How FinCEN May Be Violating Your Rights

Dec 6

A call to action against FINCEN proposal 2023-0016A

Recently the Financial Crimes Enforcement Network (FinCEN) has proposed FINCEN-2023-0016. This robust policy proposal is a gross over-reach of your freedoms as an American, and this analysis intends to document where, how, and what you can do about it.

Let’s start with the last part first: What can you do? As you read this review, you can comment on the proposal until January 22, 2024. The research in this document isn’t an exhaustive list, but it will definitely provide a framework for you to add comments into the Federal Register. This is vital: post a comment! Don’t just read this document and NOT take action. Getting the government you deserve is about taking action. So find a section you are passionate about, and post a comment on the federal register about that.

What can you address in the register? Well, for starters FinCEN had a list of questions that accompanied the proposal. I have provided a response to all of those questions here. You can follow that link and take our work, fork it, or develop your own response and submit it into the register for the questions.

Next, I’ve done an overall analysis of the proposal by addressing seven different sections of where FinCEN is attempting to infringe on your rights. From violating the sanctity of your personal information and restricting your financial autonomy, to stifling your freedom of speech and association, I’ll unpack each area. This is about shining a light on the fine print, connecting the dots, and equipping you with the knowledge you need to stand up against these intrusive measures. It’s time to draw a line in the sand and protect the liberties that define us.

Finally, Of numerous concerns found throughout the FinCEN proposal, I want to highlight upfront the concerning definition of Anonymity-Enhanced Convertible Virtual Currencies (AECVCs). Notably, this definition encompasses a broad range of technologies, not just those explicitly designed for privacy purposes. Such an expansive interpretation risks including any technology with a feature that could be considered privacy-enhancing, even if privacy is not its sole purpose. This approach stands in stark contrast to existing legal norms, where only technologies primarily aimed at ensuring anonymity are scrutinized. The inherent danger of this overgeneralization is that it potentially brings a wide array of common financial tools under regulatory scrutiny, potentially stifling innovation and infringing on the established rights of free and anonymous speech, as protected under cases like McIntyre v. Ohio Elections Commission. This is just one of many examples you’ll see throughout the proposal. So don’t hesitate to find many other examples and get them posted into the federal register. Take action!

An Overview of the FinCEN Proposal & Its Breaches

Section 1: Unreasonable Searches and Seizures

FinCEN's latest proposal, articulated in the document FINCEN-2023-0016, is a glaring example of governmental intrusion, blatantly disregarding the protections laid out in the Fourth Amendment against unreasonable searches and seizures.

Reporting Requirements: A Stark Overreach: The proposal's demand for banks and MSBs to report transactions involving convertible virtual currency (CVC) and legal tender digital assets (LTDA) is a stark overreach. The proposal cites the United States v. Miller, which considered bank records as outside the Fourth Amendment’s protection, FinCEN is attempting to justify its invasive practices. However, this proposal completely overlooks the significant shift in legal thinking marked by Carpenter v. United States, a case that recognized the sensitive nature of personal data. Here, the government’s desire to curb financial crimes does not, and should not, translate into unrestricted access to individual transaction data.

Assault on Anonymity and Autonomy: The prohibition on anonymity enhanced CVCs is a direct assault on individual autonomy, acting as a potential infringement of Fourth Amendment protections if assets are seized or unduly burdened without proper justification. This part of the proposal is particularly alarming, as it appears to disregard the constitutional safeguard against unreasonable governmental intrusion.

Overgeneralized Recordkeeping: The expansiveness of the recordkeeping and reporting requirements in this proposal is a clear violation of the Fourth Amendment’s particularity clause. This proposal goes beyond what is necessary, delving into overgeneralized mandates that are a stark deviation from constitutional standards.

Invasive Identity Verification: The proposal’s requirement for “Additional Customer Identity Verification Measures for Transactions Involving Unhosted Wallets” is an invasive practice, arguably constituting an unreasonable search. This intrusion into personal privacy is a direct challenge to the Fourth Amendment’s protections.

Ambiguous Reporting and Harsh Penalties: The vagueness in the reporting requirements and the severity of the penalties for non-compliance outlined in the proposal underscore its unreasonableness. The Fourth Amendment demands clarity and fairness, both of which are conspicuously absent from this policy.

Preserving Constitutional Safeguards: The Fourth Amendment serves as a crucial safeguard, stemming from the historical abuses of power by the British Crown. Katz v. United States redefined the landscape, emphasizing the importance of protecting individual privacy and establishing the “reasonable expectation of privacy” doctrine. The advent of digital financial systems complicates matters, as seen in cases like Smith v. Maryland, which introduced the third-party doctrine. However, the Carpenter case has challenged this doctrine, especially when it comes to sensitive personal data.

Section 2: Freedom of Speech and Association

The FinCEN’s proposal calls for Banks and Money Service Businesses to report specific transactional information related to Convertible Virtual Currency (CVC) and Legal Tender Digital Assets (LTDA) is potentially a precarious slope towards infringing free expression. Recognized as a form of expression in landmark cases such as Citizens United v. Federal Election Commission, financial transactions form an integral part of communicative liberty. This demand for government monitoring, while aimed at ensuring financial safety, might inadvertently dampen the vigor of financial expression, risking a chilling effect that runs contrary to First Amendment values.

Anonymity at Risk: Assessing the Prohibition on AECVCs: The explicit prohibition on Anonymity-Enhanced Convertible Virtual Currencies (AECVC) stands as a potential threat to anonymous speech—a right upheld by the judiciary in cases like McIntyre v. Ohio Elections Commission. Here, FinCEN’s proposal risks being perceived as an encroachment on the protective umbrella of the First Amendment, challenging the established norms of free and anonymous discourse.

Association and Privacy: Delving into Recordkeeping and Identity Verification: The detailed recordkeeping and reporting demands, alongside the additional customer identity verification requirements for unhosted wallets, not only carry financial implications but also present potential threats to the freedom of association. History reflects the judiciary’s stance on protecting associative freedom, as seen in NAACP v. Alabama, drawing a clear line against unwarranted state intrusion. The proposal's requirements, if interpreted as a tool to uncover associations or memberships, risk being contested on the grounds of First Amendment protections.

The Ambiguity Conundrum: Reporting Requirements and Enhanced Penalties: FinCEN's proposed reporting requirements and the amplified penalties for non-compliance bring forth concerns of overbreadth and vagueness—a state of affairs inconsistent with First Amendment demands for clarity and precision. Broadrick v. Oklahoma serves as a reminder that policies with potential to quell a substantial amount of protected speech must be scrutinized and questioned.

Legal Foundations and Historical Perspective: Ensuring a Balanced Approach: The First Amendment, adopted in 1791, encapsulates the nation’s commitment to safeguarding individual liberties, striking a delicate balance between personal freedoms and societal needs. Landmark cases such as Schenck v. United States and Citizens United v. FEC have shaped the contours of speech and association freedoms, emphasizing the need for protective measures while also acknowledging the state's role in maintaining order and security.

Section 3: Right to Financial Privacy

Through this lens, we uncover the nuanced interplay between governmental oversight and individual liberties, providing a comprehensive analysis of the proposal's potential overreach and the existing legal safeguards that fortify citizens' financial privacy.

Autonomy and Control Under Siege: The proposal's requirement for banks and Money Service Businesses to report transactions involving Convertible Virtual Currency (CVC) or Legal Tender Digital Assets (LTDA) raises serious concerns about individual autonomy and control. The Supreme Court, in its jurisprudence, has consistently upheld the right of individuals to maintain control over their personal financial information. This is particularly significant when policies necessitate extensive disclosure of financial transactions involving cryptocurrencies, as it may infringe upon these rights.

In the realm of the Fourth Amendment, protections against unreasonable searches and seizures extend to financial records. While the United States v. Miller established that bank records were not protected by the Fourth Amendment, the subsequent enactment of the Right to Financial Privacy Act of 1978 underscored a legislative commitment to safeguarding financial records from unwarranted governmental access.

The Erosion of Financial Anonymity: The proposal’s stark prohibition on the use of Anonymity-Enhanced Convertible Virtual Currencies (AECVC) directly targets financial anonymity. The Fourth Amendment’s zone of privacy in personal financial matters offers a shield, albeit not explicitly articulated, against undue governmental intrusion. The right to engage in private financial transactions, while not absolute, is a critical component of financial privacy.

The imposition of recordkeeping and reporting requirements on transactions involving CVC or LTDA, as well as the additional customer identity verification measures for transactions involving unhosted wallets, further threatens this veil of financial anonymity. The First Amendment’s protection of anonymous speech and association, as highlighted in McIntyre v. Ohio Elections Commission, extends to financial transactions linked to expressive activities. This constitutional safeguard becomes particularly relevant when balancing the right to financial privacy with governmental interests in preventing illicit activities.

Cryptocurrencies and mixing services, which offer a degree of financial anonymity, navigate the precarious balance between privacy and transparency. While Know Your Customer (KYC) and Anti-Money Laundering (AML) laws serve critical law enforcement and national security purposes, they also raise significant privacy concerns and potential for overreach.

Safeguarding the Sanctity of Financial Records: The clarification of reporting requirements and the enhancement of penalties for non-compliance in the FinCEN proposal directly impact the protection of financial records. The Right to Financial Privacy Act of 1978 stands as a legislative bulwark, requiring federal agencies to provide notice and an opportunity to object before accessing financial records held by institutions.

In this context, the proposal’s enhancement of penalties could be perceived as a coercive measure, compelling financial institutions to potentially over-comply at the expense of customer privacy. This not only undermines the protection of financial records but also raises constitutional alarms about the right to financial privacy.

Section 4: Due Process Rights

FinCEN continues its streak of overreach as it ventures into the realm of due process rights, a cornerstone of American freedom and justice. This section meticulously dissects the six questionable areas of the proposal, comparing them to established case law, to showcase the blatant disregard for due process.

Procedural Due Process

In Bank Reporting Overreach: The call for banks and Money Service Businesses to report specific information linked to transactions involving CVC or LTDA screams overreach. In echoing the procedural due process rights to notice and a chance to be heard, established by Mullane v. Central Hanover Bank & Trust Co., the proposal falls short. It misses the mark on ensuring that individuals are adequately informed and given a real opportunity to challenge the information being reported.

Burdensome Recordkeeping and Transparency Lapses: Demanding onerous recordkeeping and reporting requirements for certain CVC or LTDA transactions, the policy crosses the line. The procedural due process is not just a legal formality; it is a safeguard against unfairness and arbitrary governance. Here, we find the proposal lacking in offering clear, fair, and reasonable processes for compliance, echoing the concerns highlighted in cases like In re Murchison.

Questionable Identity Verification Standards: By imposing additional customer identity verification measures for transactions involving unhosted wallets, the policy raises red flags. Where is the fairness? Where is the opportunity for affected individuals to challenge adverse decisions? These are procedural due process rights, fundamental to our legal system, that this policy seems to overlook.

Substantive Due Process

A Fortress Breached: An Assault on Financial Autonomy: The outright prohibition on the use of AECVC is more than just a regulatory measure; it is an attack on individual autonomy and potentially, a breach of substantive due process rights. Drawing parallels with Roe v. Wade, the protection against arbitrary government action is paramount, and this part of the policy seems to trample on this protection.

Excessive Penalties and the Scale of Justice: Enhancing penalties for failures to comply with the proposal’s demands does not equate to justice. Instead, it raises substantive due process concerns, questioning the proportionality of the punishment and its alignment with the offense. The policy needs to reflect on the lessons from cases like Planned Parenthood v. Casey, ensuring that penalties are just, fair, and not overly punitive.

Fair Notice and the Vagueness Dilemma

A Lack of Clarity in Reporting: The policy's attempt to clarify the requirements for reporting transactions involving CVC or LTDA is shrouded in vagueness. This raises due process concerns, as fair notice is compromised. Individuals and institutions are left in the dark, struggling to grasp what is expected of them, a situation that flies in the face of due process principles.

Preserving the Pillars of Justice: The due process rights, both procedural and substantive, are pillars of the American legal system. They ensure that individuals are treated fairly, justly, and with dignity. As this analysis has shown, FinCEN's Policy Proposal 2023-0016 falls short in upholding these rights. It is a stark reminder that vigilance is needed, and that policies, no matter how well-intentioned, must be scrutinized and held to the highest standards of justice and fairness. This is not just a regulatory issue; it is a matter of preserving the fundamental rights that define our democracy.

Section 5: Right to be Secure in Personal Information

The right to be secure in personal information is under a severe threat. The sanctity of personal information, a bastion of individual freedom and privacy, is jeopardized by this proposal's far-reaching implications.

Data Collection and Storage

Reporting Information on Transactions Involving CVC or LTDA: The requirement for Banks and Money Service Businesses to report certain information related to transactions involving Convertible Virtual Currency (CVC) or Legal Tender Digital Assets (LTDA) raises the specter of governmental overreach. “Requiring Banks and Money Service Businesses to Report Certain Information Related to Transactions Involving Convertible Virtual Currency (CVC) or Legal Tender Digital Assets (LTDA)” inherently risks infringing upon the right to be secure in personal information. The storied annals of legal precedent, including the Fourth Amendment, serve as bulwarks against such overreach. The Fourth Amendment’s assurance against unreasonable searches and seizures and its prerequisite of judicial sanction and probable cause for any warrant uphold this right, as seen in Katz v. United States, where the Supreme Court ruled a warrant necessary to wiretap a public payphone. This example crystallizes the principle that personal information, encapsulated in one’s private communications, demands protection.

Onerous Recordkeeping and Reporting: “Imposing Recordkeeping and Reporting Requirements on Certain Transactions Involving CVC or LTDA” brings us to another precarious ledge. This overzealous data collection could lead to vast reservoirs of personal information, necessitating robust data security, a right underscored by the Privacy Act of 1974 and the Electronic Communications Privacy Act of 1986. These acts collectively fortify the individual’s sovereignty over their personal data against unwarranted intrusion.

Privacy and Anonymity

Eroding Anonymity Through Additional Verification: The mandate for “Additional Customer Identity Verification Measures for Transactions Involving Unhosted Wallets” is a direct affront to privacy and anonymity. This requirement transgresses on the First Amendment’s sanctuary for anonymous speech, as illustrated by McIntyre v. Ohio Elections Commission. In McIntyre, the Supreme Court safeguarded the right to disseminate anonymous campaign literature, a principle directly translatable to the preservation of anonymity in financial transactions.

A Direct Assault on Anonymity-Enhanced Currencies: The “Prohibition on the Use of Anonymity-Enhanced Convertible Virtual Currencies (AECVC)” is nothing short of a legislative bulldozer through the edifice of privacy. This outright ban on AECVCs targets the very core of anonymous transactions, undermining the constitutional guarantee to freedom of association, a principle inextricably linked to the freedom to engage in private, anonymous transactions.

Security and Protection of Personal Information

Demanding Accountability in Data Protection: “Enhanced Penalties for Failure to Comply with Reporting, Recordkeeping, and Verification Requirements” while ostensibly a deterrent for non-compliance, necessitates a reciprocal responsibility for data protection. The obligation to shield personal information from unauthorized access and breaches is paramount, drawing from the vast reservoir of statutory protections and constitutional safeguards.

Section 6: Right to Non-Discrimination

Through a closer examination, the covert biases embedded within this policy become glaringly apparent, calling into question the very foundations of equality upon which our society stands.

            Disproportionate Demands and Unintended Victims

            Targeting the Tech-Savvy: With its demands for banks and MSBs to rigorously report transactions involving CVC and LTDA, the policy inadvertently casts a wider net than intended, ensnaring specific demographics more likely to engage with virtual currencies. This, much like the invasive nature of the proposal discussed in Section 1, is a clear divergence from constitutional principles, potentially leading to discriminatory practices.

Barrier to Entry: A Blow to Small Entities: The imposition of stringent recordkeeping and reporting requirements creates an uneven playing field, placing insurmountable barriers before smaller businesses and individual entrepreneurs. Here, the echoes of Fourth Amendment concerns are undeniable, as marginalized communities find themselves disproportionately disadvantaged, reminiscent of an unwarranted intrusion.

Infringing Privacy, Ignoring Anonymity

Unwarranted Scrutiny - Stripping Anonymity: In its insistence on additional customer identity verification for transactions involving unhosted wallets, the proposal strikes at the very heart of privacy and anonymity. This move, much like the overreach discussed in Section 1, presents a clear violation, disproportionately impacting vulnerable populations and furthering discriminatory practices.

Prohibiting Privacy Tools - A Selective Ban: The outright prohibition of AECVCs reveals a startling bias, undermining the security and privacy of communities that depend on these tools. Here, we see a direct parallel with the Fourth Amendment concerns, as the proposal selectively targets and discriminates, disregarding the sanctity of individual autonomy.

Penalties and Power: A Dangerous Imbalance

Heavy-Handed Penalties: Crushing the Small Players: The proposal’s call for enhanced penalties for non-compliance is a disproportionate response, threatening to obliterate smaller entities and individuals lacking the necessary resources. This imbalance of power, much like the constitutional concerns raised in Section 1, is a blatant disregard for fairness, exacerbating the potential for discriminatory outcomes.

Section 7: Access to Financial Services

Ensuring Equal Access: Challenging the Status Quo

Mandating Reporting - Widening the Gap: The proposal’s requirement for banks and MSBs to report transactions involving CVC and LTDA could lead to disparities in service access. This mirrors concerns raised in previous sections, potentially fostering unequal access to financial services and sidelining those reliant on virtual assets.

Judicial Reference: The Community Reinvestment Act (CRA) of 1977 emphasizes equitable access, a standard that this proposal seems to challenge.

Barrier to Entry for Small Enterprises: A Disproportionate Impact

Recordkeeping Burdens - Threat to Diversity: The imposition of recordkeeping and reporting mandates on CVC or LTDA transactions disproportionately affects small businesses. This not only constrains consumer access to diverse financial services but also raises questions similar to those discussed earlier regarding operational feasibility for smaller entities.

Judicial Reference: The Equal Credit Opportunity Act (ECOA) of 1974, which guards against discriminatory practices, provides a legal framework to assess these impacts.

Infringing Privacy in the Guise of Security

Additional Verification - A Privacy Concern: Requiring extra identity verification for transactions involving unhosted wallets impinges upon privacy rights. This approach, akin to the issues raised in previous sections, restricts financial services access, especially for those valuing anonymity.

Judicial Reference: The Supreme Court’s decision in San Antonio Independent School District v. Rodriguez, though not directly related to financial services, reflects the importance of safeguarding essential resource access.

Financial Inclusion: Overlooked Marginalized Groups

Banning AECVCs - Deepening Disparities: The outright ban on AECVCs risks worsening financial inequalities and further excluding unbanked and underbanked communities. This exacerbation of financial disparities is reminiscent of the concerns of disproportionate impact highlighted earlier.

Judicial Reference: United States v. Paradise, a Supreme Court ruling, underscores the importance of remedying policies that hinder financial inclusivity.

Consumer Trust and Security at Stake

Enhanced Penalties - Eroding Trust: The proposal’s call for strengthened penalties for non-compliance risks undermining consumer confidence in financial institutions, potentially limiting access to secure services. This echoes the overarching theme of trust and security concerns raised in previous sections.

Judicial Reference: Legal precedents and frameworks, such as the CRA and ECOA, provide a basis for challenging practices that compromise consumer trust.

Conclusion

            This document provides a critical examination of the Financial Crimes Enforcement Network’s (FinCEN) recent proposal 2023-016, pinpointing potential infringements on individual rights and freedoms. The analysis delves deep into the implications of the proposal on freedom of expression, anonymity, privacy, and association, drawing from a wealth of legal precedents to underscore the gravity of these concerns.

         Highlighting the precarious balance between ensuring financial security and upholding constitutional liberties, it is argued that FinCEN’s proposal tips the scales unfavorably. The document emphasizes that, while the demand for transparency is grounded in the aim of ensuring financial security, it inadvertently dampens financial expression and erodes the anonymity and privacy integral to a free society.

         Concerns are also raised about the proposal’s potential to exacerbate financial disparities, marginalize vulnerable communities, and erode consumer trust in financial institutions. The document calls for a critical reevaluation of the proposal, urging policymakers to contemplate its far-reaching implications and to seek a balanced approach that protects individual rights while addressing financial crimes.

         Most importantly, this document serves as a call to action, encouraging engagement with the policymaking process, voicing of concerns, and advocating for a framework that upholds liberty, ensuring a future where financial integrity and individual freedoms coexist harmoniously.

Questions Proposed by FinCEN & Freedom Seeking Responses

A. CVC Mixing As a Class of Transactions of Primary Money Laundering Concern

Question 1: Is the scope of the recordkeeping requirement appropriate?

Response to Question 1:

1. Authority: Legal and Regulatory Perspective

Overreach Beyond Statutory Authority: While FinCEN's authority under the Bank Secrecy Act (BSA) and the USA PATRIOT Act is broad, it is not unlimited. The proposed regulation is argued as an overextension of this authority, especially if it can be demonstrated that the rules go beyond the scope of what Congress intended in these statutes. In cases like Utility Air Regulatory Group v. EPA (2014), the U.S. Supreme Court has curtailed agency action that significantly expands its regulatory domain beyond what Congress has explicitly authorized.

Violation of the Non-Delegation Doctrine: The non-delegation doctrine, rooted in the U.S. Constitution, posits that Congress cannot delegate its legislative powers to other branches or entities without clear and specific guidelines. If it can be argued that the FinCEN proposal is acting on a vague or overly broad delegation of authority, it may be challenged on these grounds, as seen in cases like Gundy v. United States (2019).

Arbitrary and Capricious Standard under APA: Under the Administrative Procedure Act (APA), agency actions that are arbitrary, capricious, or an abuse of discretion can be invalidated. If the proposal does not adequately consider the impact on legitimate financial activities or lacks sufficient evidence to justify its broad categorization of CVC mixing transactions, it could be seen as failing the "arbitrary and capricious" test.

Fourth Amendment Concerns: The proposal may face challenges for potentially infringing on the Fourth Amendment's protections against unreasonable searches and seizures. If the regulation mandates overly broad surveillance or reporting requirements without adequate safeguards, it could be deemed unconstitutional. This argument draws on precedents like Carpenter v. United States (2018), which recognized heightened privacy protections for digital data.

Due Process Concerns: Under the Fifth Amendment, due process rights may be implicated if the regulation adversely affects the property or liberty interests of individuals or businesses without providing adequate notice and an opportunity to be heard. The regulation could be challenged if it is seen as unduly punitive or lacking in procedural fairness, as discussed in cases like Mathews v. Eldridge (1976).

Exceeding Bounds of Reasonable Interpretation: If the regulation is based on a strained or unreasonable interpretation of the BSA or the PATRIOT Act, it may not withstand judicial scrutiny. The Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc. (1984) decision allows courts to defer to agency interpretations of ambiguous statutes, but this deference has limits, especially when an agency's interpretation is seen as unreasonable or inconsistent with the statutory language.

International Law and Extraterritoriality: The proposal's potential extraterritorial reach could also be a point of legal contention. U.S. laws are generally presumed not to apply outside the national borders unless explicitly stated. The regulation could be challenged on grounds of extraterritorial overreach, particularly in regulating international financial transactions involving CVCs.

2. Necessity: Practical and Ethical Considerations

Effectiveness for AML/CFT vs. Burden: The effectiveness of the proposed recordkeeping in enhancing AML/CFT efforts should be weighed against the burden it places on financial institutions. FinCEN’s estimate of an average annual burden of 98 hours per institution seems to overlook the complexity and volume of transactions involved, potentially underestimating the true burden.

Impact on Innovation and Use: Overly stringent recordkeeping could discourage legitimate use of CVCs and stifle innovation, particularly if smaller entities face disproportionately high costs relative to their size and operational budgets.

3. Technical Feasibility: Blockchain Technology and Implementation Challenges

Technical Limitations of Blockchain and CVC Systems: Blockchain, the underlying technology for most CVCs, is designed to ensure transactional transparency and immutability. However, the nature of blockchain technology does not inherently accommodate the kind of detailed personal data collection proposed by FinCEN. The pseudonymous nature of blockchain transactions makes it technically challenging to comply with traditional record-keeping standards. The proposed rules seem to disregard the technical nuances and limitations of blockchain technology, making compliance technically impractical.

Impracticality of Enforcing Compliance Across Decentralized Networks: CVCs operate on decentralized networks, lacking a central authority or entity that can enforce comprehensive record-keeping. This decentralization is a fundamental feature of cryptocurrencies, making it technically infeasible for any single entity to ensure compliance with the proposed extensive record-keeping requirements.

Overburdening of CVC Users and Businesses: The proposed regulation imposes an onerous burden on all participants in the CVC ecosystem, including individual users, exchanges, and wallet providers. This goes beyond reasonable record-keeping and into the realm of exhaustive surveillance, requiring the collection and maintenance of vast amounts of data, which may be technically unfeasible given the current infrastructure and privacy-preserving nature of many CVC transactions.

Challenges in Identifying Participants in CVC Transactions: Unlike traditional financial systems, CVC transactions often involve pseudonymous parties without clear identification. The proposal's requirement for detailed record-keeping of these parties’ identities and transaction details assumes a level of technical capability that may not exist, or if it does, significantly compromises the privacy and security principles of CVC systems.

Data Privacy Concerns and Compliance with Privacy Laws: The extent of data collection and retention proposed could conflict with existing data privacy laws and principles, both domestically (e.g., California Consumer Privacy Act) and internationally (e.g., GDPR). Compliance with the proposal could, therefore, place CVC businesses in a technically untenable position of conflicting legal obligations.

Potential for Technological Workarounds and Evasion: Given the rapidly evolving nature of blockchain and CVC technologies, overly stringent record-keeping requirements may spur the development of technological workarounds or lead participants to migrate to more privacy-focused cryptocurrencies or platforms, thereby undermining the effectiveness of the regulation.

Question 2: What impact would the proposed rule have on blockchain privacy or pseudonymity, noting that filings reported to FinCEN are not publicly releasable and the similarities of this proposal to the recordkeeping and reporting requirements of transactions using the traditional financial system, such as with wire or Automated Clearing House (ACH) transactions?

Response to Question 2:

Fourth Amendment Concerns: The proposal's impact on blockchain privacy must be scrutinized under the Fourth Amendment, which protects against unreasonable searches and seizures. In cases like Carpenter v. United States (2018), the Supreme Court emphasized the importance of protecting digital privacy. The proposed FinCEN rule, by potentially requiring detailed transaction records, could be argued as akin to a digital search, infringing on the reasonable expectation of privacy that users of blockchain technology possess.

Comparison with Traditional Financial Systems: While FinCEN draws parallels between its proposal and traditional financial systems like wire or ACH transactions, such comparisons may be legally flawed. The Supreme Court has recognized in cases like United States v. Jones (2012) that newer technologies might warrant stronger privacy protections. The unique, decentralized nature of blockchain technology could warrant a different legal approach than traditional financial systems.

Due Process Concerns under the Fifth Amendment: The proposed rule could be challenged for potentially violating due process rights, especially in terms of overbreadth and vagueness. In a precedent like Grayned v. City of Rockford (1972), the Supreme Court struck down laws that were overly broad or vague. Applying this to the FinCEN proposal, the rule's extensive reach into blockchain transactions could be argued as excessively broad, impacting lawful activities and lacking in clear, definable standards.

Potential Conflict with Free Speech Rights: In Reno v. American Civil Liberties Union (1997), the Supreme Court held that legislation that unduly burdens or restricts the free flow of information on the internet is subject to scrutiny under the First Amendment. By imposing stringent record-keeping requirements, the FinCEN proposal could be seen as a form of regulation that indirectly hampers the free exchange of information inherent in blockchain transactions.

International Law Considerations: The proposal's extraterritorial implications could be challenged based on principles of international law, as seen in Morrison v. National Australia Bank Ltd. (2010). The Supreme Court has often limited the extraterritorial application of U.S. laws, which could be a relevant point of contention in the context of global CVC transactions.

Privacy and Data Protection Laws: The rule's impact on privacy could be contrasted with the standards set in data protection laws, both domestically and internationally. For instance, GDPR in the EU emphasizes the protection of personal data and privacy, which could conflict with the extensive data collection and reporting requirements proposed by FinCEN.

Question 3: Does the impact on privacy and legitimate applications identified in Section IV.B potentially outweigh the risks posed by illicit activity facilitated by CVC mixing?

Response to Question 3:

Recognition of Legitimate Uses of CVC Mixing: FinCEN acknowledges that CVC mixing can serve legitimate purposes, such as privacy enhancement, especially for individuals under repressive regimes or those wishing to conduct lawful transactions anonymously. This acknowledgment is crucial, as it highlights the dichotomy between the proposal's intent to combat illicit activities and the potential infringement on lawful, private financial transactions.

Fourth Amendment Considerations: The potential infringement on privacy rights raises Fourth Amendment concerns. The Supreme Court, in cases like Carpenter v. United States (2018), has emphasized the importance of safeguarding individual privacy, especially in the context of digital data. The broad application of FinCEN's proposal could be seen as an overreach, compromising the reasonable expectation of privacy for legitimate users of CVC mixing services.

Balancing Test Between Privacy and Law Enforcement Needs: The U.S. legal system often employs a balancing test to weigh individual privacy rights against the needs of law enforcement, as seen in cases like United States v. Jones (2012). While the government's interest in preventing money laundering and other illicit activities is compelling, this interest must be balanced against the legitimate privacy interests of individuals using CVC mixers for lawful purposes.

Potential Overbreadth and Vagueness: The proposal is overly broad and vague, potentially impacting lawful activities, as per the standard set in Grayned v. City of Rockford (1972). The regulation must be narrowly tailored to address specific illegal activities without unduly infringing on legitimate uses of CVC mixers.

Impact on Innovation and Economic Freedom: The proposal's broad scope could stifle innovation and economic freedom in the digital currency space, inhibiting technological advancements. In Sorrell v. IMS Health Inc. (2011), the Supreme Court recognized the importance of protecting economic decisions and the free flow of information against overly broad regulations.

Data Privacy Laws and International Considerations: The extensive data collection and reporting requirements proposed by FinCEN might conflict with existing data privacy laws and principles, such as the GDPR in Europe, and could have international implications.

In conclusion, while the FinCEN proposal aims to address the risks of illicit activities facilitated by CVC mixing, the negative impacts on privacy and legitimate CVC mixing uses outweigh the intended benefits. The proposal's broad scope raises significant legal concerns, including potential violations of the Fourth Amendment, issues of overbreadth and vagueness, and implications for innovation and economic freedom.

Question 4: What challenges are anticipated with respect to identifying the foreign nexus of a CVC mixing transaction?

Response to Question 4:

Although there are plenty of ways to achieve this (Advanced Heuristics, Forensics, KYC, AI, Geo Analysis, Public Ledger Analysis), these actions are already violations of citizens rights.

Technical Limitations and Privacy Concerns: The technical design of blockchain and CVCs inherently supports pseudonymity and cross-jurisdictional transactions. Imposing regulations that require the identification of foreign nexus could intrude upon privacy rights protected under the Fourth Amendment, as emphasized in Carpenter v. United States (2018). The technical feasibility of complying with such regulations while maintaining the privacy and security principles of blockchain technology is highly questionable.

Extraterritorial Application of U.S. Laws: The proposal's requirement to identify the foreign nexus of CVC mixing transactions raises questions about the extraterritorial application of U.S. laws. FinCEN's authority is primarily domestic, and extending its reach to foreign jurisdictions can be legally complex and contentious. The presumption against extraterritoriality, as highlighted in cases like RJR Nabisco, Inc. v. European Community (2016), limits the application of U.S. laws beyond its borders unless Congress clearly indicates otherwise.

Potential Conflict with International Laws and Sovereignty: The enforcement of such regulations could conflict with international laws and the sovereignty of other nations. This aligns with principles established in cases like Kiobel v. Royal Dutch Petroleum Co. (2013), where the Supreme Court limited the extraterritorial reach of U.S. laws in respect of international comity and the sovereignty of other nations.

Overbreadth and Vagueness Concerns: The regulation's broad requirement to identify foreign nexus is challenged for being overly broad and vague, potentially impacting legitimate activities, as per the standard set in Grayned v. City of Rockford (1972). Regulations must be clear, precise, and narrowly tailored to avoid infringing upon lawful transactions and activities.

Question 5: Are there any other methods that covered financial institutions can use to be able to readily determine if covered transactions stemming from non-mixer CVC mixing have a foreign nexus?

Response to Question 5:

See the Response to Question 4

Question 6: Are there sufficient tools available, either free or paid, that would aid covered financial institutions to determine if covered transactions occurred outside the United States?

Response to Question 6:

See the Response to Question 4

Question 7: Are there any other methods that covered financial institutions can use to be able to readily determine if covered transactions stemming from non-mixer CVC mixing have a foreign nexus?

Response to Question 7:

See the Response to Question 4

Question 8: Has FinCEN appropriately weighed the legitimate and illicit activities associated with the use of CVC mixing? What other factors should be considered?

Response to Question 8:

Evaluation of Legitimate Versus Illicit Use: FinCEN acknowledges that CVC mixing can serve legitimate purposes, such as privacy enhancement, especially in contexts like oppressive regimes or for lawful anonymous transactions. However, the proposal's focus on the risks of money laundering and other illicit activities does not fully account for the scale and importance of these legitimate uses. For instance Sorrell v. IMS Health Inc. (2011) emphasizes the importance of considering the broader implications of regulatory actions on lawful activities.

Fourth Amendment Privacy Concerns: The proposal's potential impact on individual privacy must be weighed heavily. In Carpenter v. United States (2018), the Supreme Court recognized the need to protect digital privacy. The requirement for detailed record-keeping and reporting on CVC transactions is seen as infringing on this privacy, particularly for those using CVC mixers for legitimate reasons.

Technological Feasibility and Innovation: The proposal should consider the technical feasibility of its requirements and their impact on technological innovation. Imposing traditional financial surveillance mechanisms on blockchain technology could stifle innovation in this space. This consideration aligns with the ethos of cases like Reno v. American Civil Liberties Union (1997), where the Supreme Court recognized the unique characteristics and importance of emerging digital technologies.

International Law and Extraterritoriality: The global nature of CVC transactions necessitates consideration of international law and the principle of extraterritoriality. The U.S. Supreme Court has often limited the extraterritorial application of U.S. laws, as seen in Morrison v. National Australia Bank Ltd. (2010). FinCEN must consider the implications of imposing U.S. regulations on a predominantly international and decentralized system.

Data Privacy and Compliance with International Standards: The proposal needs to factor in data privacy laws, such as GDPR in the EU. The extensive data collection requirements proposed by FinCEN could conflict with these laws, as seen in cases where U.S. regulations have had to be reconciled with international data protection standards.

Economic Impact and Burden on Businesses: The economic impact on businesses, particularly those operating within the CVC space, should be a key consideration. The U.S. legal system, as shown in cases like FCC v. AT&T Inc. (2011), often considers the economic burden and practicality of regulatory actions on businesses.

In conclusion, while FinCEN's proposal aims to combat illicit activities associated with CVC mixing, it appears to inadequately balance this goal against the impact on legitimate uses, privacy rights, technological innovation, international legal principles, data protection standards, and the economic burden on businesses. A more nuanced approach, taking into account these additional factors and grounded in relevant case law, is essential to ensure a fair and effective regulatory framework.

B. Definitions

Question 1: Please provide suggested revisions to the proposed definitions that would better tailor the intended recordkeeping and reporting obligations to the objectives and uses described in this proposal. Where possible, please provide information or examples to illustrate how the recommended revisions improve upon the definitions as proposed.

Response to Question 1:

Explicit Exclusion for Bitcoin Full Node Operators: The proposal should explicitly state that Bitcoin full node operators are not subject to the same recordkeeping and reporting obligations as CVC mixers. This exclusion recognizes the fundamental role of full node operators in maintaining the integrity and security of the Bitcoin network, which is distinct from the activities targeted by the proposal. This approach aligns with the principle of not imposing excessive burdens on parties not directly involved in illicit activities, as seen in cases like FCC v. AT&T Inc. (2011).

Explicit Exclusion for Technologies Used to Scale Bitcoin: The proposal should explicitly state that participants operating technology used to scale the Bitcoin network, such as the Lightning Network, are not subject to the same recordkeeping and reporting obligations as CVC mixers. This exclusion recognizes the fundamental role of scaling technology to enable the use of Bitcoin, which is distinct from the activities targeted by the proposal. Similar to the suggestion above, this approach aligns with the principle of not imposing excessive burdens on parties not directly involved in illicit activities, as seen in cases like FCC v. AT&T Inc. (2011).

Clarification on the Role of Full Node Operators and Channel Runners: The definitions within the proposal should clearly differentiate between the role of full node operators/channel runners and entities actively engaging in CVC mixing for potentially illicit purposes. This distinction is critical to avoid broad-brush regulations that could inadvertently penalize legitimate network participants.

Legal Safeguards for Network Maintenance Activities: The revisions should include legal safeguards to protect the activities of full node operators and channel runners that are essential for the maintenance and functioning of the Bitcoin network. These safeguards would ensure that individuals contributing to the network's health and security are not unduly burdened or criminalized for their contributions. This consideration is in line with legal principles that protect individuals from overreaching regulations, as emphasized in cases like Reno v. American Civil Liberties Union (1997), where the Supreme Court recognized the importance of ensuring regulations do not unduly burden lawful activities.

Consideration of Technical and Operational Realities: The proposal should be informed by the technical and operational realities of running Bitcoin full nodes and channels. This understanding is crucial to ensure that regulations are grounded in the practical aspects of blockchain technology and do not impose impractical or technically infeasible requirements.

Alignment with Privacy and Data Protection Laws: Any recordkeeping and reporting requirements must be consistent with existing privacy and data protection laws. This alignment is particularly important for full node operators and channel runners, whose activities might involve the processing of personal data, albeit in a different context than CVC mixers.

Question 2: Does the proposed definition of CVC mixing adequately capture the activity of concern? If not, please provide suggested revisions to the proposed definition that would better capture such activity. Where possible, please provide information or examples to illustrate how the recommended revisions would improve upon the definition as proposed.

Response to Question 2:

Narrowing the Definition of CVC Mixing: The current definition of CVC mixing is too broad, potentially encompassing a range of activities that are not inherently illicit. To better capture the specific activity of concern, the definition should be refined to specifically target actions that deliberately obfuscate the source, destination, or ownership of CVCs for the intended purpose of evading legal scrutiny or facilitating illegal activities. This narrower definition would align with legal principles of specificity and proportionality, as emphasized in cases like Grayned v. City of Rockford (1972), where the Supreme Court invalidated overly broad laws for lack of specificity.

Differentiating Between Illicit and Legitimate Use: The revised definition should clearly differentiate between illicit uses of CVC mixing (such as for money laundering or financing terrorism) and legitimate uses (such as privacy enhancement or protection against censorship). This distinction is crucial in ensuring that lawful activities are not unfairly targeted, aligning with the Fourth Amendment considerations emphasized in Carpenter v. United States (2018), which upheld the importance of protecting digital privacy.

Incorporating Intent and Purpose: The definition should be improved by incorporating the element of intent. CVC mixing activities intended to facilitate illegal acts should be distinguished from those that are incidental to legitimate privacy or security practices. This approach is in line with legal principles that consider intent, as seen in cases like Elonis v. United States (2015), where the Supreme Court emphasized the importance of intent in determining the legality of an action.

Consideration of Technological Feasibility: Any definition of CVC mixing must also consider the technical feasibility of distinguishing between illicit and legitimate mixing activities. Overly broad or technically unfeasible definitions could stifle innovation and impede legitimate uses of blockchain technology, contrary to principles upheld in Reno v. American Civil Liberties Union (1997).

Examples and Illustrations: To illustrate the need for a more nuanced definition, consider scenarios where CVC mixing is employed by political dissidents in oppressive regimes to protect their donations from state surveillance, or by businesses seeking to protect trade secrets in transactions. These examples highlight the need for a definition that can distinguish between such legitimate uses and activities explicitly designed to evade legal oversight.

Question 3: Does the proposed exception to the definition of CVC mixing adequately account for legitimate activity conducted by VASPs and other financial institutions? If not, please provide suggested revisions to the proposed definition that would better capture such activity. Where possible, please provide information or examples to illustrate how the recommended revisions would improve upon the definition as proposed.

Response to Question 3:

Protection for Bitcoin Node Operators: The proposal needs a clear exception for individuals running Bitcoin nodes. These activities are fundamental to the Bitcoin network's operation and do not inherently involve illicit CVC mixing. The exemption should explicitly state that mere operation of a Bitcoin node or a Lightning channel does not constitute CVC mixing, aligning with the principles of specificity and avoiding overbreadth as seen in cases like Grayned v. City of Rockford (1972).

Acknowledging the Legitimacy of Scaling Technology: The proposal should recognize and make provisions for the legitimate use of technology such as the Lightning Network used to scale Bitcoin. Such technology is designed to give people access to fast and economically viable transactions on the Bitcoin network. The definition of CVC mixing should be precise enough not to inadvertently categorize the lawful and privacy-focused activities of scaling technologies as illicit, respecting the principles of digital privacy upheld in Carpenter v. United States (2018).

Clarifying the Role and Intent of Node Operators and Scaling Technology Users: The revision should include a clarification that operating a Bitcoin node or operating scaling technology such as the Lightning Network with the intent of maintaining network integrity or protecting privacy, without facilitating illegal activities, should not fall under the scope of CVC mixing. This approach follows the legal principles emphasizing the importance of intent, as highlighted in Elonis v. United States (2015).

Examples to Illustrate Legitimate Use: An example that could be provided is a Bitcoin node operator who runs channels for the purpose of enhancing network efficiency and transaction processing, without any involvement in illicit transactions.

Alignment with Technological Realities and Innovation: The proposal should consider the technological realities and the innovative potential of Bitcoin nodes and scaling technologies. Overly restrictive definitions could stifle innovation and the development of scaling and privacy-enhancing technologies in the cryptocurrency space, contrary to principles upheld in Reno v. American Civil Liberties Union (1997).

C. Alternatives

Question 1: Is FinCEN's proposal of enhanced recordkeeping under section 311's special measure one most appropriate to the objectives of this proposed rule? Where possible, please provide suggestions for alternative means of achieving the objectives and illustrate how such means would work in practice.

Response to Question 1:

Calling for a Rethink of the Regulatory Approach: Rather than proposing minor adjustments, a complete reevaluation of the regulatory approach towards cryptocurrencies and CVC mixing is called for. This response advocates for a regulatory framework that respects individual rights, fosters innovation, and is deeply informed by the technological potential and societal benefits of cryptocurrencies.

Question 2: Would section 311's special measures two through five be more appropriate to apply? If so, please explain why.

Response to Question 2:

The pivotal question is whether these measures infringe upon citizens' rights to such an extent that they call into question the very authority of FinCEN to pursue such regulatory actions.

Overreach and Intrusion into Financial Privacy (Katz v. United States, 1967; Riley v. California, 2014): The enhanced recordkeeping and reporting requirements under these measures is an unwarranted intrusion into financial privacy. The Katz and Riley decisions underscored the importance of privacy, especially in the context of personal information. Applying these principles, the proposed measures excessively encroach upon the financial privacy of individuals, surpassing what is deemed reasonable under the Fourth Amendment.

Governmental Surveillance and Proportionality (United States v. Jones, 2012; Graham v. Florida, 2010): United States v. Jones highlights concerns regarding excessive surveillance, relevant to the tracking and reporting requirements in these measures. The principle of proportionality, as emphasized in Graham v. Florida, questions whether the breadth of these measures is justified given their potential impact on individual freedoms.

Issues of Consent and Extraterritoriality (Berghuis v. Thompkins, 2010; United States v. Verdugo-Urquidez, 1990): Berghuis v. Thompkins raises issues about consent and awareness in legal procedures, which is pertinent considering the potential lack of clear consent from individuals subjected to these measures. United States v. Verdugo-Urquidez's discussion on extraterritoriality is critical, given the global nature of CVC transactions and the challenges in enforcing these measures across different jurisdictions.

Potential Regulatory Overreach (Utility Air Regulatory Group v. EPA, 2014): This case serves as a caution against agencies exceeding their congressionally delegated authority. It questions whether FinCEN, through these measures, is expanding its regulatory domain beyond the bounds set by Congress, particularly in the context of global financial transactions.

Privacy in the Context of Technology (Kyllo v. United States, 2001; Florida v. Jardines, 2013): These cases emphasize the judiciary’s concern for privacy amidst advancing technology. The measures proposed by FinCEN, particularly those involving recordkeeping and reporting, might not adequately consider the unique nature of blockchain and CVC technologies, potentially leading to infringements on privacy that are disproportionate to the risks these technologies pose.

In conclusion, when the implications of section 311's special measures two through five are scrutinized in light of these landmark cases, they reveal potential legal vulnerabilities concerning overreach, intrusion into privacy, issues of consent and extraterritorial application, and a lack of proportionality. These concerns suggest that FinCEN’s proposal, in its current form, breaches the constitutional rights of individuals and exceed the agency's statutory authority, necessitating a critical reevaluation of its approach to regulating the CVC space.

Question 3: Is the proposed mechanism for submission appropriate for the purpose of this proposed rule?

Response to Question 3:

The pivotal question is whether these measures infringe upon citizens' rights to such an extent that they call into question the very authority of FinCEN to pursue such regulatory actions. For example, here are a few examples of case law that demonstrate why the proposed mechanism for submission is inappropriate and overly restrictive.

Practicality and Feasibility (Reno v. American Civil Liberties Union, 1997): The Supreme Court's decision in Reno emphasized the need for regulatory measures to be practical and not unduly burdensome, particularly in the context of emerging technologies. The proposed submission mechanism should be assessed for its feasibility, especially given the complexities inherent in blockchain and CVC transactions.

Protection of Privacy Rights (Carpenter v. United States, 2018; Katz v. United States, 1967): Carpenter and Katz highlight the importance of protecting individual privacy, especially concerning digital data. The submission mechanism must be scrutinized to ensure it does not infringe upon the privacy rights of individuals and entities, particularly in the storage and handling of sensitive financial data.

Proportionality and Least Intrusive Means (United States v. Jones, 2012; Kyllo v. United States, 2001): In line with the principle of using the least intrusive means to achieve a regulatory objective, the submission mechanism must be evaluated for its proportionality. It should not impose excessive burdens or intrude more than necessary into private affairs.

Consent and Transparency (Berghuis v. Thompkins, 2010): The mechanism should be transparent, with clear consent obtained from those subject to the rule. Berghuis underscores the importance of clear communication and consent in legal procedures, which is relevant in ensuring that entities understand and agree to the submission requirements.

Avoiding Overreach and Extraterritorial Concerns (Utility Air Regulatory Group v. EPA, 2014; United States v. Verdugo-Urquidez, 1990): The mechanism must not overreach the statutory authority of FinCEN or impinge on extraterritorial jurisdiction issues. The cases of Utility Air Regulatory Group and Verdugo-Urquidez serve as reminders of the limits of regulatory and jurisdictional reach.

Impact on Innovation and Economic Activities (Sorrell v. IMS Health Inc., 2011): Sorrell highlights the need to consider the impact of regulations on innovation and economic decisions. The submission mechanism should not stifle innovation or unnecessarily hinder economic activities in the CVC space.

Question 4: Are there any alternative methods of submitting reports in an efficient and effective manner that FinCEN should consider utilizing?

Response to Question 4:

Digital and Automated Reporting Systems (Reno v. American Civil Liberties Union, 1997): The use of such technology should be mindful of the principles laid out in Reno, ensuring that regulations do not unduly burden emerging digital technologies.

Risk-Based Reporting Thresholds (United States v. Jones, 2012): Implementing risk-based thresholds for reporting could minimize unnecessary data collection and reporting, aligning with the principles of proportionality and least intrusiveness as highlighted in United States v. Jones. Such thresholds would require reports only for transactions that meet certain risk criteria, thereby reducing the burden on financial institutions and individuals. This is consistent with existing reporting requirements in the traditional financial sector.

Question 5: Are the proposed reporting and recordkeeping requirements discussed in Section VI.B.1 and 3 appropriately scoped? Are there additional types of information regarding reportable transactions or customers that should be collected?

Response to Question 5:

The proposed reporting and recordkeeping requirements as outlined in Section VI.B.1 and VI.B.3 of the FinCEN proposal raise significant concerns from the standpoint of individuals' rights to operate Bitcoin full nodes and open channels. The scope of these requirements must be critically evaluated in light of the constitutional principles and legal precedents that protect individual freedoms and privacy.

Protection of Privacy and Autonomy (Katz v. United States, 1967; Carpenter v. United States, 2018): The Supreme Court has repeatedly affirmed the importance of privacy in the Katz and Carpenter decisions. In the context of Bitcoin full nodes, the recordkeeping requirements must not intrude upon the operators' privacy or financial autonomy.

Minimizing Governmental Overreach (United States v. Jones, 2012): In line with the ruling in United States v. Jones, the requirements for recordkeeping and reporting should be the least intrusive necessary to satisfy legitimate regulatory interests. Full node operation, being an integral part of the Bitcoin network, should not be subject to invasive reporting that would dissuade individuals from participating in the network.

Proportionality and Relevance (Sorrell v. IMS Health Inc., 2011): The information collected must be proportional to the regulatory needs. Sorrell v. IMS Health Inc. emphasizes that regulations should not unduly burden economic decisions or technological innovation, which is highly relevant when considering the rights of full node operators.

Avoiding Unnecessary Collection of Information (Riley v. California, 2014): The decision in Riley v. California, which limits the warrantless search and seizure of digital contents, supports the stance that only the minimal necessary information should be collected from full node operators.

Technological Neutrality and Innovation (Reno v. American Civil Liberties Union, 1997): The recordkeeping and reporting mechanisms must be technologically neutral to encourage innovation, as highlighted in Reno. They should not place undue burdens on new technologies or the individuals who use them.

In light of these concerns, the proposed reporting and recordkeeping requirements should be revised to ensure they do not overreach. The recommended language for the recordkeeping requirements should acknowledge the right of every citizen to run a Bitcoin full node and to run scaling technology such as channels on the Lightning Network.

Such a stance ensures that the interests of individual privacy, technological advancement, and the foundational principles of decentralized digital currencies are preserved in accordance with constitutional protections and legal precedents.

Question 6: Should the proposed reporting and recordkeeping requirements apply to covered financial institutions that are the originator institution, the beneficiary institution, or both?

Response to Question 6:

The imposition of the proposed reporting and recordkeeping requirements on covered financial institutions, whether as originator institutions, beneficiary institutions, or both, needs to consider the implications of such requirements on the fundamental rights and freedoms of individuals participating in the cryptocurrency ecosystem, particularly those operating Bitcoin full nodes.

Need for Narrow Tailoring (Katz v. United States, 1967; Riley v. California, 2014): Any recordkeeping requirements must be narrowly tailored to serve specific regulatory goals without impinging on privacy rights. The Supreme Court's decisions in Katz and Riley underscore the imperative of protecting individual privacy and suggest that requirements must be confined to the minimum necessary scope.

Proportionality and Relevance (United States v. Jones, 2012; Sorrell v. IMS Health Inc., 2011): The requirements must be proportional to the intended regulatory objectives and should not unnecessarily burden or deter legitimate financial activities or technological innovation. The proportionality principle, as discussed in United States v. Jones and Sorrell, would call into question overly broad or indiscriminate recordkeeping mandates.

Recognition of the Decentralized Nature of Cryptocurrency (Reno v. American Civil Liberties Union, 1997): Regulations must acknowledge and accommodate the decentralized nature of cryptocurrency networks. The Reno decision's emphasis on technological neutrality implies that regulatory frameworks should not inhibit the growth and functioning of emerging digital infrastructures like Bitcoin.

Impact on Innovation and Economic Freedom (Sorrell v. IMS Health Inc., 2011): The current proposal could stifle innovation or impede economic freedom within the cryptocurrency space. Sorrell v. IMS Health Inc. recognized the importance of safeguarding economic decisions against overregulation, which is particularly relevant for fostering the continued development of cryptocurrency technologies.

Privacy in the Context of Advancing Technology (Kyllo v. United States, 2001; Florida v. Jardines, 2013): Kyllo and Jardines highlight the judiciary’s concern for privacy amidst advancing technology, a concern that must be reflected in any reporting and recordkeeping requirements for financial institutions engaged in cryptocurrency transactions.

Given these considerations, the proposed reporting and recordkeeping requirements should not indiscriminately apply to all covered financial institutions. Instead, a more discerning approach is warranted—one that differentiates between entities based on their role, size, transaction volume, and the actual risk they present. Requirements should be specifically calibrated to address identifiable risks without unduly encroaching on the rights of those who operate Bitcoin full nodes or engage in cryptocurrency transactions for lawful purposes.

Question 7: In cases where the customer of a covered financial institution is a legal entity, should the implementation of special measure one also require the beneficial ownership of that legal entity be reported, in addition to the other proposed reporting requirements?

Response to Question 7:

The proposition to mandate the reporting of beneficial ownership for legal entity customers as part of special measure one necessitates a thorough evaluation of privacy rights, the intended regulatory goals of anti-money laundering (AML) laws, and the principles of due process and proportionality.

Privacy and Association Rights (NAACP v. Alabama, 1958): The Supreme Court's decision to protect the privacy of NAACP members’ identities due to the chilling effect on free association provides a pertinent analogy. Similarly, mandating the reporting of beneficial ownership information could deter lawful association and investment in legal entities, especially if such disclosure risks exposure to harm or retribution.

Due Process Concerns (Mathews v. Eldridge, 1976): The Mathews v. Eldridge framework for due process emphasizes the importance of considering the private interest at stake and the risk of erroneous deprivation through government procedures. The financial privacy of individuals is a significant interest, and the processes for collecting beneficial ownership information must be accurate and fair to prevent unwarranted deprivation of rights.

Prohibition Against Excessive Fines (Timbs v. Indiana, 2019): The Eighth Amendment’s excessive fines clause, which was incorporated against the states in Timbs, serves as a reminder of the constitutional prohibition against disproportionate penalties. Overly burdensome reporting requirements could be construed as punitive, particularly if they impose significant costs on legal entities.

Freedom from Unwarranted Compulsion (Boyd v. United States, 1886): Boyd addressed the protection against compulsory self-incrimination in the context of government seizure of private documents. A requirement to disclose beneficial ownership could compel individuals to provide potentially incriminating information, which must be carefully weighed against Fifth Amendment protections.

Balancing Test for Searches (Camara v. Municipal Court, 1967): The Supreme Court in Camara established a balancing test for determining the reasonableness of searches, weighing the need for the search against the invasion of personal rights. This test is relevant in assessing whether the reporting requirement for beneficial ownership is a reasonable search under the Fourth Amendment.

Limitations on Government Information Gathering (Whalen v. Roe, 1977): In Whalen, the Court upheld privacy interests regarding the collection and use of personal data by the government, recognizing that legal safeguards are essential. The decision suggests the need for robust protections when sensitive financial information is collected.

In light of these additional cases, while recognizing the importance of AML objectives, the proposed reporting of beneficial ownership under special measure one raises significant legal concerns. These include privacy and association rights, due process, the risk of excessive burdens akin to fines, protections against unwarranted compulsion, and the reasonableness of government information gathering. Any such reporting requirements must be implemented with scrupulous attention to these legal principles to ensure they do not unduly infringe upon constitutional rights.

E. Burden and Other Impacts of This Proposed Rule

Response to Question 1:

This proposal involves extensive over-reach and burdensome mandates for businesses operating in this innovative space. Here are just a few examples of why this proposal is objectionable.

Overburdening Compliance Efforts (Lujan v. Defenders of Wildlife, 1992): Lujan highlights the importance of concrete facts for judicial review of agency action. FinCEN's evaluation of the burden lacks sufficient concrete evidence regarding the actual impact on financial institutions and instead relies on speculative or abstract assessments. This proposal overestimates the ability of institutions to accurately detect and report CVC mixing, leading to a misjudgment of the compliance burden.

Vagueness in Regulatory Expectations (General Dynamics Land Systems, Inc. v. Cline, 2004): General Dynamics Land Systems speaks to the need for clarity in legal definitions and expectations. The proposed rule fails to provide clear guidance on what constitutes "reason to suspect" CVC mixing, which can lead to inconsistent compliance efforts and increased costs due to the vagueness of the rule.

Impact on Resource Allocation (FCC v. WNCN Listeners Guild, 1981): This case touches on the agency's discretion in policy changes based on factual determinations and rational decision-making. Financial institutions may need to divert resources to comply with the proposed rule, which could affect their ability to serve their customers effectively. This diverts attention from other critical compliance areas, thereby impacting the institution's overall ability to function within the regulatory framework.

Due Process and Fair Notice (Hornbeck Offshore Services v. Salazar, 2011): Hornbeck emphasizes that regulated parties are entitled to fair notice of regulatory demands. The proposed rule could be critiqued for potentially not providing financial institutions with the fair notice required to adjust their operations and compliance programs to meet the new requirements, thereby imposing an undue burden.

Economic Impact and Regulatory Alternatives (Michigan v. EPA, 2015): In Michigan v. EPA, the Supreme Court required agencies to consider cost when making regulatory decisions. The proposal does not adequately consider the economic impact of the reporting requirements, especially if the costs outweigh the benefits.

Administrative Burden and Efficiency (Perez v. Mortgage Bankers Association, 2015): Perez discusses the balance between administrative burden and the goals of a regulatory scheme. FinCEN's proposal places an administrative burden on financial institutions that is disproportionate to the rule's effectiveness in combating illicit activities.

Proportionality in Regulation (West Virginia v. EPA, 2016): This case holds that agencies must not use their authority to regulate in ways that are disproportionately burdensome. The proposed rule's requirement to report transactions involving CVC mixing might impose burdens that exceed the actual risk or prevalence of illicit activity involving CVC mixing.

Fourth Amendment Concerns (City of Los Angeles v. Patel, 2015): The Patel case protects against unreasonable searches and seizures, which may be invoked if the proposed rule is seen as creating an environment where financial institutions are required to conduct what could be considered warrantless searches into customers' financial transactions.

Impact on Innovation (Mayo Collaborative Services v. Prometheus Laboratories, Inc., 2012): The Mayo case emphasizes the need to protect innovation within regulatory frameworks. The proposed rule may stifle innovation within the financial and cryptocurrency sectors by imposing burdensome requirements that could deter the development and use of CVCs.

Each case and principle mentioned provides a distinct legal angle on why the proposed rule may be seen as imposing an unjustified burden on financial institutions. The cumulative weight of these arguments presents a compelling case for FinCEN to reconsider the scope and application of the proposed rule to ensure it does not place undue burdens on legitimate financial operations and innovation.

Question 2: Is there a less burdensome way of collecting information regarding the details of a CVC transaction, which the BSA's AML/CFT objectives require financial institutions to collect, including know-your-customer and customer due diligence?

Response to Question 2:

Please refer to the response from Question 1 of this section (E).

Question 3: Would the adoption of special measure one reporting and recordkeeping requirements, as proposed, impose expected costs to covered financial institutions; state, local, or tribal governments; or the private sector in excess of $177 million annually? $200 million annually? Where possible, please provide data or studies from an identifiable source that would support the response or describe why a source cannot be identified.

Response to Question 3:

It is clear that the costs associated with implementing the proposed FinCEN rule, particularly special measure one, are likely to be substantially underestimated by the agency. This underestimation does not sufficiently account for the broader economic, social, and operational impacts that such a rule would impose on covered financial institutions, as well as on state, local, or tribal governments, and the private sector.

Broadening of Compliance Costs (FCC v. National Citizens Committee for Broadcasting, 1978): This case underscores the necessity for regulatory agencies to consider the broader impacts of their rules on the entities they regulate. The FCC's failure to do so led to a decision that was not in the public interest. Similarly, FinCEN's proposed rule may result in a wide array of direct and indirect costs that extend beyond the agency's estimation, affecting not only the immediate compliance expenses but also the market behavior, with potential chilling effects on financial innovation and participation.

Economic Impact Assessment (Motor Vehicle Manufacturers Association v. State Farm Mutual Automobile Insurance Co., 1983): The Supreme Court's decision in this case establishes the requirement for a thorough and rational connection between the facts found and the choices made by regulatory agencies. FinCEN's cost assessment should, therefore, include a comprehensive economic impact assessment that considers all potential costs, including those to consumer privacy and the competitive landscape.

Administrative Procedure Act (Vermont Yankee Nuclear Power Corp. v. Natural Resources Defense Council, Inc., 1978): Under the Administrative Procedure Act, agencies are required to consider and respond to significant comments received during the rulemaking process. Given the potential for substantial costs that far exceed FinCEN's estimates, the agency must provide a reasoned explanation for its conclusions, taking into account data and studies submitted by stakeholders.

Due Process and Economic Liberties (Mathews v. De Castro, 1976): This case emphasizes the importance of protecting economic liberties under the due process clause. FinCEN's proposal may impinge upon these liberties by imposing heavy compliance costs without adequately considering less burdensome alternatives or the actual benefits of such measures.

Considering these legal precedents, FinCEN's expected cost of $177 million annually, or even $200 million annually, is likely a significant undervaluation. The true costs must factor in the expansive scope of the rule, its impact on the operation and behavior of financial institutions, the potential stifling of economic growth and innovation, and the heightened risk of market destabilization and inefficiencies.

FinCEN must re-evaluate its cost assessment, incorporating a wider range of data and studies that reflect the true complexity and potential economic impact of the proposed rule on financial institutions and the broader financial system.

Question 4: To what extent should FinCEN consider the potential costs to currently unregistered or otherwise non-reporting entities that, if compliant, would incur costs if special measure one is adopted as proposed? If possible, please illustrate either quantitatively or qualitatively (by way of example or anecdote) how the recommended level of consideration would improve FinCEN's estimate of regulatory impact.

Response to Question 4:

Addressing the potential costs associated with the adoption of special measure one reporting and recordkeeping requirements, as proposed by FinCEN, we must consider both tangible and intangible costs that extend beyond mere financial expenditures to encompass broader societal, constitutional, and economic impacts.

Monetary Costs:

Compliance Costs: Financial institutions will face significant expenses updating systems, training staff, and conducting ongoing monitoring to comply with the new requirements.
Operational Costs: Increased operational costs include data storage, enhanced cybersecurity measures to protect sensitive data, and potential fines for non-compliance.
Legal Costs: Institutions may incur legal costs seeking advisory services to interpret the new regulations correctly and defend against potential litigation.

Intangible Costs:

Privacy Infringements: The enhanced reporting requirements could infringe on individual privacy rights, a concern supported by cases such as Griswold v. Connecticut (1965) which recognized the right to privacy in personal matters.
Chilling Effect on Innovation: The burdensome regulations may stifle innovation in the cryptocurrency space, drawing parallels with Reno v. American Civil Liberties Union (1997) where the Court struck down anti-indecency provisions due to their overly broad suppression of free speech.
Economic Disincentive: The proposal could act as an economic disincentive for startups and smaller businesses, potentially violating principles of economic freedom as discussed in FCC v. National Citizens Committee for Broadcasting (1978) which addressed the economic impacts of regulation.
Reputational Damage: Financial institutions risk reputational harm if customers perceive an overreach into their financial privacy, potentially reducing trust in these entities.

Constitutional and Legal Costs:

Fourth Amendment Concerns: The requirement for financial institutions to report detailed transaction data could lead to Fourth Amendment challenges regarding unreasonable searches and seizures, akin to the concerns raised in Katz v. United States (1967).
Fifth Amendment Concerns: Compelled disclosure of potentially incriminating information could raise Fifth Amendment issues as seen in Miranda v. Arizona (1966).
Overbreadth and Vagueness: Broad requirements may face challenges for overbreadth and vagueness, not unlike the issues in City of Chicago v. Morales (1999) where the Supreme Court found an anti-loitering ordinance unconstitutionally vague.

Broader Economic and Societal Costs:

Market Distortion: Over-regulation may distort the cryptocurrency market, creating inefficiencies and reducing competitiveness.
Reduction in Financial Inclusion: Increased regulation may reduce access to financial services for underserved populations, contravening the policy goals of financial inclusion.
Impact on Consumer Behavior: Consumers concerned about privacy may reduce their use of regulated financial services, potentially moving to less regulated or underground channels.

FinCEN's estimate of the regulatory impact must be revisited to account for these extensive costs. The adoption of special measure one is likely to impose expected costs well in excess of FinCEN's current estimate of $177 million or even $200 million annually. The proposal underestimates the cumulative effect of these costs, which, when considered in totality, present a significant economic burden on covered financial institutions, governments at various levels, and the private sector. The comprehensive accounting for these costs would align with the Supreme Court's directive in Motor Vehicle Manufacturers Association v. State Farm Mutual Automobile Insurance Co. (1983) for agencies to make reasoned decisions based on substantial evidence, ensuring that any regulatory action is not arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.

Question 5: Are there any material facts, data, circumstances, or other considerations that, had they been included in FinCEN's regulatory impact analysis, would have both improved the precision and accuracy of the analysis and substantially altered the assessment of the proposed rule's impact? If so, please provide, including attribution to the sources of such information, where possible.

Response to Question 5:

Please refer back to question 4’s response in Section E.

Question 6: Would the adoption of special measure one reporting and recordkeeping requirements, as proposed, impose significant costs on covered financial institutions that are small entities? On other small entities that are not covered financial institutions? Where possible, please provide data or studies from an identifiable source that would support the response or describe why a source cannot be identified.

Response to Question 6:

In response to the query regarding the adoption of special measure one and its potential imposition of significant costs on small entities, both covered financial institutions and those not covered, the following points elucidate the broader and possibly substantial economic impact:

Disproportionate Burden on Small Entities: Small financial institutions and businesses generally operate with limited resources compared to their larger counterparts. The compliance costs associated with the proposed rule are not scalable, meaning they represent a higher proportion of total costs for small entities, potentially stifling their operations or forcing them out of the market.

Innovation and Competition (Northern Securities Co. v. United States, 1904): The decision in Northern Securities Co. emphasized the importance of maintaining competition and preventing monopolistic practices. Over-burdening small entities could reduce competition in the financial sector, as smaller players may be unable to compete with large institutions that can absorb the compliance costs more readily.

Compliance Cost Studies: The Small Business Administration's Office of Advocacy often highlights the disproportionate impact of regulations on small businesses. These studies could be referenced to support the argument that special measure one would impose significant costs on small entities.

Lack of Granular Impact Assessment (Utility Air Regulatory Group v. EPA, 2014): In Utility Air, the Supreme Court ruled that the Environmental Protection Agency could not treat greenhouse gases as pollutants without considering the cost and impact of regulation. Similarly, FinCEN should consider the granular impact of its rule on small entities, which may not have been sufficiently analyzed.

Risk of Non-Compliance (Burlington Northern & Santa Fe Railway Co. v. United States, 2006): This case noted the potential for broad and stringent regulations to lead to non-compliance issues. Small entities, under financial strain due to the proposed rule, may opt for non-compliance as a more economically viable option, which would be counterproductive to the rule's aims.

Need for Specific Data (Massachusetts v. EPA, 2007): In Massachusetts v. EPA, the Court held that the Environmental Protection Agency must ground its actions in scientific data. Similarly, FinCEN should provide specific data demonstrating the impact of its proposed rule on small entities to justify its actions.

In conclusion, the adoption of special measure one reporting and recordkeeping requirements would likely impose significant costs on small entities, affecting their economic viability and potentially the broader market dynamics. FinCEN’s regulatory impact analysis would benefit from a more detailed consideration of these costs, drawing from case law that supports the importance of fair economic practices and the prevention of disproportionate burdens on smaller entities. Without this consideration, the proposed rule could lead to unintended consequences that undermine the health and competitiveness of the financial market, particularly for small businesses and institutions.

Question 7: Are the due diligence requirements appropriately scoped in this proposed rule?

Response to Question 7:

In evaluating the proposed FinCEN special measure one and its impact on small entities from the perspective of constitutionality and potential damage to citizens and small businesses, a critical legal analysis suggests that this proposal could indeed imposes significant, and potentially unconstitutional, burdens on these entities.

Disproportionate Economic Burden (South Dakota v. Dole, 1987): In South Dakota v. Dole, the Supreme Court discussed the limitations of federal regulation over state matters. By analogy, imposing significant costs on small entities, which often lack the resources of larger institutions, could be viewed as an excessive federal imposition, disproportionately affecting these smaller players and potentially inhibiting their ability to operate.

Impact on Privacy and Autonomy (NAACP v. Alabama, 1958): The Supreme Court in NAACP v. Alabama protected the organization’s member list to uphold privacy and association rights. Similarly, FinCEN's reporting requirements could infringe upon the privacy and autonomy of small business owners and individuals, especially those engaged in legitimate CVC transactions.

Inhibiting Free Enterprise (New State Ice Co. v. Liebmann, 1932): This case emphasized the role of states in experimenting with economic policies, which can be extended to argue that FinCEN's overarching regulations may stifle the innovative spirit and entrepreneurial activities of small entities in the evolving CVC market.

Increased Compliance Costs (NFIB v. Sebelius, 2012): The Affordable Care Act's imposition of healthcare requirements on small businesses was a key issue in NFIB v. Sebelius. In a similar vein, FinCEN’s proposed rule could impose substantial compliance costs on small financial institutions and businesses, significantly impacting their operations and financial health.

Challenge of Technical Compliance (Gonzales v. Oregon, 2006): The Supreme Court in Gonzales v. Oregon criticized federal overreach into state-regulated medical practices. The technical compliance with FinCEN’s proposed rule could be overly complex for small entities, akin to the overreach seen in this case.

Economic Disincentives for Innovation (FCC v. WNCN Listeners Guild, 1981): This case recognized the FCC’s discretion in policy changes affecting economics. Similarly, FinCEN's requirements might create economic disincentives for small entities, particularly in innovative sectors like CVC, which could lead to reduced competition and innovation.

Undue Regulatory Burden (Michigan v. EPA, 2015): The Supreme Court ruled that the EPA must consider cost in its regulatory decisions. FinCEN's proposal, if not thoroughly considering the disproportionate burden on small entities, is subject to similar criticisms of failing to adequately weigh the economic impact against the regulatory benefits.

In sum, the proposed special measure one by FinCEN, while aimed at enhancing AML/CFT measures, raises substantial concerns about the potential constitutional infringements and economic harms it could inflict on small entities. These concerns are rooted in the principles of economic fairness, privacy, autonomy, and the preservation of a competitive and innovative market environment. As such, a reevaluation of the proposal, with a particular focus on its impact on small entities, is crucial to ensure it aligns with constitutional protections and does not unduly harm this vital segment of the economy.

Question 8: What impact will this proposal have on augmenting law enforcement's ability to track and trace CVC derived from cyber heists, ransomware, or similar illicit activity to aid the return of victim's CVC?

Response to Question 8:

FinCEN's proposal to augment law enforcement's ability to track and trace Convertible Virtual Currency (CVC) derived from illicit activities like cyber heists and ransomware potentially overreaches and infringes upon constitutional rights.

Enhanced Law Enforcement Capabilities: The proposed rule mandates detailed recordkeeping and reporting requirements for transactions suspected to involve CVC mixing. By collecting extensive data on these transactions, including the type, amount, and U.S. dollar equivalent of CVC transferred, identities and wallet addresses associated with the CVC mixer and customer, and other transactional details, law enforcement agencies would have more tools to track and trace illicit CVC flows. This could indeed aid in the investigation of cyber heists, ransomware attacks, and similar criminal activities, potentially leading to the recovery and return of assets to victims.

Constitutional Considerations: The Fourth Amendment protects against unreasonable searches and seizures, which is a key consideration when the government mandates the collection of detailed personal and transactional information. In cases like Carpenter v. United States (2018), the Supreme Court emphasized the need to protect individual digital privacy. The detailed reporting requirements proposed by FinCEN could be construed as a form of digital surveillance, raising concerns about unreasonable intrusion into personal financial transactions.

Potential Overreach and Privacy Concerns: The extensive nature of the information required by the proposal might not only infringe on privacy rights but could also lead to overreach in surveillance. The requirement for financial institutions to report detailed personal and transactional data could result in the collection of information about individuals who are not involved in illicit activities, potentially violating their privacy rights.

Impact on Legitimate CVC Use: The proposed rule could also impact legitimate users of CVC, including those who value privacy for lawful reasons. The chilling effect on legitimate financial innovation and use of CVC is a concern, particularly in light of the potential for misuse of collected data and the broad net cast by the reporting requirements.

Balancing Law Enforcement Needs with Constitutional Rights: While the goal of aiding law enforcement in combating financial crimes is understood, it is vital to balance this with the constitutional rights of citizens. This balance is crucial in maintaining public trust and ensuring that measures to combat illicit activities do not inadvertently erode fundamental freedoms.

In conclusion, while the proposed rule has the potential to enhance law enforcement capabilities in tracking illicit CVC activities, it raises significant concerns regarding government overreach, privacy infringement, and potential chilling effects on legitimate CVC use. As an analogy, we do not allow police to mandatorily track the whereabouts of citizens at all times in order for them to more easily discover who performed robberies or other similar crimes.

Question 9: Are there any international efforts to address illicit finance risks stemming from mixing not addressed in the NPRM?

Response to Question 9:

Constitutional and Jurisdictional Considerations: Any U.S. regulation, including FinCEN's NPRM, must respect constitutional protections and acknowledge jurisdictional limitations. Cases such as Morrison v. National Australia Bank Ltd. (2010) emphasize the presumption against extraterritorial application of U.S. law. Therefore, while international cooperation is vital, U.S. efforts must not infringe upon sovereign jurisdiction or the rights of U.S. citizens under the guise of international alignment.

International Privacy Laws: The NPRM must consider the privacy laws of other jurisdictions. Regulations like the General Data Protection Regulation (GDPR) in the European Union place significant restrictions on the processing of personal data. The NPRM should ensure that any proposed rules align with international privacy standards to avoid conflicts of law.

Potential Impact on International Relations: The NPRM should take into account the potential diplomatic implications of unilateral actions to regulate mixing services. For instance, the United States v. Microsoft Corp. (2018) case illustrates the complexities involved in accessing data stored in foreign jurisdictions. U.S. regulations on CVC mixing could have similar cross-border implications.The Microsoft case illustrates how aggressive U.S. regulation, without coordination with international participants, can challenge a business's ability to operate globally. It highlights the potential for such regulation to create conflicts with other countries' laws, potentially impacting U.S. companies' ability to lead and innovate if they are caught between complying with U.S. law and respecting the legal frameworks of the countries in which they operate. Moreover, it demonstrates the importance of international dialogue and cooperation in developing frameworks that both enable effective law enforcement and respect international standards of privacy and jurisdictional sovereignty

Question 10: What effect would the proposed rule have on international efforts to address the illicit use of CVC mixing?

Response to Question 10:

See response to question 9 from Section E.

Question 11: Are there specific examples of “covered transactions” or sample scenarios that FinCEN could have provided to assist financial institutions and other affected parties in further understanding the intended applicability of the proposed definition of ``covered transactions''? Alternatively, are there other clarifications to the definitions in this NPRM, or other modifications to the proposed regulatory text that would meaningfully clarify when a covered transaction occurs that would warrant reporting? If so, please describe.

Response to Question 11:

Question 12: Is FinCEN correct in its assessment that covered financial institutions would have access to reasonable and appropriate services or tools, whether free or paid, to be able to effectively identify covered transactions? If not, what are impediments to accessing such tools, and what costs would be associated with gaining access?

Response to Question 12:

Question 13: To what extent could public guidance or other informational materials regarding compliance with the requirements of proposed special measure one (such as FAQs, pre-recorded instructional audio-visual resources, or in-person presentations with industry groups) meaningfully reduce costs to covered financial institutions? Please describe any preferred method(s), as well as any qualitative or quantitative estimates of the extent to which costs are expected to be reduced.

Response to Question 13:

The opinions and analysis presented in this blog post are intended solely for informational and educational purposes. They reflect the views of the author(s) and are not to be construed as legal or financial advice. Ego Death Capital and its associates do not endorse or guarantee the accuracy or reliability of the information provided.

Readers are encouraged to conduct their own research and consult with qualified professionals before making any decisions based on the content of this blog. The information presented is based on interpretations and opinions regarding FinCEN policy proposal FINCEN-2023-0016 and is subject to change as the policy evolves. Ego Death Capital disclaims any liability for actions taken or not taken based on the content of this blog.

This blog should not be interpreted as an attempt to offer or render a legal opinion or otherwise engage in the practice of law.

BitcoinFinCENEgo Death CapitalPreston PyshJeff BoothLyn AldenAndi PittNico Lechuga

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