Analysis: The US government is going to crack down on money laundering. Is Bitcoin a big risk coming?

Author: Zhong Dai

Due to its natural anonymity, cryptocurrencies can easily escape regulation and become a source of funds for illegal activities, and are therefore considered a thorn in the eyes of many governments that threaten national security. Now, the new U.S. Treasury Secretary Janet Yellen has taken over the baton from Mnuchin and may be about to remove this "thorn in the eyes."

During his tenure, Trump proposed a new set of regulatory rules for the crypto industry, requiring financial services companies to record and hand over the identities and transaction information of some cryptocurrency holders in order to curb money laundering or other illegal activities involving cryptocurrencies.

After Trump lost the election, the Financial Crimes Enforcement Network (FinCEN) under the U.S. Treasury Department continued to promote the set of rules. FinCEN even wanted to shorten the consultation period, which usually takes several months, to 15 days, so as to launch the policy before the Trump administration leaves office at the end of January.

This move triggered a lot of negative comments from the crypto industry, and a cryptocurrency trade organization even filed a lawsuit in court. Under pressure, FinCEN announced a delay at the last minute of the policy release. The new Treasury Secretary Yellen took over the work, and the consultation period for the policy was eventually extended to the end of March 2021.

There are two controversial crypto regulation proposals from FinCEN:

1. Banks and cryptocurrency service companies (including cryptocurrency exchanges) are required to submit reports to the U.S. Treasury Department when customers transfer more than $10,000 worth of cryptocurrency to non-custodial wallets. To put it simply, when a customer wants to withdraw $10,000 in cash, the platform must send a report. The technical difficulty of this move is that most non-custodial wallets are offline, so they are difficult to track.

2. Banks and cryptocurrency service companies are required to keep records when customers send cryptocurrencies worth more than $3,000 to other non-custodial wallets, including the identity of the counterparty. However, for cryptocurrency exchanges, this measure will lead to a significant increase in business costs, and sometimes it is impossible to verify the identity of the counterparty.

This set of policies will threaten the core "decentralization" function of cryptocurrency. Industry insiders analyzed that if this set of regulatory rules is officially implemented, it is likely to cause a sharp drop in cryptocurrency prices.

When it comes to cryptocurrencies, the Biden administration seems to share the same hatred as the Trump administration.

Last week, Yellen said at an online event hosted by The New York Times:

I don't think Bitcoin can become a widely used transaction mechanism. I'm concerned that it's often used for illicit financing.

New U.S. Securities and Exchange Commission (SEC) Chairman Gary Gensler said on Tuesday that the SEC will ensure that the cryptocurrency market is "free from fraud and manipulation" under his supervision.

Coinbase, a crypto exchange seeking to go public, also recently received an administrative subpoena from the U.S. Treasury Department's Office of Foreign Assets Control (OFAC), requiring it to disclose certain transaction information.

According to Bloomberg, many heavyweights on "K Street" ("Lobbying Street", which is home to a large number of think tanks and lobbying groups) and Wall Street are trying to lobby FinCEN to withdraw the new regulations, such as the U.S. Chamber of Commerce, Fidelity, venture capital firm Union Square Ventures, the Winklevoss brothers, co-founders of the Gemini exchange, blockchain protocols, and Coinbase, etc.

The U.S. Chamber of Commerce has said the rule will have "unintended long-term consequences" for the virtual currency industry.