US Treasury Secretary Drops Crypto Bomb Before Leaving Office
Image courtesy of Creative Commons, Stern Matty.

US Treasury Secretary Drops Crypto Bomb Before Leaving Office

Circle CEO Jeremy Allaire calls out US Treasury Secretary Mnuchin, and sheds light on the "midnight rulemaking".
Neither the author, Tim Fries, nor this website, The Tokenist, provide financial advice. Please consult our website policy prior to making financial decisions.

In the interim between the election outcome and inauguration, many outgoing administrations try to leave their lasting mark. This time, US Treasury Secretary Steven Mnuchin takes his mask off as he proposes rules that would severely hamper the maturation of digital assets.

FinCEN Proposal Explained

A month away from inauguration day, Steven Mnuchin proposed last Friday a new set of rules designed to debilitate the growth of an asset-type that many believe stands against the Fed’s money-printing machine. The rules are to be implemented under the guise of closing loopholes, national security, and money laundering, according to Mnuchin’s statement:

“The rule, which applies to financial institutions and is consistent with existing requirements, is intended to protect national security, assist law enforcement, and increase transparency while minimizing impact on responsible innovation,”

Effectively, both crypto exchanges and banks would have to receive a new regulatory burden, while crypto holders would have to relinquish their privacy further:

  • Any unhosted wallets – those that are private and secure – would have to be verified by banks and crypto exchanges, in addition to reporting all transactions above $3,000.
  • New compliance rules for all transactions over $10,000, which would need to be recorded.
  • No structuring of transactions, so multiple incremental transactions under $10,000 but still amounting to $10k would still have to be recorded.

The unhosted-wallet-focused rules were issued by the U.S. Treasury agency, Financial Crimes Enforcement Agency (FinCEN), under “Requirements for Certain Transactions Involving Convertible Virtual Currency or Digital Assets”. Curiously, the proposal has only two weeks for a public comment period, due to concerns of cryptocurrencies being used almost exclusively in ransomware attacks. Just when it seemed we were transitioning out of the Silk Road days, old besmirchment habits reappear.

Foreign Adversaries Serving as an Excuse for the Proposal?

Considering that FinCEN is highlighting the usage of convertible virtual currency (CVC) in evading sanctions and international terrorist financing, there is little doubt as to what entity they are referring to – Iran. At the end of October, Bitcoin achieved a milestone with the help of Iran. Cut off from the world’s financial system, the populous nation was the first one to tweak its legislation so it can fund imports with Bitcoin.

Furthermore, the FinCEN proposal places a heavy focus on hosted vs. unhosted wallet distinction. The former kind obviously refers to crypto exchange wallets that serve more as accounts, given that users relinquish their private keys and, therefore, privacy. Also, even though two biggest cryptocurrencies, Bitcoin and Ethereum, boast transparent blockchain where each transaction can be followed, FinCEN is citing money laundering as one of the key issues that need to be addressed.

It’s as if every attack on Bitcoin that has ever been uttered, is suddenly being dredged out. Moreover, this is happening amid the historic wave of institutional investors, when even Elon Musk is inquiring about the wildly successful MicroStrategy Bitcoin investment:

“Are such large transactions even possible?”

The question is, does the outgoing Treasury Secretary hold a different agenda, as appears to be the case?

Jeremy Allaire Responds to the FinCEN Proposal

Jeremy Allaire, the co-founder and CEO of Circle platform, with its USD Coin (USDC) capped at $3.3 billion, opened up a can of worms with his hot take on the issue. In the 20-part tweet thread, he framed the proposal as a watered-down assault on cryptocurrency, aimed to decrease its viability and adoption rate:

“2/20 This specific effort has been a personal mission for Secretary Mnuchin for multiple years. His own view is far more aggressive than the proposed rule put forward.”

In summary, Allaire suggests that the proposal emerged from the following goings-on behind the scenes:

  • Steven Mnuchin’s personal hostility toward CVCs as a concept. 
  • The proposal came as a surprise to even insiders, originally with drastically shorter public notice than 15 days (which will be even shorter given the holidays).
  • Backlash ramped up immediately upon the first inkling of the proposal, resulting in a standard public notice period.
  • Treasury personnel, and other intelligence security employees, are supposedly not on board with Mnuchin’s plan.
  • The proposed rules would create an unprecedented, real-time surveillance environment that goes beyond even the existing banking system.

With all things considered, it is a miracle such rules did not emerge sooner. The world’s central banks are on track to develop Central Bank Digital Currencies (CBDCs) within a few short years. In the meantime, Bitcoin serves as a powerful normalization force toward digital assets, just in time until FedCoins are to become a reality. 

Allaire’s view suggests the Federal government has many tricks up its sleeve to stifle blockchain innovation, and hijack its momentum with CBDCs. However, President-elect Biden could choose Andrew Yang, a long-standing Bitcoin fan, as his top pick for the position of Secretary of Commerce. Time will tell what kind of policy Yang would be able to exert or resist, should he land the position.

If the United States federal government decides to make Bitcoin less private than paper cash, do you think other nations would follow suit? Let us know in the comments below.

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