Misinformation and the return of Mnuchin’s self-hosted wallets rule

Mar 14, 2022

On Thursday, Peter, Neeraj, and I recorded a podcast in which we discussed the new Biden executive order on digital assets and the continuing sanctions saga (video, audio). In particular we talked about the media narrative around these topics and the possibility of sanctions-driven crypto legislation in the short term.

For my thoughts on the EO I’ll refer you to a twitter thread I wrote in reaction. In short, I think expectations that it would deal a blow to crypto were obviously wrong, but so are over-optimistic interpretations of the EO as equivalent to the Clinton Administration’s “Framework for Electronic Commerce,” which set the policy vision for a hands-off approach to the Internet and fostered its explosive growth. That policy document was the culmination of a two-year process of study and consultation, while this EO is just a starting whistle. The ultimate outcome is not yet determined and we’ll have to work hard to make sure it’s positive. In the meantime the upshot is that, in stark contrast to many naysayers in Congress, this administration has made it clear that our ecosystem is socially and economically important and that it’s in the U.S.’s interest to lead (rather than hamper) its development.

That brings me to the sanctions saga and what could flow from it. The media continues to propagate a narrative of fear and concern that is unwarranted by the evidence they cite. Here are two examples that particularly rankle Neeraj.

First, the Wall Street Journal published a story last week in which Secretary Yellen said that the U.S. would continue to monitor Russian efforts to evade sanctions however they took place. She is then quoted as saying, “I often hear cryptocurrency mentioned and that is a channel to be watched. It’s not that that sector is completely one where things can be evaded.” So, what’s the headline of that story?

I mean, you can’t make this up! The other example is a type of headline we saw used across several outlets. It basically takes the fact that an executive order on crypto was signed and marries it to the unrelated fact that some folks are expressing concerns about sanctions, which leaves the impression that the former is spurred by the latter.

Sadly, headlines are the only thing most people will read, especially on social media, and it’s hard to understand how these headlines shouldn’t be considered “misinformation”. There’s seemingly no accountability.

Top prize, though, goes to Reuters with a story headlined, “Russians liquidating crypto in the UAE as they seek safe havens.” To support the proposition in the headline, that Russians are liquidating assets, the story cites one anonymous source described as an executive at “a crypto firm.” What did this person say? “We’ve had like five or six [inquiries] in the past two weeks. None of them have come off yet – they’ve sort of fallen over at the last minute, which is not rare - but we’ve never had this much interest.”

It’s enough to drive you crazy. They’ve had “five or six” inquiries? That never materialized into anything? That’s it?

The executive goes on: “We have one guy – I don’t know who he is, but he came through a broker – and they’re like, ‘we want to sell 125,000 bitcoin’. And I’m like, ‘what? That’s $6 billion guys’. And they’re like, ‘yeah, we’re going to send it to a company in Australia’.”

I kid you not. This is in a Reuters article. The anonymous source claims that a person whose identity he does not know asked for help selling $6 billion of BTC (which would be about a third of Bitcoin’s daily volume – i.e. very noticeable) in order to send the money to that jurisdiction notorious for money laundering: Australia.

Maybe instead of anonymous “executives” who overuse the word “like”, Reuters should quote someone who knows what he’s talking about like FBI Director Christopher Wray who said on Thursday at a Senate Intelligence Committee hearing:

The Russians’ ability to circumvent the sanctions with cryptocurrency is probably highly overestimated on the part of maybe them and others. We are, as a community and with our partners overseas, far more effective on that than I think sometimes they appreciate. …

We have built up significant expertise both at the FBI and with some of our partners, and there have been some very significant seizures and other efforts that I think have exposed the vulnerability of cryptocurrency as a way to get around sanctions.

What he means is, a sanctioned oligarch cannot move $6 billion to Australia using crypto!

Now I want to say it again as I’ve said it in my last two missives: Could crypto be used to evade sanctions? Absolutely. Will it? It would not surprise me if on the margin it is. Given that, should we be concerned? Only as much as the White House, Treasury, and now the FBI have said they are, which is not too much because the system works. Is the level of concern expressed by some politicians and reflected in headlines justified? Absolutely not.

And yet, I have no doubt we’ll get more of these headlines and more unsubstantiated stories. And I don’t doubt they will be cited by politicians as evidence for why we need legislation to further restrict the use of cryptocurrency – even though it is the crypto industry’s partnership that allows the FBI and Treasury to be so confident in their ability to prevent sanctions-busting, and even thought the President manifestly wants to take a considered approach to crypto.

In particular I’m thinking about Senator Elizabeth Warren who on Tuesday announced she is drafting a bill “to ensure crypto isn’t used by Putin and his cronies to undermine our economic sanctions.” NBC reported this about the bill:

One of the draft provisions in Warren’s proposal would seek to make it easier to verify the identities of customers and transfers to private crypto wallets by requiring financial institutions to keep detailed records and submit reports to the Treasury Department. The Treasury Department’s Financial Crimes Enforcement Network, known as FinCEN, is in the preliminary stages of drafting a similar rule, but Warren’s bill would codify that requirement.

This sounds like a reference not to a rule that FinCEN is “preliminarily” drafting, but to the shelved last-minute rulemaking that former Treasury Secretary Steven Mnuchin tried to ram through at the end of the Trump Administration. This rule is often referred to as the “self-hosted wallets” rule since it would place severe limitations on how exchanges could interact with persons who self-custody their funds. It would require exchanges to collect name, address, and other information about the send or recipient of funds over $3,000 if that person is not receiving or sending the funds from another exchange. This means it would require exchanges to collect information about persons who are not their customers, as well as collect sender/recipient information in situations where it is impossible to do so, such as when the “recipient” is a smart contract, thus severely limiting the ability of centralized exchanges to interact with DeFi. At the time we explained the problems with the Mnuchin rule this way:

Because compliance with the rule would often be impossible, it is, in effect, a “secret” and therefore undemocratic and extra-legal ban on certain types of otherwise innocent transactions. It will hamper law enforcement efforts to track illicit payments activity by pushing more users of the technology to self-custody their own cryptocurrency. Finally, it would mandate the unconstitutional, warrantless search and seizure of private information, and would obligate financial institutions to keep and report to government lists of persons engaged in the exercise of their First Amendment rights to assemble anonymously.

The rule was shelved in large part thanks to an unprecedented protest from the cryptocurrency community. In a fifteen-day window that included Christmas and New Year, Coin Center worked with other digital rights groups, such as the EFF and Fight For the Future, to rally the public and together sent nearly 2,000 personal letters to Secretary Mnuchin and filed over 7,500 substantive comments in the rulemaking – more comments in one proceeding than FinCEN had received cumulatively in its history. Members of Congress also objected.

Now, while it’s certainly concerning that Sen. Warren seems poised to introduce a bill to codify Mnuchin’s proposal, it won’t be a red alert if it goes through the regular order of deliberation and debate in the Senate and House. I’m certain that if it gets appropriate consideration, members will understand how foolhardy (and unconstitutional) such a measure would be, and the bill will go nowhere.

What I worry about, however, is that it could be attached to a fast-moving “must-pass” bill like a Ukraine aid package or an omnibus government funding bill. In such a circumstance there would be little time for careful discussion, and in an environment of misleading headlines it could move. If that were to happen, I would certainly expect the community to go to Defcon 1 and its vociferous reaction to the Infrastructure Bill last summer would probably pale in comparison.

So, we’ll have to keep our eyes peeled. The next thing to watch is a Senate Banking Committee hearing scheduled for this coming Thursday. It’s on crypto and illicit financing and will no doubt touch on sanctions. Ms. Warren is a member of the committee. So far the only announced witness is Jonathan Levin of Chainalysis.

The good news is we have allies on the Hill. For example, just last month Rep. Warren Davidson introduced a bill aimed directly at protecting the use of self-hosted wallets.

Various and Sundry

As I mentioned at the top, I recorded an episode of Tangents from Coin Center on sanctions and the EO with Peter and Neeraj. You can watch or listen and subscribe.

Nota Bene

Bitcoin May Serve Many Masters in the War in Ukraine - Bloomberg

Gyges Lydia: The Cryptonative’s Guide to US Financial Regulators

Francis Fukuyama on the endgame in Ukraine

Hu Wei: Possible Outcomes of the Russo-Ukrainian War and China’s Choice

A Serious Proposal on US Energy - Doomberg

You Can Have Geothermal Power Everywhere If You Drill Deep Enough - Treehugger