Unchained - Why Is the Proposed FinCEN Rule for Unhosted Wallets Being Pushed So Quickly? - Ep.204

Episode Date: December 22, 2020

Jeremy Allaire of Circle Pay and Kristin Smith of the Blockchain Association explain the impact of and motivation behind Treasury Secretary Steve Mnuchin’s proposed FinCEN rule that targets “unhosted” wallets. In this episode, they cover: what the new FinCEN rule says, and how it would impact unhosted or self-hosted wallets, as well as crypto businesses why they believe this is really politically motivated and unilateral midnight rule making by Secretary Mnuchin  what other bureaucrats and policymakers think should be done instead  whether the rule only affects businesses rather than individuals  what information will be recorded according to the rule ways to circumvent compliance  how the rule affects DeFi and Web3 the procedural hurdles Mnuchin took to propose the rule, and what they recommend the crypto community to do try to stop the implementation of the rule  how the rule comports with European GDPR regulations  which government entities will be tasked with making the regulatory changes the space needs  why President-Elect Joe Biden’s administration may be more favorable for the space   Thank you to our sponsors!  Crypto.com: http://crypto.com 1inch: http://1inch.exchange    Episode links:  Jeremy Allaire: https://twitter.com/jerallaire  Kristin Smith: https://twitter.com/kmsmithdc   Circle: https://www.circle.com/en/ The Blockchain Association: https://theblockchainassociation.org   Stories on proposed rule:  https://www.coindesk.com/fincen-proposes-kyc-rules-for-crypto-wallets https://www.theblockcrypto.com/post/88347/treasury-crypto-wallets-reporting-rule   Effect on DeFi: https://twitter.com/jerallaire/status/1340060806088671232?s=20   https://twitter.com/jchervinsky/status/1340050400871911424?s=20   Coin Center response: https://www.coincenter.org/a-midnight-rule-for-cryptocurrency-transaction-reports/   Brian Armstrong’s earlier tweet thread: https://twitter.com/brian_armstrong/status/1331745196887867393 Collins Belton’s tweet thread: https://twitter.com/collins_belton/status/1340051986008350721?s=20 Learn more about your ad choices. Visit megaphone.fm/adchoices

Hi everyone. Welcome to Unchained, your no-hype resource for all things Crypto. I'm your host, Laura Shin, a journalist with over two decades of experience. I started covering crypto five years ago and as a senior editor at Forbes was the first mainstream media reporter to cover cryptocurrency full-time. Subscribe to Unchained on YouTube, where you can watch the videos of me and my guests. Go to YouTube.com slash C-unshamed podcast and subscribe today. Crypto.com, the crypto super app that lets you buy, earn, and spend crypto, all in one place. Earn up to 8.5% per year on your BTC and more than 20 other coins. Download the crypto.com app now to find out how much you could be earning. One-inch exchange is Defi's leading Dex aggregator that discovers the best trade practices across all dexes. One-inch was launched in May 2019 by two White Hat hackers at ETH Global's ETH New York Hackathon. One inch has reached almost $7 billion in overall volume in just over a year.

Today's topic is the recently proposed FinCEN role around crypto transactions related to unhosted wallets, self-hosted wallets, or just plain wallets, whatever you want to call them. Here to discuss are Jeremy Allaire, founder and CEO of Circle and Kristen Smith, executive director of the Blockchain Association. Welcome, Jeremy and Kristen. Thanks for having us. Because this involves news, I'm just going to let the audience know up front that we are recording Saturday morning the day after the proposed rule was published. First, can you guys

explain what this rule is? Basically, the rule as proposed, and we'll come back to the fact that even the fact that this is a proposed rule versus a final rule, which has been a huge battle, and Kristen has been at the front lines of that, which we'll talk about. But the proposed rule is really around transaction reporting for individuals that you, use a custodial wallet or an exchange or it's technically in the in the rule a money service business or a bank. So a regulated financial institution in the United States. And any transaction that involves, you know, essentially sending or receiving funds from a

crypto wallet that is not associated with another regulated financial institution or money service business, whether internationally or the U.S. and it essentially says that if an individual is sending greater than $3,000, you know, over a crypto network, then you need to actually record their full KYC information. You need to receive the name and address of the recipient and then keep that record. And then if it's greater than $10,000, let's say you're sending, you know, these days half a Bitcoin to, to someone to another, you know, Bitcoin wallet that either you control or is someone else. You also need to collect that name and address of the recipient.

And you need to report it, all of that information to FinCent, you know, essentially to the federal government and law enforcement in the federal government. And so there's essentially a data feed that gets sent to the U.S. government with all transactions above $10,000 with that collected information. And then they can go on and monitor that freely and track your blockchain activity. It's bad. And why do you say that? Well, listen, I think there are a couple reasons of problematic.

One, and as proposed, all of the comments for this rule are due on January 4th, which isn't a lot of time given that. We've got, you know, Christmas and New Year's and a couple of things coming up. It's going to be a pretty intense couple of weeks to get that because there are a lot of questions about how you would actually go around collecting this information. And, you know, it's not that our exchanges can't get out there and do this type of work. But it is a huge burden to just turn on a dime, especially there's no proposed, you know, implementation period here. it would take a long time to do this. And so, yeah, but I think more problematically, and I'll let Jeremy go into this, is that not every self-hosted wallet has a name and a physical address, right?

If you're working with a smart contract, you know, this is going to prohibit or prevent crypto from going from an exchange wallet into smart contracts. And that's the whole point of everything that we're all building here is to get more services that are built on top of smart contracts. But I'll let Jeremy talk more about that. Yeah, I mean, I think there's so many issues with the proposed rule. There's so many issues with the process by which this is happening. This is, you know, a midnight rulemaking, you know, attempt. This is extremely unilateral from the Secretary of Treasury himself, despite significant objections throughout the government.

including from within law enforcement to this. So this is a highly politically motivated individual who wants to jam this through and is doing everything in his power to do that, despite many, many good actors in the federal government who, I think, realized that something like this should not be just jammed through and requires really careful review, deliberation, and planning and thinking. So we'll come back to that maybe, but I do want to say, When you look at blockchains, like the fundamental innovation today is this infrastructure where you can actually have programmable money.

The breakthroughs that are happening, this is what motivated me to get in the industry almost eight years ago was this idea that you could have money as a data type on the internet and you could program it and you could create contracts around it and that those could be enforced by code and work global. and interoperably, and that that would eventually allow for financial services innovation and access to that financial services innovation globally as well. Really profound stuff. And, you know, this rule basically just completely ignores the fact that that even exists. It completely ignores the fact that, you know, innovation in open finance is built on this idea of, you know, smart contracts that, whether they're providing. lending markets or they're providing other forms of economic arrangements are executing in code

and that individuals for the first time ever have the ability to access and interact with those, that's a huge breakthrough. And I think, you know, there's obviously like the full decentralization movement, which says, well, the whole point is to get outside of regulated intermediaries. And as long as we have access to, you know, to this outside of regulated intermediaries, it's fine. It doesn't matter. But I think we want a world where, you know, financial institutions are able to offer, whether it's a business or a consumer, are able to offer people access to this, offer access to these services around the world. I think we want that world. And, you know, effectively, you know, this rule, it says nothing to this issue. And the reality is that individuals and businesses are going to want to be able to transact with smart. contracts. Like, it's sort of like, duh. Like that's like so much. And, you know, so this is essentially, I think, you know, really, really limiting. And by saying nothing to that issue, it raises very significant questions about how, you know, a Coinbase, if you're on Coinbase.com,

can you, can you actually, you know, interact with a smart contract? What is staking? Is staking interacting with a smart contract? What are all these things? What, what can a consumer facing or business-facing institution do. So that's a major issue. And I think coming back to the procedural question, you know, what we ought to do is say, okay, we have these, you know, kind of concerns. And I think they are legitimate concerns, you know, money laundering and financial crime is legitimate. And we can, you know, talk about that. But, you know, you don't jam it through over the holidays without any consideration, without any thinking, without any industry engagement. And, you know, the letter, or the, the rule says, oh, yeah, we, we had an hour meeting in March with a few

people from exchanges. And last year we went to California for a day, big deal. I mean, that is not industry engagement. So the reality here is that we need, we need industry to be able to work on this and in a really material way and not just this jam through kind of situation. So let's parse out a bunch of what you just spoke about. I'm so curious about what you said about how this isn't even a unilateral motion from the government that, you know, Treasury Secretary Steve Mnuchin apparently is the one individual you imply that's really driving this and that actual people who work in this area, you know, in law enforcement, are opposed. Why is he so driven to do this? What is his perception about what's happening in the

crypto industry that makes him feel that this is the right way to go? Yeah, so we started to get wind that Secretary Manusian had serious concerns with Bitcoin, really, and crypto in general, but he really does not like Bitcoin. We started getting a sense of this over the summer around the same time that the FATF released their report that had some suggested policy tools that policymakers could use if they had concerns about self-hosted wallets. And what we were hearing at the time was very concerning because, you know, we would hear stories about how he wants to just ban Bitcoin entirely, that he doesn't like permissionless networks, that he doesn't want any of this stuff he wants to go after it. And, you know, that's when at the Blockchain Association, prior to this, we had never been concerned about bank secrecy act issues. We thought that the guidance that FinCED had put out in 2014 and again in 2014. or 2013, I guess. And again, in 2019, was very reasonable and we didn't have any issues with the policy. But when we started hearing that Manusian was so fired up about this, we decided that, okay, if something's going to be coming, we need to get into this. And so we worked with our membership and drafted a report called self-hosted wallets in the future of free societies. Was this the one that we went over in the episode with Jake? Okay. Yes. Yeah. Yeah.

That episode will be in the show notes for people. It was with Jake Trevinsky of Compound. Yes. And so we released that in November. And what had always kind of been going on in the back of my mind is like, okay, they're going to kick off a notice of proposed rulemaking that is going to go after self-hosted wallets. They know you can't actually ban Bitcoin. You can't actually prevent permissionless networks from existing. But they're going to try to go with the interaction between the regulated world and the less regulated world. And so, you know, we wrote this report and we sent it around to folks in government. and very quickly heard back from FinCEN that this was very timely and that they wanted to meet as soon as possible. And so we did some large meetings there with folks from Treasury and folks from FinCEN. We also did some meetings on the Hill. But all this is to say that the reason we wanted to lay the foundation is we always envisioned this would be a long battle, right? because you typically have a notice of proposed rulemaking. There's a 30, 60, sometimes even 90-day comment period.

There's often follow-on comment periods. And it's a very open process, and it allows for a lot of dialogue back and forth. But what we learned a couple of weeks ago is that this was actually being floated as an interim final rule. And an interim final rule goes into effect immediately. There's often a common period associated with it, and then it becomes a final final final rule. Only in government can you have a final final rule, but the interim final rule would go into effect immediately. And the reason that they were using to bypass the regular process is that there's kind of this public interest exception to going through the process. But the reason the reason

they said this was that, well, the money launderers will move their money around and they will be able to get around the rule if we give them any advance notice. So, All of that is to say that the real time has nothing to do with January 20th. It has nothing to do with Mnuchin is actually being booted out of power and that he's trying to get done something that he personally thinks it needs to happen. Like, let's talk honestly about this. This is a bunch of BS. Yes. But the motivation for this is that he, this stuff, and he doesn't understand this stuff.

There is no, like we have tried to game out every possible angle here. There's no, like, I want to, you know, leave and make a bunch of money in traditional banking. I mean, the guy's already worth hundreds of millions of dollars. This isn't like a career play. This isn't, he isn't beholden to any interests. He just fundamentally at his core believes that this stuff is bad. I have a story about that, and I think it's relevant. So almost a year ago in January at Davos, there was a closed session, a closed-door meeting

where, you know, a small number of people from the crypto industry. and folks, you know, like David Marcus, myself and others, but basically like the heads of the leading financial institutions in the world, major central bank heads, you know, the heads of the BIS, the Swift. I mean, a lot of people, and it was meant to be a dialogue on, you know, what kind of governance do we need around digital currency, what should this look like? And Mnuchin was brought in, and he sat at the front of the room, and people kind of got called on to give their perspective on things. And he got up, he basically just mocked Bitcoin. I mean, he essentially just started by saying, you can buy Bitcoin, you can do whatever

the hell you want with it. I think it's, you know, basically this is complete trash and, you know, you might as well just buy a bushel of bananas. And, you know, I mean, he literally kind of went off on this personal rant about, you know, how stupid he thought Bitcoin was. And, you know, if you want to, if you want to, you know, do that, you know, fine, basically kind of mockingly. But if you want to do that, you know,

and you want to like transfer that and control it yourself, no way, basically over my dead body. And so I think there's a mixture of a personal sentiment that he thinks he just, I think there's, you know, I've seen this for eight years. Like people who come out of the traditional financial system have an enormous amount of cognitive dissonance about open finance, about the idea of, you know, digital money that exists outside the realm of the government or corporations. And I think he's one of those people who is just, it sort of violates his

frame of reference for how the world works. And it makes him angry. And I think he felt like he was very much on a personal mission on this issue. And so that was the first time I really saw that and obviously we're sort of seeing that play out in the twilight of the administration. And yeah, and I think I was going to say going back to your original question, though, Laura, he's alone on this. He is 100% alone. We have law enforcement agencies that don't think that this is going to be a useful rule. We have FinCEN itself that, yes, the rule came from FinCEN, but there are very smart people at FinCEN that understand crypto and they understand. And they understand and that this is going to be very problematic

for all the innovation that's going on. But they're at the direction of the Treasury Secretary on this. So we have, you know, staff-level people at the White House that have been helping to push back on this. So we have members of Congress that are wanting to push back on this. And even folks I've heard, you know, that work for the secretary directly don't think this is the right approach. But he is on a personal mission.

And the logistics, by the way, of getting a rule out the door are incredibly complicated. And what he has done to get this posted as quickly as he has is like really quite remarkable. He is, you know, it's like where there's a will, there's a way. And even though there's all this opposition against it, he is, you know, taken a personal, you know, level interest in ushering this through at the last minute. It's so fascinating. One thing that I'm. I'm curious about, though, is, you know, as you mentioned earlier, FinCEN did release guidance twice, that the industry largely felt was pretty sensible. So I was curious at this point in time, what do the people who don't think that this is a good role, you know, in FinCEN, or just pretty much any of the law enforcement or other people in government that you mentioned? What would, what do they think should be done? Like, do they have any kind of proposals on their wish list? Yeah, no, I mean, I think that, you know, so the way this has played out over the past couple weeks is, you know, there was a big stakeholder meeting because with different leaders at these various agencies. And everyone does agree that there's something needs to be done in general about concerns of illicit finance. I mean, it's hard to not have that position, especially when you're, you know, sitting in government. There were a lot of concerns around the process at the time.

I think the smarter way and those that are more informed understand that blockchains are actually a little bit different than cash. I know we love to make the comparison and it's useful in certain circumstances, but they're actually really cool, amazing tools that are used every day. We have chain analysis and elliptic and cypher trace that are all out there, working with law enforcement, working with companies to help track down and figure out who the best. bad guys are and where the illicit financial activity is going. And that is like very cool and different than how you would go and chase down the bad guys in the traditional world and in the traditional financial services world. And so the right way to have this is to have a conversation is

what else could we be doing? How can we use the unique characteristics of the blockchain to help us find these transactions that that are bad and the people who are associated with them as opposed to taking a, you know, regime that is meant for an old system and trying to apply it on top of crypto. And I think there are lots of people that are very interested in open and to have that conversation. But they want to have that conversation first before, you know, crafting this midnight rule and cramming it down at the very last minute. And one other thing that I really wanted to ask about a little bit further is I actually already engaged in a little bit of a Twitter debate about this with Ari Paul, but I actually, I think the point I was arguing was wrong and

he was right. He was saying that actually this doesn't really affect people who already primarily transact in wallets or even people who would choose to do so, which I actually, honestly, at this point in time, do think probably would describe, is the description of the majority of people who operate in defy at the moment that they're not doing it from a business that they're doing it from their own personal wallet. So if, you know, in the future, people have to, you know, on ramp through something like Coinbase, but then transfer for under, you know, 3,000 or 10,000 or whatever to their own personal wallet and then engage in DFI from there, like, what is the problem? You know, does it, because like my sense earlier, even also

from the FinCEN guidance was that in a way that that guidance would probably just drive more people to interact from their own wallets. And I understand, you know, that raises maybe some security issues if you're using, you know, huge amounts of money. But, you know, for most average people, you know, it's just, it's just going to be how they're going to interact. And a lot of people kind of like that idea that that's how most people would interact. So, so Ari was saying, this is really going to affect businesses more than individuals. That's what his point was. Right. I read his threads and I think he makes some very strong points. And I, and I agree. with most of it. And just to maybe reiterate what that, how that translates is, you know, I go to an

exchange. I go to, I work with a custodian. I'm getting some USDC or Bitcoin or whatever I'm doing. And in this new rule, let's say I want to, you know, take $15,000 and move it so I can use that and put it into defy or a Dex or whatever it is. Yeah, I need to say, I'm putting this in a self-fisted wallet, it's my wallet, you have my name and address, that's what I'm doing. And, you know, I can imagine a user interface where there's essentially like, you know, the service identifies, okay, you're, you're not sending to another VASP, you're sending to an unknown wallet, a checkbox that says, this is my wallet, and, you know, it goes, and then you go and you go and interact with Defi. Right. So at a practical level, I think that is accurate. Now,

here's the difference. Here's the challenge. Under this rule, this rule will mean that effectively the record of you as an individual doing that and the blockchain address, those just get sent in a data feed to the federal government and law enforcement, and they can do whatever they want with it. And so whether you're transacting with another person using an unhosted wallet or on your own account, so to speak, Now, basically, I mean, we know how all this works. The data feed goes to the government, and they're quite capable of writing software. And so you can imagine, okay, now we have this data feed.

And now we can basically have surveillance downstream over every transaction on chain tied to a specific identity and tied to that. Now, in the traditional financial system, there's nothing equivalent to that. You actually, the government needs a subpoena to get that information. unless the financial institution deems that the person is doing something suspicious, where they have reason to believe that there's money laundering or financial crime or some other action. If they do, then they have to report it to the government. Now, anyone who transacts above $10,000 is presumed to be a money laundering and are now under full surveillance and monitoring. They can be without consent.

And that is what this rule does. When you take cash out of a bank, you take $10,000 cash out of the bank, that does get reported. But, you know, there's not someone looking over your shoulder everywhere you go and seeing what you did. So there's a huge difference. And as we move into a world of, quote unquote, you know, digital money on internets, on blockchains, this is a small step towards radically higher levels of surveillance. And it is different than the way it works in the existing banking system. And so while it might feel good to say, oh, well, I can just put it in my self-hosted wallet

and then I can do what I want. Well, you've also, you've done that and your blockchain addresses and your transaction, downstream transaction activity are now, you know, under surveillance without you can, without you knowing or being able to do anything about it. Bet mode activated. The scorebed app here with trusted stats and real-time sports news. Yeah, hey, who should I take in the Boston game? Well, statistically speaking.

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And just remind me also, what is the information that is required to be reported? It's what identity, yeah, can you just list all the things? Yeah. Do you want to talk about that, Kristen? Well, no, for the self-hosted wallet, the customer registered with the exchange, there's information reporting about that. But the identity of the self-hosted wallet, the wallet ad, self-posed a wallet address has to have a name and physical address. The physical address is kind of a particularly complicated one person of the D-Fi stuff.

Yeah, I mean, the real question is, does that, and the rule does not specifically say, the CTR, what is the kind of currency transaction report? Yeah, does the CTR include blockchain address or wallet address? Now, like they SARS for virtual currency exchangers. Suspicious activity report. Yeah, sorry. Suspicious activity reports that are filed do require inclusion of blockchain addresses. And so that's a, that's certainly an open clarification.

But I think if in fact these CTR do include your wallet address. That is an enormous amount of, you know, sort of oversight that becomes possible. And then someone else also said something like, and I don't know if this is true, that then if you interact with somebody, then the exchange also will need to know their entire transaction history or something like that, if you're transacting above a certain amount. I don't think you need the whole transaction history.

No, you need to, the money service business or, or, you know, the money service business or, or bank who's providing, you know, interaction with blockchains is required to keep those records for statutory five years, basically. So, so for, you know, transactions of $3,000, you know, you need to essentially internally log what is like your own CTR. You need to track that so that that is on record. In the event that you got a subpoena, those records would be available to the government, you know, over a statute.

period of five years. One other thing that I want to ask about this was, so FinC also is going to try to propose these rules around structuring, which is, you know, ways in which users might try to break these larger transactions that would trip these requirements into smaller ones so, you know, they don't have to report. But then I actually try to glance through the document to figure out how they're going to do that. And it just looks like all they're saying is like, it's prohibited. Do you get a sense of what that would look like or how they would prevent that? I mean, my take on that is, so as a financial institution, we are required to have AML programs and monitoring to identify structuring activity and report it. I think it's not entirely clear how that translates in this proposed rule.

I think effectively, what I think it says is if your internal systems that are designed to identify structuring, identify structuring, then you need to presumably either freeze the transaction or close the account. Again, the details are not there, but it's essentially to have a more intense intervention than just I'm seeing structuring and I'm filing a SAR. Okay. So in a moment, we're going to talk a little bit more about the impact of this and also what the industry plans to do about it. But first, a quick word from the sponsors can make this show possible. 1-inch is a decentralized exchange aggregator that sources liquidity from the top dexes and liquidity sources to save users money and time on swaps. One-inch is capable of finding the best possible trading paths and splitting them among multiple market depths. Recently, the 1-inch team unveiled 1-inch version 2.

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Back to my conversation with Jeremy and Kristen. So, okay, so now I feel like I have a better understanding of what's included in the rule, but is there anything else that we should let people know about? Like, what is, you know, the content of this proposed rule before we move on to other topics? I think we got all that high level points. Well, one thing that I was wondering, because, you know, we did talk about defy, but I also wondered how this rule could affect the wider world of DAPs in general. or Web3, like, you know, if you wanted to buy, like if you had some $10,000 cryptocurrency

or something, you wanted to buy from somebody, how would that affect things? Like, would you need to get the KYC from that person or like, I don't know how this would impact? Well, I think this gets back to your comments about your thread with Ari Paul, right, which is basically, you know, if you're using a DAP, you're using that through a non-custodial wallet, because that's how Web 3 works. And if you're transacting with an NFT exchange, that NFT exchange is something you're connecting to through a non-custodial wallet as well. And so, you know, effectively what that would look like is I move, you know, $10,000

of USDC or ether or Bitcoin or whatever it is. And I'm interacting with the marketplace and I want to transact for an NFT. and I'm doing that, you know, on a permissionless infrastructure, and I then take possession of that, et cetera. That activity is sort of in that kind of parallel permissionless blockchain world. Now, if a custodial service wanted to allow you to, you know, buy an NFT from a marketplace and the custodial service

is interacting directly with the smart contracts, that's where it starts to get complicated. This gets back to the whole smart contract discussion. There are lots and lots of services now where it's a custodial service that itself behind the scenes is putting stable coins up into defy contracts or is putting Ethereum up into defy contracts on your behalf and interacting with smart contracts to give you access to it where you don't actually need to do self-custody, etc. that set of activities, that is, there's a giant question mark about that. Like, is that even legally possible? Because there is no way for that exchange or that custodial service to know the name and address of the smart contract.

Like, what's the name and address of compound protocol? You know, it just, it just doesn't work. This is, again, back to the rulemaking, why if this was serious in terms of process, like we would take the time to think about, okay, how are financial intermediaries deal with defy in the context of these, you know, financial crime concerns? And like, let's think that through and frankly, give the industry time in my letter to the senior staff, including Secretary Mnuchin, I specifically believe that there are ways for decentralized identity and identity protocols and other things to be layered on this in a way where you can. both have financial privacy and you can have accountability and record keeping and that is compatible with, you know, this emerging world of smart contracts. But it's going to take a year or two to figure that out. And so the right thing in my mind is create the space, try and work with industry to

figure it out. Don't just jam it through. So I think that's really where the big question marks are. All right. So let's talk a little bit about this process. You know, as you guys, mentioned earlier, the comment period for this proposed rule is only 15 days. A normal length of time is more like minimum 30 or more often something like 60 days. A coin center even published something where they talked about how there's this one proposed rule for the banking industry that's been under consideration for six years. So yeah, like has a 15 day comment period ever happened before? Like is this? Not out of FinCEN. They have never done a 15 day comment period. So I mean, I know this sounds crazy. We're actually grateful to have these 15 days because, as I mentioned

before, there was going to be zero days. So, you know, this is at least something, but it's, you know, a very inconvenient time. And though the good news is it could be the grounds for an Administrative Procedure Act case against them for not taking enough time and allowing enough time for this to happen. So we've been working with Jake Schrovinsky, who is, you know, one of our, he chairs our defy working group at the Blockchain Association. We've been working with the team at Kirkland and Ellis, including Paul Clement, who's a former Solicitor General, to try to figure out what is the best sort of legal strategy. So, you know, going forward, we're going to obviously comment on the letter and, you know, work through Christmas and probably not go skiing as many days as I had

hoped because we're going to have to be figuring out how best to respond to this. But simultaneously, we're also coming up with a legal strategy to figure out how to push back on this and prevent it from going into effect because we do think that the process here has not been followed. I mean, it very clearly hasn't been followed and that, you know, that they shouldn't be allowed to move forward with such a short time frame. I would add one thing to that just, and this is almost a little bit of a call to action, which is there, you know, I think there are probably 30 to 40 million people in the United States who are, you know, interacting with digital currency and who probably care a lot about this.

And that's a huge number of people that are impacted. So the impact is broad. But the call to action is really people who care about this need to be, they submitting their own comments, but also, you know, reaching out to Congress, reaching out to their representative. elected officials and making it clear that they feel very strongly that this is not a fair review process and that this deserves a review, not just on this administrative level, but frankly, this is something that Congress has not even had an opportunity to look at. And so I think people need to get out there and apply as much pressure as possible so that there is a more extensive review period on this so that, you know,

some of the issues that we've identified here can be thought through. There's also an interesting time frame ahead of us. I mean, as we mentioned before, I think Manusian is going to do everything he can to make this role final prior to inauguration day on January 20th. But if we could succeed in extending the comment period or extending the period of time where FinCEN has to review all of the comments to get to January 21st, I think this would be a totally different ballgame. I think we would be able to work with the new administration and start over on something like this. And so going back to Jeremy's call for action, every, you know,

sort of unique argument that is brought forth has to be addressed as part of the regulatory process. And so, you know, we highly encourage people to comment and, um, and, um, um, that will, you know, lengthen the time needed in order for FinCEN to meet all of the requirements before making the rule final. So getting a lot of comments in is going to be important. It sort of reminds me of a common tactic in crypto, which is, you know, the denial of service attack. But anyway, yeah, one thing that I was curious about is you, so you mentioned this, administrative procedure act and legal action. I don't know what that looks like.

Would that mean like a literal lawsuit against this or what? Oh, okay. Yeah. So there's a couple ways. There's a couple ways we could do it. And we're evaluating. But one way to stop this thing from going into effect is to sue the government and say that you can't put this out there.

And so, yeah, we're looking to do that. And that would probably be in the form of a preliminary. injunction at the time that a final rule comes out. But we're looking at all of the different options that are there right now. The other option we have, because if the rule does become final, it does become quite difficult to undo the rule, right? Once it's finally, I can't just, but if it's in this proposal stage, I think, like you said, the Coin Center folks had mentioned, some of these rulemakings go on for years, and sometimes they get pulled and they, or they get, you know, it gets stopped along the way. And so if we can keep the rulemaking,

open to get to the next administration, that's our best chance. But if it does go final, we have the lawsuit route that I mentioned. And we also have something called the Congressional Review Act, which is a tool that Congress has to undo regulations that they don't like. That is going to be a, that would be a fairly heavy lift to get the votes to essentially undo this rule, but it's not necessarily impossible. So we're looking at a legislative, legislative strategy on that side. And then we're also looking at, you know, working with, working through the courts in order to get this thing slowed down before it goes into effect. And then I wanted to add, sorry, go ahead. No, go ahead, Jeremy.

I wanted to add one one thought here as well, which is somewhat tangential, which is essentially, you know, I don't want everyone to be all doom and gloom here because I think, you know, you've We've actually seen, you know, a week or so ago, obviously there was some heightened concerns about, you know, an outright ban or, you know, more, more aggressive measures, which were, in fact, being contemplated. And the market obviously reacted to that. I think, you know, gradually, you know, there's so much interest in the market right now. It's obviously, it's obviously grown. But, but even, you know, specifically after 5 p.m. yesterday when the details of this rule were published, the market is up. And I think, you know, I'm very close to, you know, some of the biggest market makers in the world. And I think people have kind of shrugged it off. And I think they've shrugged it off for two reasons. I think one is the perception is, you know, if you refer to the Ari Parle thread as well, is sort of like, okay, well, defy I can go on. People can continue to utilize, you know, permissionless infrastructure. Yeah, there's some hassle around it, et cetera.

but this is not somehow, you know, kind of destroy the ability to use permissionless blockchains, right? So I think that's one piece. I think the other piece, which is actually more subtle, is that, you know, I have been, you know, obviously, you know, trying to work with mainstream financial institutions to work with the crypto industry for a very long time.

And the number one issue that has always been limiting financial, institutions, banks specifically, of getting involved is the compliance teams. The compliance officers basically say there's no way for us to have a way to keep track of what people are doing with permissionless blockchains. And we can therefore, it's impossible for us to meet our BSA obligations. So we have to stay completely away from this. As the OCC has basically said, hey, you guys can get into crypto. You guys can keep crypto on your balance sheet. You can provide custodial service. you can support stable coins, stable coin networks.

As that has happened, that's been a really positive thing. You're seeing institutional participation that's meaningful, that's coming into the market right now. And you're seeing more and more banks saying, hey, how do we get into this? The PayPal announcement is another example. This issue and having some resolution around this issue, I believe, will lead to massive scale financial institution participation in these markets because they will. will finally, at some level, the compliance departments will say, okay, compliance departments don't like gray area. They don't like not having rules. They like rules. If they have a rule, then they know

what they need to follow. And so this in some ways answers that question, which has been looming over this industry for seven or eight years. And so you could decide whether you think that's a good thing or a bad thing to have more banks involved in crypto. But I think that some resolution of this issue, whether it's this specific rule as it's proposed now, or some more extensive period where the industry can work on it and address some of the issues that we've identified, will lead to the mainstreaming of crypto in a larger way. And I want to make sure that that's not lost on people as well. Yeah, although I think what's fascinating to me about this is that, So I totally get the point that you're making it, and I do agree that it will lead to that, just having more clarity.

However, it goes also back to what we were saying, you know, was my debate with Ari Paul, where I do think that the rules, the way they're written now, will actually cut off certain revenue streams and lines of business for some of these bigger companies. You know, like I don't know how this would affect, yeah, like different things like staking or any services they might want to offer in yield farming or whatever it is. So in that regard, I feel like it disadvantages less technical people, like people like me who, you know, it's not like I interact with MetaMask all the time. And then the one time I did for the first time in a long time, I literally lost $500 in like five minutes. It was terrible. Like I haven't used MetaMask since. I was like so burnt. So I feel like this drives a thing where like it opens up crypto only to more technical people and not to everyday people. Yeah, I think that's a risk. And I think like worst case scenario, this thing gets jammed through. There's no way to stop it. It goes into effect. There's some, you know, some period of time.

The next step is we need additional guidance. We need additional clarification. We need additional amendments. We need to, we need to work on that issue so that, you know, mainstream financial institutions that want to tap decentralized networks for services and provide those as value to their users have the ability to do so and do so in a really clear way. So we have to continue to fight for that. And so just to go back to Kristen's points earlier about the Biden administration, Jeremy, you did say on CNBC that you expected the Biden administration

ultimately be positive toward crypto. But I don't know in the context of your comments, did you, did you mean like around this type of issue? Or, you know, why did you say that? And why did you, and what do you think their attitude would be in the short term if the rulemaking does go past the Trump administration? Well, I mean, I would I would say a couple things. I mean, I think there's obviously, you know, career civil servants that work in agencies. There's a tremendous number of people who work in the Treasury Department, in the OCC, in FinC, in FinC, in FinC, in FinC, in, in law enforcement, in, you know, in other key agencies who are getting more and more educated on crypto, thanks to Kristen and team and, you know, a broader, just general awareness in the space. And I think there's just so much more understanding now than there's ever been. and there's a real recognition that this is very significant and important infrastructure.

And so I just think at the federal government level, there is just in general a more constructive view on all of this. And I think that's getting more and more heightened as this grows around the world. I think specifically with the Biden administration, my view is that there's going to be a major focus in the Biden administration on, you know, American competitiveness in critical industries and infrastructure areas. I think that the approach that the Biden administration will take is not going to be one of, you know, the standing up massive, you know, federal government initiatives. It's going to be to tap American entrepreneurship.

It's going to be to tap the great, you know, technology capabilities, the great, you know, private firms to do that in a way where the public sector and the private sector work closely together to advance those things. And blockchains and what they enable is clearly a category and digital currency is clearly a category where, you know, the United States needs to have a leadership position, not just in this sort of U.S.-China thing, which people tend to over-dramatize, I think. But I think just in general, you know, this is, you know, I always use the 1996 metaphor and I think it's very apt. You know, we might have a Netscape moment with Coinbase's IPO, which was similar to back then, but I think very specifically, people are seeing that the global economic system and the financial infrastructure is going to get rebuilt in the image of the internet and on this. And we got to get it right. And so I think that this is just a time it happens to be when Biden and team are coming to power. And I likewise, I think that in general will want to kind of govern from the middle and try to approach this in a bipartisan manner.

There are, I think this is an industry that has, you know, people on on every which way of the political spectrum who are interested in seeing it move forward. And I think that that will contribute to general engagement and support. And so just so I understand how this will work, if indeed the rulemaking does go into the Biden administration, do you expect at that point, then it would be kind of more of the, you know, career level just bureaucrats who will carry the ball forward. and then therefore we'll institute, like a more typical process, is that your sense of what would happen? Or, you know, because I also like, I mean, not that I've looked into this, but I feel like the Biden administration probably has a lot of priorities when it comes in. I don't know how high this is going to rank. So I just wonder, is it going to languish or? You know, there could be a number of things. The very least, I think we can expect it to slow down. At the very best, maybe it gets pulled entirely. And then the conversation can start.

you know, a new with with folks in the administration. You know, FinCEN is one of those agencies that it is all career people. So the team that's in place now will continue to be there, you know, going in, you know, post-January 20th. And so we're hopeful that the problem we have now is that we have a Treasury Secretary who's, for whatever reason, made this his number one priority. I don't think this is going to be Ellen's number one priority out of the gate. And this will be Yeah, sort of reverted to the normal process where we have really well-educated, talented people in government that are trying to think creatively about these issues. And, you know, those are the ones that we want to be engaging with on these conversations, not, you know, Treasury secretaries

that are difficult to get in front of. So one other thing is that, you know, pretty much this whole conversation has been pretty focused domestically. But Collins Belton, who's an another lawyer in the crypto space, told me that he thinks this breaks down GDPR compliance in the EU and he just was super skeptical it would fly over there. So how do you think GDPR issues might affect the ability to implement a rule like this? Well, I hadn't thought through that angle, but yeah, I mean, there's just a lot of information that's going to be stored in one place. But yeah, no, that's an interesting thought. And this is, I mean, I believe that there are exemptions around, you know, basically, you know, information sharing associated with tracking associated with financial crimes enforcement.

I don't know the details on that. But, I mean, for example, I mean, the European Union and its members have been very proactive around the travel rule and fat of work. And that requires a massive amount of PII flying around all around the world, you know, creating, you know, kind of honeypots for cybercriminals, which is one of the issues with travel rule. And Jeremy, when you say they've been active with that, you mean that they are requiring kind of more... Absolutely, yeah.

I mean, 5AMLD is very, very, you know, clear on that. What is 5AMLD? Okay. So the European Union has an anti-money laundering directive. They're now in the fifth version of the anti-money laundering directive. It has a whole series of things specific to virtual currency firms, to registration requirements to KIC procedures. And it is the sort of regulatory framework that binds those virtual asset service providers

to the FATF guidelines that have been laid out as well. So actually, the European Union is pretty strict on a lot of this. And I think you obviously saw what happened in France last week. You know, all this came out of the G7 meeting. This has been worked on as an issue. This has been one of the top issues for the Secretary of Treasury. in the G7 and frankly at the G20 level. And so, you know, I think there was essentially a kind of handshake around the table that

everybody's going to go roll this out in the G7. So I don't think we're done with this. I think we're going to see, you know, G7 and other G20 member states introducing rules or regulations similar to this in a coordinated fashion as we go into the new year. Oh, interesting. So it seems like that you does not see. a conflict between these types of rules and GDPR? No, I mean, if you look specifically at what France has already done,

if you look at what the German finance minister announced around this coming out of the G7 meeting, whatever that was on the 10th, I mean, his words did not need mincing. And so I would expect certainly in Germany that something in this space is imminent. Yeah, I don't remember the exact quote, but I did include it in my newsletter and unconfirmed one week recently, so I will try to find that and link to that in the show notes. All right. So, I mean, we kind of talked a little bit about what you thought people should do in terms of the comments over the next few days, but I don't know if you have any other kind of like tips for people because I kind of was like, are we going to see some mass exodus of crypto

from the exchanges over the next 15 days? Like, yeah, no, listen, I would encourage individuals, to submit comments. If you go to Treasury's website, you can get a copy of the rule on their instructions in there on how to email and a comment. There will probably, my guess, be some activists that come up with a streamlined way for people to do this. So I'd keep an eye out for those links

that make it easier to submit comments. But, you know, if you're listening as someone who is participating in the cryptocurrency, industry, you know, this is a, I think this is a really, this is the biggest bullet that's been fired at us so far in the United States. And, and, you know, we need to fight back against these types of attacks. And if you're not a member of the blockchain association, I'm putting in a plug, like, please join us. Like, we are a very small team because we have a very small budget. We could be a very big team if we had a big budget and we could do more work if we have.

more support. So, you know, for those companies that are out there that are not yet working with us, please join us. Like we are working together. We had Jeremy and I were in a war room that we set up on our signal here where we were all sharing information with different people that we were speaking with in government and coming up with a strategy and also, you know, analyzing the information when it came out last night. And so, you know, it's a really great team, a really smart people, you know, both here internally at the blockchain association and also within our membership. And so, you know, this work doesn't do itself. So we want to get more boots on the ground. I want to reiterate that. And I was going to say the same thing, which is Kristen and her team are

amazing. And the work has been incredible and just witnessing even the ability to change some of the things that have been happening on this particular matter, just in a matter of weeks. It's tremendous. You know, there's sort of the 1% rule, which is everyone in the world should put 1% percent of at least one percent of their wealth into crypto. Well, every crypto firm and every crypto firm's treasury, they should probably take one percent of it and contribute to and become members of blockchain association because this is extremely high value, high leverage work and would really, really encourage that. One other thing I wanted to ask about, Kristen, was I've been noticing on Twitter that Coin Center has been raking in the bucks on

Gitcoin, they raised $300,000 last I saw via Gitcoin. Is that something that the blockchain association could do? Or I don't know if there are any particular rules around? Yes, we've thought about trying to do something. We are stewards of the Defend Crypto Fund, which is a separate project that we have oversight of. But the way we're structured is we represent the companies and the organizations. then individuals should absolutely, and companies too, should also support Coin Center. I think that's a fantastic team. We do a lot of sharing of information and strategizing back

and forth with them. But they have a different point of view. They represent the technology and they're a great way for individuals who want to get involved to go over there. But yeah, from the industry perspective, that is the Blockchain Association's point of view. So very similar missions, but slightly different perspectives. And yeah, they do fantastic work. Okay. So I know you may not want to make predictions, but I was just curious how you thought this was going to go. Like, what do you think is the most likely outcome of all this?

I mean, we're going to give it our best shot to continue to throw sand in the gears and slow this thing down. Based off of how aggressive and how personally involved the Treasury Secretary is, you know, I think, he is going to push this out to a final rule. And I think we're going to have to go to court. I think that's the most likely pathway we see. Jeremy? I completely concur. Wow. It's very, you know, I've never worked in government. But it's just very interesting how one individual at the top, even when everybody around that person doesn't agree how that can force things through. All right, well, so we we'll check back and see if you guys were correct. But anyway, okay, well, it's been so fun having you on the show.

Thank you for doing this on a Saturday morning. Where can people learn more about you and this proposed rule? Well, if you go to the blockchain association.org and you go to our policy positions page, wallets issues are right at the top and you can see our report. You can see our letter that we sent over to Treasury, I guess a week or so ago when we were in the middle of this lobbying blitz. And we've got lots of information there. And I would just say I, you know, I communicate publicly on this here and there on Twitter at Jara Lair.

So follow me there. And, you know, I'll have more and more to say about this there as well. And you also have your show, money. That's right. The money movement. So, yes, you can tune in the money movement. The money, you know, YouTube.com slash the money movement. And certainly we'll be picking up the conversation there as well.

All right. Great, great. Well, thank you both so much for coming on Unchained. Thanks, Laura. Thanks so much for joining us today to learn more about Jeremy, Kristen, and this advanced notice of proposed rulemaking. Check out the show notes for this episode. Don't forget. You can now watch booty recordings of the shows on the Unchained YouTube channel. Go to YouTube.com slash c slash unchained podcast and subscribe today. Unchained is produced by me, Laura Shin, with help from Anthony Yun, Daniel Nuss, Bossie Baker, Shashonk, Josh Nirm, and the team at CLK transcription. Thanks for listening. Thank you.