On Oct. 5, the U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN) revealed it is scrapping a reporting initiative aimed at crypto mixing, which refers to methods that conceal a transaction’s origin, destination, or value.
The measure extended past dedicated mixing platforms, mandating that financial institutions submit data concerning targeted transactions and their clientele.
FinCEN is pulling back both its 2023 determination that international crypto mixing constitutes a class of transactions of primary money laundering concern along with the associated recordkeeping and reporting mandate.
According to the withdrawal notice, the official publication date in the Federal Register is set for Oct. 6, with the cancellation becoming effective upon release. FinCEN pointed to feedback from commenters who warned that the broad scope could stifle lawful behavior and create a heavy reporting workload.
The drafted definition encompassed any protocol or service type. Among the listed examples were combining funds, utilizing code to coordinate transactions, dividing transfers, funneling money across a sequence of disposable wallets, swapping between crypto assets, and adding user-triggered delays.
This requirement was triggered when a covered domestic financial institution was aware of, suspected, or had grounds to suspect that a cryptocurrency transaction passing through, by, or to it involved mixing inside or connected to a foreign jurisdiction.
Furthermore, the definition carved out specific internal mechanisms utilized by banks, broker-dealers, and money services businesses to carry out transactions, provided they maintained records of the source and destination and furnished them upon lawful request.
For individuals using digital wallets, the anticipated privacy risks arose from the reports filed by institutions. These files would have incorporated wallet addresses, transaction hashes, IP addresses, and any customer identity details held by the institution. Additionally, companies would have been forced to log their compliance efforts.
Compliance checks remain
Based on current FinCEN guidance, applicable crypto money transmitters continue to face requirements for registration, risk-driven anti-money-laundering frameworks, relevant customer verification, recordkeeping, and the filing of suspicious activity reports. Qualifying transfers are likewise governed by the Funds Travel Rule.
The guidelines draw a line between an anonymizing service that takes in and forwards value versus a creator of anonymizing software. Merely providing a tool does not classify an individual as a money transmitter, though running a transmission operation can.
An individual utilizing an unhosted wallet to purchase merchandise or services for themselves is not classified as a money transmitter purely on those grounds.
FinCEN’s disclosure additionally addresses the distinct unhosted-wallet rule put forward in December 2020. That measure was previously marked as withdrawn on April 12, 2024, within the Spring 2024 regulatory agenda. The updated notice confirms that the agency will pursue no further steps.
FinCEN stated that it will maintain surveillance on crypto mixing regarding money laundering, the financing of terrorism, and other unlawful behavior, and could implement additional measures down the line. Financial institutions must still account for existing duties when evaluating privacy-focused transactions.