Mercy Corps’ Response to FinCEN’s Proposed Rule for Virtual Currency or Digital Assets

Refugees, Regulations and the Risks of Financial Exclusion

Alpen Sheth
Jan 11 · 7 min read

TL;DR

As regulators begin proposing rules for emerging fintech, it is critical to assess potential impact on those already excluded from the financial system to ensure we are not reinforcing that exclusion in the digital world and perpetuating cycles of poverty that have the potential to be broken.

Given our 40 year history of working on financial inclusion in frontier markets, Mercy Corps submitted formal comments on the Financial Crimes Enforcement Network’s (“FinCEN”) proposed rule to implement a new recordkeeping rule for convertible virtual currency (CVC) transactions over $3,000 and apply existing currency transaction report (CTR) requirements to CVC transactions over $10,000.

While we appreciate that financial inclusion is a high priority for FinCEN and support its goals of reducing illicit finance threats, we have serious concerns about the financial exclusion risk to refugees and internally displaced persons without permanent and stable physical addresses if this rule is approved. Besides the high cost of serving individuals in these environments, the largest barrier to inclusion is overly restrictive Know Your Customer (“KYC”) requirements — and, now, potentially, “Know Your Counterparty” requirements — that shut out the millions of people, including refugees, who may not have permanent or stable physical addresses.

Based on our experiences on the ground working directly with vulnerable populations globally, we believe that recent technological advancements in blockchain and cryptocurrency (like unhosted wallets) can be transformational tools that can bring financial access to the traditionally unbanked, including those lacking permanent and stable physical addresses. We have written elsewhere about why we think “unhosted wallets” have a role in avoiding large-scale financial exclusion here:

The proposed rule as drafted would actually increase the barriers facing the unbanked by introducing new requirements that are not part of existing regulations and risk increasing inequalities of access by pushing more activity into the informal sector. Several former regulators have underscored why the proposed rule would be harmful from a regulatory perspective as well, including Jai Ramaswamy, former DOJ AML Chief, (here) and Katie Haun, former SEC, FBI, and Treasury (here). We encourage FinCEN and the Department of Treasury to reconsider its proposal in light of the substantial and disproportionate financial exclusion risk to refugees and other displaced persons that would result from asymmetrical recordkeeping requirements for cryptocurrency transactions involving unhosted wallets.

Moving forwards, we would like to continue to engage on how FinCEN may strike a more reasonable balance between financial inclusion and the importance of preventing terrorism financing, money laundering, and other illicit activity.

Our full response is available in PDF and reprinted below:

_______________

Policy Division
Financial Crimes Enforcement Network
P.O. Box 39
Vienna, VA 22183

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

To Whom It May Concern:

We thank the Financial Crimes Enforcement Network (“FinCEN”) and the Department of Treasury for the opportunity to share comments on FinCEN’s Notice of Proposed Rulemaking regarding “Requirements for Certain Transactions Involving Convertible Virtual Currency or Digital Assets” (the “Proposed Rule”).

As an initial matter, as the period for notice-and-comment has been reduced to less than three weeks over the December holidays, we request that FinCEN offer a 60-day notice-and-comment period on the Proposed Rule so that the public has adequate opportunity to review and comment on the Proposed Rule. Given the truncated notice-and-comment period, we offer only limited comments on the Proposed Rule that are critical to our core mission to serve refugees, internally displaced persons, and other vulnerable communities.

Background

Mercy Corps is a global team of humanitarians working together on the front lines of today’s biggest crises to alleviate suffering, poverty, and oppression by helping people build secure, productive, and just communities. Since our founding in 1971, we have provided emergency assistance to refugees, internally displaced persons, and other vulnerable communities facing poverty, natural disasters, and violent conflicts all over the world. Today, Mercy Corp is comprised of nearly 6,000 team members in more than 40 countries around the world.

Mercy Corps is one of the leading global experts working to facilitate functioning markets and create safe and ethical pathways to extend banking services to the 1.7 billion people who are currently excluded from financial services. The “unbanked” — comprising 31% of the world’s population — are refugees, small farmers, and other vulnerable populations living in fragile and insecure markets, often without permanent and stable physical addresses. They are excluded from banking services for a variety of reasons, including a lack of reliable identification, underdeveloped financial services infrastructure, unstable governments, and poor macroeconomic policy environments. Besides the high cost of serving individuals in these environments, the largest barrier to inclusion is overly restrictive Know Your Customer (“KYC”) requirements — and, now, potentially, “Know Your Counterparty” requirements — that shut out the millions of people who may not have permanent or stable physical addresses.

Unhosted Wallets Provide Ethical Means To Serve Traditionally Underserved Populations.

Based on our experiences on the ground, we believe that recent technological advancements in blockchain and cryptocurrency are game-changing tools that can bring banking services to the traditionally unbanked, including those lacking permanent and stable physical addresses. For example, unhosted wallets offer the possibility of simplified user registration (e.g., simply a phone number and a name or perhaps even a selfie), that, when combined with limits on transactions and real-time fraud-detection made possible by blockchain, may provide efficient means to serve traditionally underserved populations without unduly increasing illicit finance risk. Mercy Corps understands how quickly and powerfully access to digital technology can change the lives of the traditionally unbanked. Building safe legitimate structures for these populations to access funds — whether traditional or with cryptocurrencies coupled with smart contracts — is the first step for them to build a transaction history that allows increasing levels of access to financial services like index-based disaster insurance, crop insurance, remittances, loans, and much more.

The Proposed Rule May Unreasonably Exclude from the Financial System Refugees and Internally Displaced Persons Who Lack Permanent and Stable Physical Addresses.

Mercy Corps appreciates that financial inclusion is a high priority for FinCEN. With this Proposed Rule, however, Mercy Corps is concerned that FinCEN has not appropriately considered the financial exclusion risk to refugees and internally displaced persons without permanent and stable physical addresses. If adopted, the Proposed Rule may cause financial institutions to stop processing transactions to unhosted wallets altogether or stop processing transactions to unhosted wallets where the counterparty is not able to provide a physical address — even for transactions that are under the $3,000 threshold. This unintended result would largely block off the potential inclusion of refugees, displaced persons, and other vulnerable and unbanked communities, creating simply a new digital version of the exclusive system we have now.

For example, not only may certain refugees, internally displaced persons, and other vulnerable persons lack permanent or stable physical addresses, they may also have a reasonable fear of disclosing their physical addresses. Those persons depend on remittances and — without access to traditional financial services and/or reliable internet connectivity — would be well served by being able to receive remittances to their unhosted wallets.

As detailed in Coin Center’s Comments to the Financial Crimes Enforcement Network on Requirements for Certain Transactions Involving Convertible Virtual Currency or Digital Assets (Dec. 22, 2020), the Proposed Rule creates a new obligation for financial institutions that only apply to virtual currency transactions. For virtual currency transactions over $3000 between a financial institution and an unhosted wallet, a bank or exchange would have to collect the name and physical address of the counterparty to the transaction. This obligation would be unique to cryptocurrency transactions. For example, when a bank customer writes a check, the bank does not require its customer to provide the address of the check recipient.

Like Coin Center, Mercy Corps is concerned that FinCEN has not appropriately considered whether the Proposed Rule will create compliance obligations for banks and exchanges so onerous that transactions with unhosted wallets will, in effect, be banned, regardless of dollar value. For example, financial institutions — when faced with large payments arriving from unidentifiable addresses and the accompanying compliance costs and legal risks — may choose to drop support for all transactions with unhosted wallets or choose to drop support for all transactions with unhosted wallets where the counterparty’s physical address cannot be provided.

As a result, the Proposed Rule’s increased compliance requirements for financial institutions may largely block off the potential inclusion of refugees, internally displaced persons, and other vulnerable communities facing poverty, natural disasters, and violent conflicts all over the world. The Proposed Rule is not the best way to counter the money laundering risk associated with personal cryptocurrency transactions. Practically speaking, even illicit actors must eventually convert between cryptocurrencies and local fiat currencies to meet basic needs and run their operations. FinCEN’s and the U.S. Department of Justice’s focus on non-compliant money services businesses remains the most effective way of combating illicit financial activity involving personal cryptocurrency transactions, without exacerbating financial exclusion and inequality.

Conclusion

We support FinCEN’s goals of reducing illicit finance threats. However, thoughtful development of the regulation of new financial technologies is key to ensuring that compliance is balanced with the risks of financial exclusion and a rapid increase in inequality of access that pushes more activity into the informal sector. We are concerned that the Proposed Rule, as drafted, fails to strike a reasonable balance between minimizing illicit financial risks and increasing equality and inclusion. We encourage FinCEN and the Department of Treasury to reconsider its proposal in light of the substantial and disproportionate financial exclusion risk to refugees and other displaced persons that would result from asymmetrical recordkeeping requirements for cryptocurrency transactions involving unhosted wallets.

Thank you for your attention to these matters. We would like to request a meeting with FinCEN to discuss the Proposed Rule and how FinCEN may strike a more reasonable balance between financial inclusion and the importance of preventing terrorism financing, money laundering, and other illicit activity. We look forward to discussing these issues with you at your earliest convenience.

Respectfully Submitted,

Mercy Corps

FinX.vc

We’re out to discover how a broken financial system that excludes billions can be remade.

FinX.vc

FinX is an initiative of Mercy Corps Ventures that is leveraging the 40+ years of experience in frontier markets and financial inclusion of Mercy Corps to reimagine the financial system with the world’s most vulnerable at the center of its design

Alpen Sheth

Written by

Senior Technologist @MercyCorps & FinX.vc, previously @Etherisc, @MIT, @PSU, @ecospaceagency, @WorldBank, @RMS, @INURED

FinX.vc

FinX is an initiative of Mercy Corps Ventures that is leveraging the 40+ years of experience in frontier markets and financial inclusion of Mercy Corps to reimagine the financial system with the world’s most vulnerable at the center of its design

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