FinCEN announces withdrawal of crypto mixing reporting proposal after public concerns

The US Treasury's Financial Crimes Enforcement Network (FinCEN) announced on Oct. 5 that it is withdrawing a reporting proposal for crypto mixing. Crypto mixing uses techniques that obscure a transaction's source, destination or amount. FinCEN is also withdrawing its 2023 finding that international crypto mixing is a class of transactions of primary money laundering concern. The withdrawal covers the proposed recordkeeping and reporting rule. The withdrawal notice lists Oct. 6 as its scheduled Federal Register publication date and makes withdrawal effective upon publication. FinCEN cited commenters' concerns that the expansive definition could discourage legitimate activity and impose a large reporting burden.

The proposal extended beyond dedicated mixing services and would have required financial institutions to report information about covered transactions and their customers. The proposed definition applied regardless of the protocol or service used. The examples included pooling funds, coordinating transactions with code, splitting transfers and routing funds through a series of single-use wallets. The examples also included exchanging between crypto assets and introducing user-initiated delays.

The proposed obligation covered domestic financial institutions that knew, suspected or had reason to suspect that a crypto transaction involved mixing outside the US. The covered transaction had to occur by, through or to the institution and involve mixing within or involving a jurisdiction outside the US. The definition excluded certain internal transaction processes at banks, broker-dealers and money services businesses that retained source and destination records and supplied those records when legally required.

Wallet users' proposed privacy exposure would have come through institutions' reports. The reports would have included wallet addresses, transaction hashes, IP addresses and customer identity information in the institution's possession. Institutions would also have had to document compliance.

FinCEN's existing guidance still subjects covered crypto money transmitters to registration, risk-based anti-money-laundering programs, applicable customer checks, recordkeeping and suspicious activity reporting. Qualifying transfers also remain subject to the Funds Travel Rule. The guidance distinguishes an anonymizing service that accepts and retransmits value from a supplier of anonymizing software. Supplying a tool alone does not make someone a money transmitter, although operating a transmission business can. An unhosted-wallet user paying for goods or services on the user's own behalf is not a money transmitter on that basis.

FinCEN's announcement also covers the separate unhosted-wallet proposal published in December 2020. The Spring 2024 regulatory agenda already listed that proposal as withdrawn on April 12, 2024. The new notice says FinCEN will take no further action on that proposal. FinCEN says it will continue monitoring crypto mixing for money laundering, terrorist financing and other illicit activity, and may take further steps. Financial institutions' existing obligations remain relevant when assessing privacy-related transactions.