On Jan. 22, Coinbase submitted a letter in response to a Notice of Proposed Rulemaking (NPRM) to the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN). The letter challenged the notion that crypto mixing services are primarily used for illicit activities and money laundering.
The “minimum threshold” is missing in the new regulations
On Monday evening, Coinbase’s Chief Legal Officer (CLO) Paul Grewal took to social media platform X to elaborate on Coinbase’s views on the U.S. Treasury Department’s proposed rules on crypto mixing.
As Grewal explained in a tweet, the exchange’s stance on regulations is supportive, as long as they are “effective.” However, the company disagrees with the case for “bulk data collection and reporting requirements for all transactions involving any crypto mixing.”
The NPRM “proposes to require domestic financial institutions to implement recordkeeping and reporting requirements with respect to transactions involving the commingling of transferable virtual currencies (CVCs),” the letter states.
In its letter, the CLO highlighted two key points of questioning the NPRM. The first focuses on the lack of a “regulatory gap” that needs to be filled, as exchanges like Coinbase are already required to “investigate and report suspicious mixing activity associated with the platform.”
Grewal also questioned why the U.S. Treasury Department is required to receive reports of non-suspicious activity along with suspicious data.
The second highlighted the lack of a “minimum threshold” in the new proposed rule, which would result in bulk reporting only, “all mixes must be reported, no matter how small the value.” He noted that Coinbase shares Congress’ previous statement that such data dumps waste time and resources.
Grewal believes that the U.S. Treasury should assist exchanges in fulfilling their obligations to report suspicious mixing activity so that the issue of illegal mixing of transferable virtual currencies (CVCs) can be properly focused. Finally, the CLO made some suggestions in the letter that may be helpful if new crypto mixing regulations are needed.
Grewal stressed that “specific guidance is more effective than mandatory wholesale reporting,” a sentiment that appears to align with the thoughts of Bill Hughes, global director of regulatory affairs at ConsenSys. Highlights of the blockchain software company’s letter to the U.S. Treasury, which was submitted on Jan. 22, were also shared on the X platform.
He said:
Today, @Consensys submitted a letter to FinCEN regarding its proposal to have regulated financial intermediaries monitor and report on activity related to crypto token commingling. In short: if you must do this, make it narrow enough not to cause material harm to the ecosystem and its users.
The Importance of Financial Privacy
Some previous crypto mining regulations have led to sanctions and bans on crypto mixing services, preventing U.S. crypto users and businesses from working with them. In particular, in August 2022, the U.S. Treasury Department sanctioned Tornado Cash for allegedly failing to "implement effective controls" to prevent it from laundering money for malicious cyber actors, leading to the blacklisting of the service and the arrest of one of its developers.
Although crypto mixing services can be used for illegal activities, just like any other tool or asset, the main purpose of such tools is to help users maintain their privacy in crypto transactions and make them more difficult to trace.
These tools can help protect crypto users, improve their security, and guard against potential malicious parties trying to track users’ transaction histories.
There are many reasons why users might want to remain anonymous. However, as Coinbase’s letter states, “there is nothing fishy or illegal in the desire to gain some financial privacy from the world.”
