A Risk to Financial Privacy: Unpacking FinCEN’s New Rule Proposal

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In a world where data is the new oil, privacy is a luxury few can afford. The Financial Crimes Enforcement Network (FinCEN) is proposing new rules that would significantly encroach on the privacy of Bitcoin and crypto users in the US and could, in fact, threaten the entire existence of companies doing business in the industry. The proposal aims to make sweeping changes to how financial entities, from banks to Bitcoin and crypto services, handle information related to transactions involving “mixing.” Mixing is typically defined roughly as a process used to obfuscate the origins of cryptocurrency funds. The biggest problem in FinCEN’s new proposal is how they define “mixing,” which is to say very broadly.

FinCEN’s proposal is breathtaking in its scope. It requires a myriad of regulated institutions, including Virtual Asset Service Providers (VASPs), to report transactions linked to any mixing activity within 30 days. What’s alarming isn’t just the act itself and the far-reaching definitions of what qualifies as “mixing.”

At first glance, mixing might appear as an attempt to conceal the source of funds. However, according to FinCEN, merely pooling funds from different wallets or using algorithmic code to manage transactions could be categorized as mixing. This overly expansive definition doesn’t just affect traditional crypto activities; it can potentially impact the Lightning Network, a second-layer solution for Bitcoin transactions, and even everyday software and hardware used to handle Bitcoin transactions.

The proposed rules mandate the collection of extensive personal data, from full names to taxpayer identification numbers. This rule isn’t merely bureaucratic red tape; it’s an audacious play at unprecedented surveillance.

Let’s be clear: the fight here isn’t against regulating illegal activities, which is the guise under which the rule change is proposed. It’s against the normalization of mass data collection and invasion of financial privacy. FinCEN claims these changes are necessary to combat activities like money laundering and terrorism, but their argument falls short when evaluating legitimate uses of mixing.

The government’s rationale appears half-baked at best. They cite ample examples of illicit activities that suit their agenda yet claim that data is insufficient for legitimate use cases. Such selective reasoning is not just disingenuous; it’s downright alarming.

The FinCEN proposal may seem like another bureaucratic hurdle, but its implications are profound. As we move towards a future where cryptocurrencies play an increasingly significant role, the battle for financial privacy affects us all. In an age where data privacy is becoming a rare commodity, this proposal should not just be sidestepped; it must be actively challenged.

Byte Federal plans to submit a written comment to the proposed rule change and encourages all Bitcoin and crypto companies to do the same. You can learn more about submitting a comment during the comment period, which is open until January 22, 2024here.

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ohn "John D" Donovan is the dynamic Tech Editor of News Bytes, an authoritative source for the rapidly evolving world of cryptocurrency and blockchain technology. Born in Silicon Valley, California, John's fascination with digital currencies took root during his graduate studies in Information Systems at the University of California, Berkeley.

Upon earning his master's degree, John delved into the frontier of cryptocurrency, drawn by its disruptive potential in the realm of finance.
John's unwavering dedication to illuminating journalism, his deep comprehension of the crypto and blockchain space, and his drive to make these topics approachable for everyone make him a key part of Cryptosphere's mission and an authoritative source for its globally diverse readership.