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FinCEN’s crypto mixing reporting for banks poses ‘disruptive’ risks, lawyers say

fincens-crypto-mixing-reporting-for-banks-poses-disruptive-risks-lawyers-say
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FinCEN’s crypto mixing reporting for banks poses ‘disruptive’ risks, lawyers say

In an op-ed on Bloomberg Law, Steven Merriman and Jim Vivenzio of Perkins Coie raised concerns over FinCEN’s latest move to crack down on crypto mixers.

The Financial Crimes Enforcement Network (FinCEN) is pushing for financial institutions to impose new compliance measures in its latest reporting plan, focusing on crypto transactions involving” convertible virtual currency (CVC) mixing.”

According to fintech compliance lawyers Steven Merriman and Jim Vivenzio, FinCEN’s latest proposal broadens the definition of “mixing” and “mixers,” potentially targeting not only transactions involving traditional mixing services — e.g. sanctioned Tornado Cash — but also “innocuous blockchain transactions,” like converting one form of crypto to another.

“The amount of monitoring and reporting contemplated by FinCEN’s proposal could be disruptive.”

Steven Merriman and Jim Vivenzio

While FinCEN’s primary focus is on the illicit finance risks associated with crypto mixers, the lawyers argue that the proposed reporting extends beyond these operations.

For example, banks may need to report transactions involving crypto mixing features within or involving a jurisdiction outside the U.S. As a result, financial institutions would have to cover various activities such as pooling, algorithmic manipulation, splitting, using single-use wallets, exchanging between types of CVC, and facilitating delays.

“For example, FinCEN calls out facilitating ‘exchanging between types of CVC or other digital assets’ as a form of mixing, which arguably covers any service that lets users exchange one form of CVC for another form of CVC or other digital assets, including centralized exchanges, decentralized exchanges, and non-fungible token marketplaces.”

Steven Merriman and Jim Vivenzio

The lawyers argue that designating a broad class of transactions as a “primary money laundering concern” increases expectations for due diligence by regulators and raises the likelihood of additional criteria for Suspicious Activity Reporting. Public comments on FinCEN’s proposal are being accepted until Jan. 22.

In early December 2023, analysts at blockchain forensic firm TRM Labs said in a blog post that the U.S. Treasury Department is likely to double down on its approach to sanction decentralized finance in 2024, specifically targeting mixing protocols.

Analysts at TRM Labs suggested that Treasury’s efforts might set a precedent for the whole crypto industry as the regulator is set to go after “particular blockchain nodes or networks, rather than requiring that they be a designated person’s property or interest in property.”

In late November 2023, crypto.news reported that the Treasury apparently wants to expand its regulatory power by introducing a “secondary sanctions regime.” Such sanctions would control a company or person within the U.S. financial system as the crypto market makes it possible for any firm “to do business with a sanctioned target,” recently said U.S. foreign trade representative Wally Adeyemo.