Friday, December 1, 2023

Even crypto mixing deserves a threshold

Many of you may not realize this, but in most parts of the developed world, banks automatically record and report our transactions to law enforcement. The logic behind this is that by giving up our personal data, we get more security, albeit at the cost of 1) losing our privacy, and 2) adding an extra layer of costly red tape into financial life.

It's a pragmatic compromise, and one hopes that the benefits outweigh the costs. The way that we've been balancing this compromise up till now is by using thresholds, so as to reduce the cost side of the equation. Below a certain dollar threshold (i.e. $10,000 for cash), transactions don't get reported. The folks making these sub-threshold transactions thus enjoy the dignity of not having their privacy invaded, nor do they add to the financial sector's administrative burden. However, they also don't contribute to the effort to improve security and safety.

Anyways, last month, the U.S. government announced a new anti-money laundering reporting requirement, one for crypto mixing. In doing so it broke with a long tradition of not including a threshold. That got my hackles up. Thresholds have always been key to balancing the costs and benefits of automatic reporting requirements.

In short, the government thinks that mixing of cryptocurrency is of primary money laundering concern. Any U.S. financial institution that knows, suspects, or has reason to suspect that a customer's incoming or outgoing crypto transaction, in any amount, involves the use of a mixer will have to flag it and send a report to the government. That report must include information like the customer's name, date of birth, address, and tax ID. 

I submitted the following comment on the proposed rule for crypto mixing. If you agree, feel free to copy it and add your own comment to the growing pile. 

Dear sir/madam,

Re: Proposal of Special Measure Regarding Convertible Virtual Currency Mixing, as a Class of Transactions of Primary Money Laundering Concern

Historically, all U.S. anti-money laundering recordkeeping and reporting requirements have been accompanied by a monetary threshold. The current proposal to impose recordkeeping and reporting requirements for crypto mixing is the sole exception. This should be fixed.

When Treasury Secretary Henry Morgenthau published an executive order to implement the U.S.'s first large cash transaction reporting regime all the way back in 1945, for instance, he established a $1,000 reporting requirement for transactions in which only bills in denominations over $50 were present. He also set a $10,000 reporting threshold when small and large denomination bills were involved in the transaction.

Morgenthau's thresholds remained in place through the 1950s and 1960s. They were eventually ratified in 1972 with the implementation of a $10,000 cash reporting threshold for the purposes of implementing the Bank Secrecy Act.

When suspicious activity reports were introduced in 1996, the government's initial proposal did not include a reporting threshold. But after receiving public comments, the government admitted that its first version of the rule would impose a "burden of reporting." In its final version it introduced a $5,000 threshold for filing a suspicious activity report, which remains to this day.

In addition to reporting thresholds for cash transactions and suspicious activity, the government has set a number of thresholds for recordkeeping requirements. For instance, financial institutions are required to keep a log of all cash purchases of monetary instruments between $3,000 and $10,000.

The government's long history of twinning reporting and recordkeeping requirements with thresholds is a pragmatic compromise. It balances law enforcement's need for information against the administrative burden imposed on the private sector as well the invasion of privacy imposed on civil society. It only seems fair and prudent to extend this pragmatic compromise to cryptocurrency mixing recordkeeping and reporting requirements, especially in light of the fact that, as FinCEN admits, there are "legitimate purposes" for mixing.

I would suggest a threshold of at least $10,000, which is in-line with the cash transaction reporting threshold.

JP Koning
Moneyness Blog

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