Contemporary Legal Problems of Cryptocurrency: Case Study in US
〈加密領域當前的法規問題：以美國為例〉。中文版請點擊這裡。
An attention-achieving MOOC about blockchain, which its lecturers came from Stanford, Imperial, UIUC, UCB etc., ended in December 2022. One of the lecture invited Peter Van Valkenburgh, a Harvard Law School graduate who reviewed regulations on crypto industry from the legal perspective.
In this article, we are going to explore issues related to crypto industry regulations, by following Valkenburgh’s points of view.
Why legalise cryptocurrency and facilitate a healthy regulatory system?
What are the problems of current regulations?
Is it anti-money laundering or invasion of privacy, when personal information should be revealed for transactions over 10k USD?
What happened in the Tornado Cash incident?
Authors／Jojo Kwong, Yoyo, Morris Yang
- Why legalise cryptocurrency and facilitate a healthy regulatory system?
In 1970s, there were privacy problems related to base stations of telecommunication in US. When crimes occurred, police could acquire information from the stations, such as geolocation. However, the ambiguity of the law left the questions below: Is search warrant necessary for obtaining personal information? Without search warrant, how much information could be acquired by the police?
For the above case, the court decision was whether the information was voluntarily provided. The court believed that users were not truly voluntary, if they had to sacrifice their personal information in exchange for using the communication services. This judgment led to the establishment of Third-party Doctrine, which regulates the expectation of privacy in the eyes of users.
Coming back to the field of cryptocurrency, the mission of legal workers in Washington DC has gradually shifted from “educating lawmakers” to “defending civil rights”. They hope to protect investors and prevent money laundering, meanwhile they also do not hope to violate civil rights secured by constitution, nor invade the privacy of civilians. For example, they believe that warrant must be issued before the government acquires the personal information.
- What are the problems of current regulations?
There are 4 questions raised by Valkenburgh to inspire audience to reflect on cryptocurrency regulations:
- Can Centralized Crypto Exchange (CEX) collect personal information of users?
- During trans-platform exchange, can CEX collect data from non-users? For example, if a customer of Coinbase transacts cryptocurrency to the Metamask address of a non-Coinbase customer, can this organization collect information of the Coinbase customer?
- Are software developers legal to collect personal information of users in Decentralized Crypto Exchange (DEX)?
- During DEX transaction, will it be possible to investigate without search warrant?
- Is it anti-money laundering or invasion of privacy, when personal information should be revealed for transactions over 10k USD?
In US, cryptocurrency does not belong to legal tender, but still it is legal for transaction activities. Financial Crimes Enforcement Network (FinCEN) defines cryptocurrency as “other value that substitutes for currency”, while the definition of the Internal Revenue Service (IRS) is “a digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value”, and has issued tax guidance regarding it.
Cryptocurrency exchanges are under the regulatory scope of Bank Secrecy Act (BSA), which means service providers must register themselves with FinCEN, implement AML/CFT programme, and submit regular reports to the authorities as well. Besides, US Securities and Exchanges Commission (SEC) considers cryptocurrencies as securities, and related laws are totally applicable to digital wallets and exchanges. In June 2019, Financial Action Task Force (FATF) adjusted Travel Rule Recommendation 16, which extended the area in effect into Virtual Asset Service Provider (VASP). Information of originators and beneficiaries, including account numbers and identifying documents, shall be shared between VASPs. They must also report suspicious activities to the authorities. In addition, Travel Rule established by BSA also considers the regulatory status of cryptocurrency as if traditional money transmitters. The following table summarises the differences between Travel Rule by FATF and BSA:
In December 2020, FinCEN proposed a new regulation to collect data on cryptocurrency transfer, which requires service providers to submit suspicious activity reports (SAR) about transactions over 10,000 USD, and digital wallet owners should identify themselves during single transactions over 3,000 USD.
In November 2021, US President Joe Biden signed the Infrastructure Investment and Jobs Act, which includes amendment to cryptocurrency regulations. If individuals or business organisations commit crypto-exchange valued more than 10,000 USD, they must report name of originator, DOB and taxpayer identification number to IRS. This Act will come into effect in the Fiscal Year 2024. Such amendment satisfies Section 6050I also, parties can be fined up to 250,000 USD and sentenced up to 5-year jail if they fail to comply.
- What happened to Tornado Cash?
Tornado Cash is a cryptocurrency tumbler, which its most prominent feature is to protect the privacy of users. For instance, Tornado Cash can hide the source and flow of capital, as well as prohibit others from inquiring and editing.
On Tornado Cash, all cryptocurrency by all users saved in the capital pool will tumble together. However, such mechanism may encourage illegal exchange activities, making internet crimes like robbery and fraud become increasingly convenient. Since 2022, many frauds involving De-Fi have been making use of Tornado Cash to launder. US Treasury expected cryptocurrency valued over 7 billion USD have been laundered on Tornado Cash. Eventually, the platform was sanctioned in August 2022.
Brian Armstrong, co-founder and CEO of Coinbase, questioned the rationale of the Treasury banning the whole technology behind Tornado Cash. Many law-abiding users might not be able to access to their capital or privacy tools, even causing people to reject investing in cryptocurrency after the sanction of Tornado Cash.
Conclusion
As cryptocurrency become more and more popularized, some people start to worry about their laws and regulations. Over-regulating will violate the core value of de-centralization, while under-regulating will undermine the confidence of investors. This article takes the legal perspective to explain the reason of regulating cryptocurrency, current laws and problems, and the controversial case of Tornado Cash. It is hoped that readers can have a clearer picture on the regulatory problems of cryptocurrency and the logic behind such laws.
References
1. Coin Center Report: The Case for Electronic Cash https://www.coincenter.org/the-case-for-electronic-cash/
2. Coin Center Report: Electronic Cash, Decentralized Exchange, and the Constitution
https://www.coincenter.org/electronic-cash-decentralized-exchange-and-the-constitution/
3. Peter Van Valkenburgh: Current Topics in Crypto Regulation
https://youtu.be/OO_mar88bb8/
4. Comply Advantage: Cryptocurrency Regulations Around The World
https://complyadvantage.com/insights/cryptocurrency-regulations-around-world/
5. Comply Advantage: FATF Travel Rule
https://complyadvantage.com/insights/fatf-travel-rule/
6. KryptoGO: 如何監管虛擬貨幣？ — 關於 FATF 提出的 Travel Rule 建議https://medium.com/kryptogo/%E5%A6%82%E4%BD%95%E7%9B%A3%E7%AE%A1%E8%99%9B%E6%93%AC%E8%B2%A8%E5%B9%A3-%E9%97%9C%E6%96%BC-fatf-%E6%8F%90%E5%87%BA%E7%9A%84-travel-rule-%E5%BB%BA%E8%AD%B0-78deab3519ee
7. The Sumsuber: What is the FATF Travel Rule? The Ultimate Guide to Compliance (2023)
https://sumsub.com/blog/what-is-the-fatf-travel-rule/#fifth
8. The Verge: A legal challenge over crypto reporting could strike down decades-old anti-money laundering laws https://www.theverge.com/2022/6/21/23176774/coin-center-legal-challenge-crypto-money-laundering-6050i
9. 數位時代：混幣服務Tornado Cash遭到美政府制裁！背後與洗錢犯罪劇增有關？https://www.bnext.com.tw/article/71413/ignore-us-treasury-sanction-tether-still-support-tornado-cash
10. 理財學長：被駭客用來洗超過70億美元！混幣器Tornado Cash是什麼 | DeFi | 加密貨幣 https://vocus.cc/article/62f38a59fd897800017e843c
11. iThome：加密貨幣社群因美國制裁Tornado Cash一案控告財政部
https://www.ithome.com.tw/news/152971
12. BlockTempo：隱私混幣協議Tornado Cash重返GitHub，TORN代幣漲10%
https://www.blocktempo.com/ethereum-coin-mixer-tornado-cash-is-back-to-github/
