Mixed Controversy: Coinbase Sends Letter to U.S. Treasury Department Opposing Crypto Regulations

On January 22, Coinbase submitted a letter in response to a Notice of Proposed Rulemaking (NPRM) to the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN). The letter challenged the notion that crypto hybrid services are primarily used for illegal activities and money laundering.

Missing “Minimum Thresholds” in the New Rule

On Monday night, Coinbase’s Chief Legal Officer (CLO) Paul Grewal took to social media platform X to address Coinbase’s views on the U.S. Treasury Department’s proposed rule on crypto-mixing.

As Grewal explained in the tweet, the exchange’s position on the regulations is supportive as long as they are “effective.” However, the company does not agree with the “bulk data collection and reporting requirements for all transactions involving any crypto-mixing.”

The letter states that the NPRM “proposes to require domestic financial institutions to implement recordkeeping and reporting requirements for transactions involving a mix of transferable virtual currencies (CVCs).”

The CLO highlighted two key points in the letter that challenge the NPRM. The first focuses on the lack of “regulatory gaps” that need to be filled, as exchanges like Coinbase are already required to “investigate and report suspicious commingling activity associated with the platform.”

Grewal also questioned why the U.S. Department of the Treasury is required to receive reports of non-suspicious activity along with suspicious data.

The second highlighted the lack of a “minimum threshold” in the new proposed rule that would only result in bulk reporting, where “all commingling must be reported, no matter how small the value”. He noted that Coinbase agrees with previous statements by Congress that such data dumps are a waste of time and resources.

Grewal argues that the U.S. Treasury should assist exchanges in meeting their obligations to report suspicious commingling activity in order to properly focus on illegal commingling of transferable virtual currencies (CVCs). Finally, the CLO made a number of recommendations in its letter that may be helpful if new crypto-mixing regulatory rules are needed.Litecoin DOGE Miner Asic

Grewal emphasized that “specific guidance is more effective than mandatory bulk reporting,” a view that seems to echo the thoughts of Bill Hughes, ConsenSys’ director of global regulatory affairs. Highlights of the blockchain software company’s Jan. 22 letter to the U.S. Treasury Department were also shared on the X platform.

He said:

Today, @Consensys submitted a letter to FinCEN regarding its proposal to have regulated financial intermediaries monitor and report on activities related to the mixing of crypto tokens. In short: If this must be done, then please make it narrow enough not to cause material harm to the ecosystem and its users.

The Importance of Financial Privacy

A number of prior crypto mining regulations have resulted in sanctions and bans on crypto-mixing services, preventing U.S. crypto users and businesses from working with them. In particular, in August 2022, the U.S. Department of the Treasury sanctioned Tornado Cash for allegedly failing to “implement effective controls” to prevent it from laundering money for malicious cyber actors, leading to the blacklisting of the service and the arrest of one of its developers.Bitmain Miner

While crypto hybrid services can be used for illegal activities, just like any other tool or asset, the main purpose of such tools is to help users protect their privacy in crypto transactions and make them harder to trace.

These tools can help protect crypto users, increase their security, and guard against potentially malicious parties attempting to track a user’s transaction history.

There are many reasons to explain the motivation behind users’ desire to remain anonymous. However, as Coinbase’s letter states, “there is nothing suspicious or illegal in the desire to gain some financial privacy from the world.”