skeptical it would fly over there. So, how do you think GDPR issues might affect the ability to implement a rule like this?

Kristin Smith:

Boy, I hadn’t thought through that angle, but yeah, I mean, there’s just a lot of information that’s going to be stored in one place, and…but yeah, no, that’s an interesting thought.

Jeremy Allaire:

This is, I mean, I believe that there are exemptions around, you know, basically information-sharing associated with tracking, associated with financial-crimes enforcement. I don’t know the details on that, but I mean, for example, the European Union and its members have been very proactive around the travel rule and FATF work, and that requires a massive amount of PII flying around all around the world, you know, creating kind of honeypots for cyber criminals, which is one of the issues with travel rule. But…

Laura Shin:

And Jeremy, when you say they’ve been active with that, you mean that they are requiring kind of more…?

Jeremy Allaire:

Absolutely, yeah…

Laura Shin:

Yeah, so, actually, that’s…

Jeremy Allaire/Kristin Smith:

…I mean, 5AMLD is very, very, you know, clear on that, and…

Laura Shin:

What is 5AMLD?

Jeremy Allaire:

Okay, so, the European Union has an anti-money laundering directive. They’re now in the fifth version of the anti-money laundering directive, has a whole series of things specific to virtual currency firms, to registration requirements, to KYC procedures, and it is the sort of regulatory framework that binds those virtual asset service providers to the FATF guidelines that have been laid out as well.

So, actually, the European Union is pretty strict on a lot of this, and I think, you obviously saw what happened in France last week. You know, all this came out of the G7 meeting. This has been worked on as an issue, this has been one of the top issues for the secretary of treasury in the G7, and frankly, at the G20 level. And so, I think there was essentially a kind of handshake around the table that everybody’s going to go roll this out in the G7.

So, I don’t think we’re done with this. I think we’re going to see, you know, G7 and other G20 member states introducing rules or regulations similar to this in a coordinated fashion as we go into the new year.

Laura Shin:

Interesting. So, it seems like the EU does not see a conflict between these types of rules and GDPR.

Jeremy Allaire:

No. I mean, if you look specifically at what France has already done, if you look at what the German finance minister announced around this coming out of the G7 meeting, whenever that was, on the 10th, I mean, his words did not need mincing. You know, and so, I would expect, certainly in Germany, that something in this space is imminent.

Laura Shin:

Yeah, I don’t remember the exact quote, but I did include it in my newsletter, and I confirmed one week recently, so I will try to find that and link to that in the show notes. All right. So, I mean, we kind of talked a little bit about what you thought people should do in terms of the comments over the next few days, but I don’t know if you have any other kind of, like, tips for people, because I kind of was like, are we going to see some mass exodus of crypto from the exchanges over the next 15 days? Like…

Kristin Smith:

Yeah, no, listen, I would encourage individuals, you know, to submit comments. If you go to treasury’s web site, you can get a copy of the rule, and there are instructions in there on how to email in a comment. There will probably, my guess, be some activists that come up with a streamlined way for people to do this, so I’d keep an eye out for those links that make it easier to submit comments. But you know, if you’re listening as someone who is participating in the cryptocurrency industry, I think this is a really, this is the biggest bullet that’s been fired at us so far in the United States.

And you know, we need to fight back against these types of attacks, and if you’re not a member of the Blockchain Association, I’m putting in a plug, like, please join us. Like, we are a very small team because we have a very small budget. We could be a very big team if we had a big budget, and we could do more work if we have more support. So, you know, for those companies that are out there that are not yet working with us, please join us. Like, we are working together.

We had, Jeremy and I were in a war room that we set up on our signal here, where we were all sharing information with different people that we were speaking with in government, and coming up with a strategy, and also analyzing the information when it came out last night. And so, you know, it’s a really great team of really smart people, both here internally at the Blockchain Association and also within our membership. And so, you know, this work doesn’t do itself. So, we want to get more boots on the ground.

Jeremy Allaire:

I want to reiterate that, and I was going to say the same thing, which is Kristin and her team are amazing, and the work has been incredible, and just witnessing even the ability to change some of the things that have been happening on this particular matter, just in a matter of weeks, it’s tremendous. You know, there’s sort of the one-percent rule, which is everyone in the world should put one percent of, at least one percent of their wealth into crypto.

Well, every crypto firm and every crypto firm’s treasury, they should probably take one percent of it and contribute to and become members of the Blockchain Association, because this is extremely high-value, high-leverage work, and I would really, really encourage that.

Laura Shin:

And one other thing I wanted to ask about, Kristin, was I’ve been noticing on Twitter that Coin Center has been raking in the bucks on Gitcoin. They raised 300,000 dollars last I saw, via GitCoin. Is that something that the Blockchain Association could do, or, I don’t know if there are any particular rules around…?

Kristin Smith:

Yes, we’ve thought about trying to do something. You know, we are stewards of the Defend Crypto Fund, which is sort of a separate project that we have oversight of, but the…no, the way we’re structured is we represent the companies and the organizations, and individuals should absolutely, and companies, too, should also support Coin Center. You know, I think that’s a fantastic team. We do a lot of, you know, sharing of information, and strategizing back and forth with them, but they have a different point of view.

They represent the technology, and they’re a great way for individuals who want to get involved to go over there. But yeah, from the industry perspective, that is the Blockchain Association’s point of view. So, very similar missions, but slightly different perspectives, and yeah, they do fantastic work.

Laura Shin:

Okay. So, I know you may not want to make predictions, but I was just curious how you thought this was going to go? Like, what do you think is the most likely outcome of all this?

Kristin Smith:

I mean, we’re going to give it our best shot, to continue to throw sand in the gears and slow this thing down. Based off of how aggressive and how personally involved the treasury secretary is, you know, I think he is going to push this out to a final rule, and I think we’re going to have to go to court. I think that’s the most likely pathway we see.

Laura Shin:

Jeremy?

Jeremy Allaire:

I completely concur.

Laura Shin:

Wow. You know, I’ve never worked in government, but it’s just very interesting how one individual at the top, even when everybody around that person doesn’t agree, how that can force things through. All right, well, so, we will check back and see if you guys were correct. But anyway, okay, well, it’s been so fun having you on the show. Thank you for doing this on a Saturday morning. Where can people learn more about you and this proposed rule?

Kristin Smith:

Well, if you go to the TheBlockchainAssociation.org, and you go to our policy positions page, wallets issues are right at the top, and you can see our report. You can see our letter that we sent over to treasury I guess a week or so ago, when we were in the middle of this lobbying blitz, and we’ve got lots of information there.

Jeremy Allaire:

And I would just say, you know, I communicate publicly on this here and there on Twitter, @JerAllaire, so follow me there, and I’ll have more and more to say about this there as well.

Laura Shin:

And you also have your show, money…

Jeremy Allaire:

That’s right, “The Money Movement.” So, yes, you can tune into “The Money Movement,” you know, YouTube.com/TheMoneyMovement, and certainly we’ll be picking up the conversation there as well.

Laura Shin:

All right, great. Well, thank you both so much for coming on Unchained.

Jeremy Allaire:

Thanks, Laura.

Kristin Smith:

Thanks, Laura.

Laura Shin:

Thanks so much for joining us today. To learn more about Jeremy, Kristin, and this advanced notice of proposed rule-making, check out the show notes for this episode. Don’t forget, you can now watch video recordings of the shows on the Unchained YouTube channel. Go to YouTube.com/c/UnchainedPodcast, and subscribe today.

Unchained is produced by me, Laura Shin, with help from Anthony Yoon, Daniel Nuss, Bossi Baker, Shashank, Josh Durham, and the team at CLK Transcription. Thanks for listening.