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In Crypto-Land, Debate Over Privacy vs. Security – And Regulation – Looms

In the starkest terms, the latest regulatory debate over cryptocurrencies – as with so much else in the financial sphere – comes down to privacy versus security.

And the debate, which has been in place for a long time, will likely be louder than ever, as cryptos strive to be ever more mainstream in consumer and commercial settings.

Late last month, the U.S. Treasury Department, through the U.S. Financial Enforcement Crimes Network (FinCEN), proposed a set of new rules that would boost information gathering activities as cryptos are bought, stored and sold – which, in turn, would ostensibly deter criminals. That information would include reporting the identity of the parties that engage in a range of digital transactions – including those tied to “unhosted wallets.”

Those wallets, generally speaking, are not provided by financial firms, but are instead held on users’ hardware (such as computers or mobile devices), and thus are self-hosted. To get a sense of scope in terms of the allure for criminals: FinCEN reported roughly $119 billion in suspicious activity in relation to convertible virtual currencies (CVC) in 2019. Convertible Virtual Currency (CVC) is increasingly being used to launder money, ply the drug trade or conduct ransomware attacks, among other activities.

Transaction Thresholds

The increased data collection and disclosed activities are aimed at transactions above $10,000 for non-wire transactions and $3,000 for wire transactions (which are the same thresholds for cash activities).

The commentary period ended this month, according to the Federal Register.

And, perhaps not surprisingly, the Treasury rule, as reported in the Financial Times, is eliciting opposition from at least some crypto firms themselves. The FT noted this week that more than 7,000 crypto groups and advocates have filled public comments in response to the proposed rule. Among the critics, as cited by the FT, is Coinbase, the largest crypto exchange operating in the U.S. Separately, Square CEO Jack Dorsey has said the proposal would “leave people out of participating fully in the economy.”

But the standards of record-keeping might be necessary to bring crypto out of the realm of speculation and toward greater use in everyday commerce.

Jeremy Allaire, CEO of financial technology firm Circle, told PYMNTS that digital currencies are ready to make the transition.

“The biggest problem was they are highly volatile, and really still are, because they are more like commodities that people are trading,” he noted.

Over the summer, the U.S. Office of the Comptroller of the Currency announced that banks could hold reserves on behalf of customers who issue stablecoins — which are, of course, a form of crypto, but are pegged to an underlying asset, such as a dollar.

“Regulators are getting their arms around them … the digital asset market is now moving, more and more, into the mainstream of finance, FinTech payments and banking world,” Allaire said. We note that banks, whether handling stablecoins or the more volatile cryptos like bitcoin that do not have the same underlying “pegs,” will want to keep accurate records to ensure not only that they are in compliance, but also that they are not unwittingly being used as funnels to get money to bad actors. Transparency is key here. Individuals and commercial enterprises may turn to banks as part of their own day-to-day crypto ecosystem (the trust factor placed in traditional FIs is widely known).

Yahoo! Finance reported on Tuesday (Jan. 12) that money transmitters such as Western Union and MoneyGram must abide by those same record-keeping requirements that are being proposed for crypto firms (essentially calling for the digital equivalent of the driver’s license that would be presented when sending or receiving cash at a brick-and-mortar agent location).

We contend that if crypto firms – and, by extension, crypto – seek to make inroads against cash, and boost support among key stakeholders in the economy, the playing field should be a level one.

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