The Financial Crimes Enforcement Network (FinCEN) has recently proposed rules that could have significant implications for the world of cryptocurrency mixers, including Bitcoin’s CoinJoin. These new rules, if enacted, would classify the mixing of convertible virtual currencies as a “primary money laundering concern.” This would affect both dedicated tumblers like Tornado Cash, as well as service providers utilizing basic privacy protocols.
Exploitation of Crypto-Mixing Services
There is a growing concern that malicious actors are exploiting crypto-mixing services to launder illicit funds. FinCEN specifically mentions groups such as Hamas, Palestinian Islamic Jihad, Russian criminal organizations, and the Democratic People’s Republic of Korea as examples. Recent incidents involving these groups, such as the receipt of Tron-based USDT by Palestinian Islamic Jihad and digital asset donations seized from Hamas, have highlighted the need for increased transparency and compliance measures.
Increased Regulations on Financial Institutions
The proposed rules would require financial institutions to maintain records and reports related to transactions involving digital asset tumblers. This essentially means that operators of crypto tumblers would be subject to know-your-customer (KYC), anti-money laundering (AML), and combating the financing of terrorism (CFT) requirements. These regulations are grounded in Section 311 of the USA Patriot Act, which gives the Treasury Secretary the power to identify and take special measures against entities classified as “primary money laundering concerns.”
In August of last year, Tornado Cash, a popular mixer, faced sanctions from the Office of Foreign Asset Control (OFAC). This generated controversy, with some arguing that it unfairly targeted honest users seeking privacy and raised concerns about potential violations of free speech rights. Despite the debate, the sanctions had a significant impact on the mixer, resulting in a decline in transaction volume.
FinCEN’s proposed rules may also affect CoinJoin services, including popular implementations like CoinJoinXT and Wasabi Wallet. Operators of these services could potentially face increased obligations to collect, record, process, and disclose extensive data to the government. These requirements could make it more challenging for users to utilize such services legally.
It is important to note that FinCEN’s proposed rules will undergo a 90-day public comment period before potentially being enacted by Treasury Secretary Janet Yellen.
“Bitcoin mixers are not just a tool for money launderers. They are essential for basic financial privacy on the blockchain.” – Samourai Wallet
In simpler terms, CoinJoin is a type of collaborative Bitcoin transaction where all parties input and receive the same amount of crypto, but the addresses are mixed in the transaction, making it difficult to trace the origin of the coins.
