The Financial Crimes Enforcement Network (FinCEN) has put forward a notice of proposed rulemaking that could have significant implications for the crypto mixers, including Bitcoin (BTC)‘s CoinJoin.
If these new rules are implemented, they would classify the mixing of convertible virtual currencies as a “primary money laundering concern,” affecting both dedicated tumblers like Tornado Cash and service providers utilizing basic privacy protocols, Protos reported Monday.
FinCEN’s proposal comes amid increasing concern that malicious actors are exploiting crypto-mixing services to launder illicit funds.
The bureau specifically mentioned groups such as Hamas, Palestinian Islamic Jihad, Russian criminal organizations, and the Democratic People’s Republic of Korea as examples.
The report claimed that recent incidents involving these groups, such as the receipt of Tron-based USDT by Palestinian Islamic Jihad and digital asset donations seized from Hamas, have highlighted the need for increased transparency and compliance measures.
The proposed rules would require financial institutions to maintain records and reports related to transactions involving digital asset tumblers.
Essentially, this means that operators of crypto tumblers would be subject to know-your-customer (KYC), anti-money laundering (AML), and combating the financing of terrorism (CFT) requirements.
FinCEN’s rulemaking is grounded in Section 311 of the USA Patriot Act, which empowers the Treasury Secretary to identify and take special measures against entities classified as “primary money laundering concerns.”
These measures could include prohibiting correspondent or payable-through accounts, verifying the purpose and source of funds for payments, imposing recordkeeping and reporting requirements, and mandating beneficial ownership disclosures.
CoinJoin Services Could Take a Heavy Hit From New Regulation
In August last year, Tornado Cash, a popular mixer, was sanctioned by the Office of Foreign Asset Control (OFAC).
The sanction on Tornado Cash generated some controversy, with some arguing that it unfairly targeted honest users seeking privacy and raising concerns about potential violations of free speech rights.
Nevertheless, the crypto mixer took a heavy hit following the sanction, with the volume of transactions declining significantly.
CoinJoin services, including popular implementations like CoinJoinXT and Wasabi Wallet, could also be affected by FinCEN’s proposed rules.
Operators would potentially face increased obligations to collect, record, process, and disclose extensive data to the government.
These requirements could make it more challenging for users to utilize such services legally.
Meanwhile, FinCEN’s proposed rules will undergo a 90-day public comment period before they are potentially enacted by Treasury Secretary Janet Yellen.
As reported, Bitcoin mobile software wallet Samourai Wallet defended the need for CoinJoins last year, insisting that they are not the same as coin mixers but rather that they provide users with “basic financial privacy” that is not offered by public blockchains.
In simple terms, CoinJoin is a type of collaborative Bitcoin transaction where all parties put in and get out the same amount of crypto, but the addresses are mixed in the transaction making the origin of the coins difficult to trace.