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While supporting efforts to combat criminal misuse, Coinbase argued that the proposed regulations, as they stand, do not strike the right balance.
The popular cryptocurrency exchange Coinbase has expressed its concerns about new rules proposed by the US Treasury Department. These rules would require reporting on all transactions involving cryptocurrency mixing services.
In a letter sent on January 22, 2024, the exchange argued that these broad regulations could violate people’s privacy rights and create unnecessary compliance burdens.
Cryptocurrency mixers, also known as tumblers, blend funds from different sources, making it difficult to trace the original transaction. Regulators believe that while these services can have legitimate privacy uses, they have also become a common tool for criminals to launder money and hide illegal activities.
The proposed rules from the Treasury’s Financial Crimes Enforcement Network (FinCEN) would make it mandatory for cryptocurrency firms to gather and report information about all mixer transactions.
Coinbase’s Major Concerns Related to Crypto Rules
Coinbase cautioned that this requirement for bulk reporting would apply to all mixed cryptocurrency transfers, regardless of whether there is any suspicious activity involved. In its response, the exchange highlighted that it already has important responsibilities under anti-money laundering (AML) laws to monitor and report suspicious activity. However, if mandatory reporting is required for all mixed cryptocurrency transactions, it would create a significant burden and drain resources needed for effective anti-money laundering enforcement.
The argument was also supported by Paul Grewal, chief legal officer of Coinbase, as he believes it is a waste of time and resources.
Second, this rule includes no minimum threshold – all mixing has to be reported, regardless of how small the values. That will just lead to bulk reporting of non-suspicious transactions. Congress has said that kind of data dump is a waste of time and resources. We agree. 3/6
— paulgrewal.eth (@iampaulgrewal) January 22, 2024
Coinbase suggested that the rules should focus only on reporting transactions that internal controls identify as likely illicit. This approach, based on assessing the risk involved, is more practical and respects user privacy rights, according to the company.
Furthermore, Coinbase recommended implementing reasonable monetary thresholds to avoid bulk reporting of smaller transactions that are likely harmless. The exchange also proposed that regulators prioritize recordkeeping over immediate reporting to reduce the exposure of sensitive customer data. The letter states:
“If FinCEN insists on new requirements outside of SARs, it should at least establish a monetary threshold to avoid triggering reporting of an enormous volume of low-value transactions… at most require recordkeeping – not reporting – to avoid the significant privacy and security risks inherent in a new centralized FinCEN repository of highly sensitive information.”
While supporting efforts to combat criminal misuse, the exchange argued that the proposed regulations, as they stand, do not strike the right balance. Requiring disclosure of all mixed cryptocurrency transfers could potentially undermine constitutional privacy protections, as stated in the exchange’s letter.
Coinbase requested that FinCEN offer clearer instructions to differentiate between illegal anonymous transactions and legitimate ones and at the same time protect user privacy. The exchange expressed its willingness to work together with officials to develop sensible and focused policies that achieve law enforcement goals without going too far.
