The Treasury Department has recently issued a notice of proposed rulemaking under the Bank Secrecy Act regarding the reporting of convertible virtual currency (“CVC”) mixing.[1]
Perceived Problems with CVC Mixing
The Treasury Department explains that “[t]he public nature of most CVC blockchains, which provide a permanent, recorded history of all previous transactions, make[s] it possible to know someone’s entire financial history on the blockchain.”[2] CVC mixing involves various methods “intended to obfuscate transactional information, allowing users to obscure their connection to the CVC.”[3] These methods include:
- “combining CVC from two or more persons into a single wallet or smart contract and, by pooling or aggregating that CFC, obfuscating the identity of both parties to the transaction by decreasing the probability of determining both intended”;[4]
- “splitting a single transaction from sender to receiver into multiple, smaller transactions, in a manner similar to structuring, to make transactions blend in with other, unrelated transactions on the blockchain occurring at the same time so as to not stand out, thereby decreasing the probability of determining both intended persons for each unique transaction”; [5]
- “coordinat[ing] two or more persons’ transactions together in order to obfuscate the individual unique transactions by providing multiple potential outputs from a coordinated input, decreasing the probability of determining both intended persons for each unique transaction”;[6]
- “use of single-use wallets, addresses, or accounts . . . that have the purpose or effect of obfuscating the source and destination of funds by volumetrically increasing the number of involved transactions, thereby decreasing the probability of determining both intended persons for each unique transaction”;[7]
- “exchanges between two or more types of CVC or other digital assets . . . to facilitate transaction obfuscation by converting one CVC into a different CVC at least once before moving the funds to another service or platform thereby decreasing the probability of determining both intended persons for each unique transaction”;[8] and
- “use of software, programs, or other technology that programmatically carry out predetermined timed-delay of transactions by delaying the output of a transaction in order to make that transaction appear to be unrelated to transactional input, thereby decreasing the probability of determining both intended persons for each unique transaction.”[9]
While the Treasury Department recognizes that there are legitimate reasons for CVC mixing—for example, “privacy enhancement for those who live under repressive regimes or wish to conduct licit transactions anonymously”[10]—the Treasury Department also contends that CVC mixing is used by criminal actors to facilitate or promote money laundering.[11]
The Proposed Rule
The proposed rule would require a covered financial institution to report certain information and maintain certain records regarding a transaction involving CVC by, through, or to the covered financial institution that the covered financial institution knows, suspects, or has reason to suspect involves CVC mixing within or involving a jurisdiction outside of the United States.[12]
What is CVC?
“CVC” would be defined as “a medium of exchange that either has an equivalent value as currency, or acts as a substitute for currency, but lacks legal tender status.”[13] An exception to this last clause would be Bitcoin, which would be included within the definition of CVC even though it has legal tender in at least two jurisdictions.[14]
What is CVC Mixing?
Meanwhile, “CVC mixing” would be “the facilitation of CVC transactions in a manner that obfuscates the source, destination, or amount involved in one or more transactions, regardless of the type of protocol or service used . . . .”[15] This would include (but apparently would not be limited to):
- Pooling or aggregating CVC from multiple persons, wallets, addresses, or accounts;
- Using programmatic or algorithmic code to coordinate, manage, or manipulate the structure of a transaction;
- Splitting CVC for transmittal and transmitting the CVC through a series of independent transactions;
- Creating and using single-use wallets, addresses, or accounts, and sending CVC through such wallets, addresses, or accounts through a series of independent transactions;
- Exchanging between types of CVC or other digital assets; or
- Facilitating user-initiated delays in transactional activity.[16]
What is a CVC Mixer?
Predictably, a “CVC mixer” would mean “any person, group, service, code, tool, or function that facilitates CVC mixing.”[17] Note, however, that the proposed rule covers CVC mixing and thus could apply to CVC users engaged in any of the above activities.[18]
What is a Covered Financial Institution?
The proposed rule would define a “covered financial institution” by reference to the general definition in 31 C.F.R. 1010.100(t), which includes each agent, agency, or office within the United States of any person doing business as a bank, broker/dealer in securities, money services business, telegraph company, casino, card club, person subject to supervision by any federal or state bank supervisory authority, futures commission merchant, introducing merchant in commodities, or mutual fund.[19]
What is a Covered Transaction?
A covered transaction is any deposit, withdrawal, transfer between accounts, exchange of currency, loan, extension of credit, purchase or sale of any stock, bond, certificate of deposit, or other monetary instrument, security, contract of sale of a commodity for future delivery, option on any contract of sale of a commodity for future delivery, option on a commodity, purchase or redemption of any money order, payment or order for any money remittance or transfer, purchase or redemption of casino chips or tokens, or other gaming instruments or any other payment, transfer, or delivery by whatever means effected in CVC by, through, or to a covered financial institution that the covered financial institution knows, suspects, or has reason to suspect involves CVC mixing within or involving a jurisdiction outside the United States.[20]
The requirement that a covered transaction be “in CVC” means that the proposed rule applies only to “covered financial institutions that directly engage with CVC transactions, such as a CVC exchange.”[21] A covered transaction does not “include transactions that are only indirectly related to CVC, such as when a CVC exchanger sends the non-CVC proceeds of a sale of CVC that was previously processed through a CVC mixer from the CVC exchanger’s bank account to the bank account of the customer selling CVC.”[22]
What Would be the Reporting Requirements under the Proposed Rule?
A covered financial institution would be required to report the following information within its possession within 30 days of the initial detection of a covered transaction:
- The amount of any CVC transferred, in both CVC and its U.S. dollar equivalent when the transaction was initiated;
- The CVC type;
- The CVC mixer used, if known;
- CVC wallet address associated with the mixer;
- CVC wallet address associated with the customer;
- Transaction hash;
- Date of transaction;
- The IP addresses and time stamps associated with the covered transaction;
- A narrative; and
- Information regarding the customer associated with the covered transaction, including the customer’s name, date of birth, address, email address, phone number, tax identification or other identifying number, and all accounts from or to which CVC was transferred.[23]
Comments?
The Treasury Department requests comments on the proposed rule by January 22, 2024.
[1] 88 Fed. Reg. 72701 (Oct. 23, 2023) (proposing 33 C.F.R. § 1010.662).
[2] Id. at. 72702.
[3] Id.
[4] Id. at 72703.
[5] Id.
[6] 88 Fed. Reg. 72703.
[7] Id.
[8] Id.
[9] Id.
[10] Id. at 72706.
[11] 88 Fed. Reg. 72704-72706.
[12] Id. at 72722 (Prop. 31 C.F.R. § 1010.662(b)).
[13] Id. (Prop. 31 C.F.R. § 1010.662(a)(1)).
[14] Id. (Prop. 31 C.F.R. § 1010.662(a)(1)). The countries in which Bitcoin currently has legal status are El Salvador and the Central African Republic. See Council on Foreign Relations, What Does the Cryptocurrency Decline Mean for Bitcoin Countries?, https://www.cfr.org/in-brief/what-does-cryptocurrency-decline-mean-bitcoin-countries.
[15] Id. (Prop. 31 C.F.R. § 1010.662(a)(3)(i)).
[16] Id. at 72722 (Prop. 31 C.F.R. § 1010.662(a)(3)(i)).
[17] Id. (Prop. 31 C.F.R. § 1010.662(a)(2)).
[18] Id. at 72703.
[19] Id. (Prop. 31 C.F.R. § 1010.662(a)(4)).
[20] See Id. (Prop. 31 C.F.R. § 1010.662(a)(5)); 31 C.F.R. § 1010.100(bbb)(1).
[21] 88 Fed. Reg. 72710.
[22] Id.
[23] Id. at 72722-72723 (Prop. 31 C.F.R. § 1010.662(b)(1)).
