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A Commentary On FinCEN’s Proposed KYC Necessities


Coverage Division

Monetary Crimes Enforcement Community

P.O. Field 39

Vienna, VA 22183

FinCEN Docket No. FINCEN-2020-0020, RIN 1506-AB47

January 4, 2020

Expensive Sir or Madam,

The proposed laws on foreign money transaction experiences and record-keeping appear to require that banks and cash companies companies (MSBs) be capable to show that an recognized counterparty to a transaction certainly owns a number of specific cryptocurrency addresses, when that counterparty makes use of an unhosted pockets and the transaction is over $3,000 in worth. (The $3,000 mark would invoke the record-keeping requirement, whereas the $10,000 mark would additionally invoke the foreign money transaction report requirement.)

The proposal makes no specific distinction between withdrawals and deposits, so I assume that the aforementioned proof of possession requirement would apply to each sorts of transactions in the event that they exceed $3,000 and contain a counterparty with an unhosted pockets. 

From right here on out, I’ll name any process or measure that makes an attempt to show the possession connection between a counterparty’s identification and a number of cryptocurrency addresses, as an “tackle verification process.” I’ll confer with the overall course of itself as “tackle verification.” 

In my nation of residence, the Netherlands, the central financial institution rushed via tackle verification final fall for these transactions from exchanges and custodians which contain withdrawals to an unhosted pockets. In contrast to your proposal, tackle verification is required within the Netherlands on withdrawals in these instances whatever the transaction worth. Handle verification isn’t a requirement for deposits from an unhosted pockets. 

As a long-time advisor and educator inside the cryptocurrency ecosystem, I’ve given intensive consideration to the practicality and desirability of tackle verification in gentle of the measures which have lately been taken by the Dutch central financial institution (De Nederlandsche Financial institution NV). And I need to share with you my ideas on these issues.   

Total, my conviction is that tackle verification is unlikely to be very productive in combating monetary crime, and that it carries important prices to commerce and innovation, and buyer privateness and safety. 

On this letter, I wish to set out why I’m so skeptical of the apply of tackle verification and why I deem your proposal unworkable and disproportionate. Earlier than beginning, I wish to make three feedback concerning the scope of my vital suggestions. 

First, neither out of your proposal nor from any extra commentary in your half have I been in a position to verify precisely what sorts of measures you intend for tackle verification. I might assume, nevertheless, that you’ve got in thoughts related procedures as these which might be presently really helpful by the central financial institution within the Netherlands to our custodians and exchanges.

Therefore, I’ll take its advised procedures as a tenet for formulating my criticisms of tackle verification. These advised procedures are as follows:

  • For purchasers to take screenshots of their wallets with the vacation spot tackle
  • For the client and the enterprise to video convention in the course of the transaction
  • For purchasers to digitally signal the vacation spot tackle with the related non-public key 
  • For purchasers to return slightly of the bitcoin they’ve obtained to the change or custodian
  • For the enterprise to provide the client with an tackle (presumably by possessing an prolonged public key of the previous)

Second, I’ll restrict my examples to instances during which cash is withdrawn to an unhosted pockets. The identical criticisms may be leveraged towards the case during which cash is deposited from an unhosted pockets. In actual fact, tackle verification is a good greater sensible drawback within the case of deposits, as cryptocurrency transactions sometimes contain a number of unspent transaction outputs as their inputs (which means that you would need to join an recognized counterparty to a number of addresses, not only one). 

Third, your regulation additionally proposes tackle verification in instances the place the counterparty’s pockets is hosted, however the financial institution or MSB of which the counterparty is a shopper is positioned in sure international jurisdictions. I solely limit my commentary to instances during which the counterparty makes use of an unhosted pockets. 

Unproductive In The Battle In opposition to Monetary Crimes

The proposal intends for tackle verification to fight all kinds of economic crimes. Within the government abstract, for instance, the proposal states:

As defined additional under, U.S. authorities have discovered that malign actors are more and more utilizing CVC to facilitate worldwide terrorist financing, weapons proliferation, sanctions evasion, and transactional cash laundering, in addition to to purchase and promote managed substances, stolen and fraudulent identification paperwork and entry gadgets, counterfeit items, malware and different laptop hacking instruments, firearms, and poisonous chemics. As well as, ransomware assaults and related calls for for fee, that are virtually completely denominated in CVC, are growing in severity, and the G7 has particularly famous concern concerning ransomware assaults ‘in gentle of malicious actors focusing on vital sectors amid the COVID-19 pandemic. 

I can’t probably focus on tackle verification procedures close to all of those crimes. So, as an alternative, I’ll simply restrict my discussions to some monetary crimes which might be a minimum of a significant a part of the issues with these proposed laws: cash laundering, terrorist financing and sanctions evasion. 

These are structurally very related crimes, although they differ by way of their authorized underpinnings and substances. And tackle verification procedures are going to have little impact on combating them for a similar causes, for my part. 

Suppose, for instance, that the client of an change is intent on laundering cash for a drug cartel by way of bitcoin, and that the change implements tackle verification by having clients take screenshots of their wallets. How precisely would this cease the client from taking part in cash laundering actions? 

The shopper may simply circumvent the requirement within the following method: 

  • Create an tackle in their very own pockets and take a screenshot. After the change confirms the transaction and the client receives the bitcoin, they will switch them to the felony group. 
  • Obtain an tackle instantly belonging to the felony group and incorporate it right into a watch-only pockets. The shopper takes a screenshot of this watch-only pockets and the vacation spot tackle. The change confirms the screenshot, and instantly transfers the bitcoin to the felony group. The shopper by no means has entry to the bitcoin. 
  • Obtain an tackle instantly belonging to the felony group and create a faux screenshot, comparable to with the Bitcoin Pockets Screenshot Generator. The change confirms the client’s screenshot, and sends the bitcoin on to the felony group. The shopper by no means has entry to the bitcoin.

Generally clients are tricked into being cash mules, moderately than deliberately supporting a felony group. Even for such clients, nevertheless, it might not likely change a lot about my reflections above. If a buyer may be tricked into turning into a mule for a felony group, it’s unclear how a screenshot may assist forestall their stupidity.

And these conclusions may be made extra usually about most different tackle verification procedures. I didn’t simply cherry decide the screenshot implementation of tackle verification. Many different sensible implementations — comparable to making digital signatures or sending again a few of the funds — would expertise an identical stage of fecklessness. 

Total, tackle verification procedures actually appear to supply no extra tangible advantages close to combating cash laundering, terrorist financing and sanction evasion when commonplace buyer due diligence and transaction monitoring procedures are in place. 

I’m not a lot satisfied that tackle verification fights different sorts of monetary crime nicely both, a minimum of not in any method that would not even be finished in a much less invasive method. I consider the feedback above are sufficient to point out the sorts of effectiveness issues tackle verification will expertise in apply. 

The Prices Of Handle Verification Procedures

Handle verification additionally comes with important prices. Exactly what these prices are will rely upon the precise measures taken by the banks and MSBs that should implement it. However I need to emphasize two main issues that, to totally different levels, will in all probability apply to some extent for any sensible implementation of tackle verification.    

First, tackle verification procedures current a hurdle to commerce and innovation. 

Suppose, as an example, that an change required all counterparties to attract a connection between their identification and their cryptocurrency tackle(es) on an unhosted pockets by way of a digital signature over the tackle(es). (I put aside for the second the priority that this might be an ineffective proof of something.) 

Most clients do not know methods to make digital signatures and this can create an overload of buyer complaints and requests. It could additionally require clients to acquire software program and {hardware} that would comparatively safely enable them to make these digital signatures. Numerous enterprise will in all probability be misplaced as a consequence of the chaos of implementing such an tackle verification process. 

Some doable implementations of tackle verification, in fact, is perhaps barely much less invasive to commerce, comparable to a screenshot of a pockets (once more setting apart the priority that this might be ineffective proof of something). However even right here, we have now to acknowledge that some prices or problems to commerce and innovation will materialize. 

As an illustration, as cryptocurrencies are programmable, you may also ship them to addresses ruled by decentralized protocols, not human beings. Whereas these decentralized protocols are largely experimentation in the intervening time, they might show to have very fascinating and invaluable use instances. 

However how precisely may these decentralized protocols match into the proposed tackle verification requirement? 

In my opinion, the proposed laws can’t accommodate this type of use case: decentralized protocols wouldn’t have identities or bodily addresses in spite of everything. So, even a comparatively easy measure to implement tackle verification by a financial institution or MSB, comparable to a pockets screenshot, may have damaging penalties to commerce and innovation. 

Second, tackle verification is more likely to damage buyer privateness and safety. I’ll simply run via a few the doable implementations to make the purpose. 

To start out, a screenshot reveals what kind of pockets a buyer is utilizing and probably additional data, probably about the kind of working system or gadget. A video convention will reveal much more in regards to the buyer’s private storage preparations. 

This sort of data could be very harmful within the improper arms. We don’t ask clients of valuable steel retailers the place they retailer their gold and silver. So why do that with bitcoin clients? 

Whereas I acknowledge that bitcoin is far more liquid and introduces extra dangers close to monetary crimes, the upper the dangers for buyer privateness and safety are for my part not proportionally weighed with tackle verification procedures. 

One other probably candidate for tackle verification is making a digital signature over the counterparty’s tackle. It’s a well-established finest apply inside the Bitcoin business that you just solely reveal your public key when making a transaction (therefore, why it is best to solely use an tackle as soon as). This sort of measure would instantly contravene business finest practices. 


In conclusion, I’m uncertain that tackle verification procedures, as required for these contexts prescribed by these laws, will make any actual contribution to combating monetary crimes. A minimum of, I’ve not likely seen any sound implementation of them that may make me suppose in any other case.

As well as, tackle verification procedures include prices to commerce and innovation, and buyer safety and privateness. Certainly these prices rely upon how precisely you implement them. However prices they are going to have, a minimum of in any method that I can envision their implementation.  

I, subsequently, urge FinCEN to cease transferring with this proposal in its present kind. Any revised proposal should for my part reply three key questions:

  1. How precisely will tackle verification should be carried out by banks and MSBs? 
  2. How precisely will these procedures for tackle verification fight the big variety of economic crimes talked about within the proposal? 
  3. What precisely would be the prices to commerce and innovation, and buyer privateness and safety of these tackle verification procedures?


Jan-Willem Burgers

The creator wish to thank Daan Kleiman for his vital suggestions on an earlier model of this letter.

It is a visitor put up by Jan-Willen Burgers. Opinions expressed are completely their very own and don’t essentially replicate these of BTC Inc or Bitcoin Journal.

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