FinCEN Pulls Back Proposed Crypto-Mixing Reporting Rule After Industry Pushback

The U.S. Treasury's Financial Crimes Enforcement Network (FinCEN) said Oct. 5 it is withdrawing a proposed reporting regime aimed at crypto "mixing"—techniques designed to obscure a transaction's source, destination, or amount. The proposal would have gone beyond dedicated mixing services and required financial institutions to collect and report details on certain transactions and customers. FinCEN is also rescinding its 2023 determination that international crypto mixing constitutes a class of transactions of "primary money laundering concern," along with the related recordkeeping and reporting rule. According to the withdrawal notice, the action is scheduled for publication in the Federal Register on Oct. 6 and will take effect upon publication. FinCEN pointed to feedback warning that the proposal's broad definition could deter legitimate activity and create substantial reporting burdens. Under the withdrawn framework, the definition would have applied regardless of the protocol or service used. Illustrative conduct included pooling funds, coordinating transactions via code, splitting transfers, routing funds through a chain of single-use wallets, swapping between crypto assets, and adding user-initiated delays. The reporting trigger would have applied when a covered U.S. financial institution knew, suspected, or had reason to suspect that a crypto transaction by, through, or to the institution involved mixing and either occurred within, or involved, a jurisdiction outside the U.S. FinCEN said it is abandoning the unimplemented crypto-mixing reporting plan, while existing money transmission, funds transfer, and suspicious activity reporting requirements remain in place. The proposed definition would also have carved out certain internal processes used to execute transactions at banks, broker-dealers, and money services businesses, provided those firms maintained source-and-destination records and produced them when legally required. For users of self-custodied wallets, privacy exposure under the proposal would have come through institutional reports, which could have included wallet addresses, transaction hashes, IP addresses, and customer identity information held by the institution. Firms also would have been required to document compliance. Existing compliance expectations remain FinCEN reiterated that, under its current guidance, covered crypto money transmitters remain subject to registration, risk-based anti-money-laundering programs, applicable customer due diligence, recordkeeping, and suspicious activity reporting. Qualifying transfers also remain subject to the Funds Travel Rule. The guidance distinguishes between an anonymizing service that accepts and retransmits value and a provider of anonymizing software. Providing a tool by itself does not make someone a money transmitter, while operating a transmission business can. An unhosted-wallet user paying for goods or services on their own behalf is not a money transmitter on that basis. FinCEN's Oct. 5 announcement also addresses a separate unhosted-wallet proposal first published in December 2020. That proposal had already been listed as withdrawn on April 12, 2024, in the Spring 2024 regulatory agenda; the new notice says the agency will take no further action. FinCEN said it will continue monitoring crypto mixing for money laundering, terrorist financing, and other illicit activity and may take additional steps. Financial institutions' existing obligations remain relevant when evaluating transactions that raise privacy-related concerns. The post "FinCEN drops crypto mixing proposal as backlash kills rule" appeared first on CryptoSlate.