The U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) recently announced a Notice of Proposed Rulemaking (NPRM) that identifies international convertible virtual currency mixing as a class of transactions of primary money laundering concern and seeks to increase transparency around virtual currency mixing to combat its use by illicit actors.

Primarily achieved through the use of “tumblers,” “privacy wallets,” and other mixing services, virtual currency mixing involves a process of pooling virtual currency from numerous sources and then distributing the mixed virtual currency either to the original source or another destination. The purpose of this mixing is to obscure the source of virtual currency after it has been mixed and distributed. Because the blockchain is entirely public, anyone can typically see when and how much virtual currency is exchanged between two parties. But when a mixer is used, that point A to B transaction is obscured. For example, if person A sends 10 bitcoins to a mixer — along with numerous other individuals — the public ledger would only show the transaction from person A to the mixer. When the virtual currency is then distributed, the ledger would only show the transaction from the mixer to person B. The result is that there is no direct transaction between person A and person B in the public ledger.

While there may be legitimate and non-nefarious purposes for virtual currency mixing, the transactional anonymity provided by mixers is ripe for abuse — giving rise to regulators’ concerns that it will be used for money laundering and the funding of terrorism. With the new NPRM announced by FinCEN, the Treasury Department now seeks to address these concerns head on through regulation. Indeed, as Deputy Secretary of the Treasury Wally Adeyemo explained, the purpose of the proposed regulation is “combatting the exploitation of Convertible Virtual Currency mixing by a broad range of illicit actors, including state-affiliated cyber actors, cyber criminals, and terrorist groups.”

Specifically, the NPRM would require “covered financial institutions” to keep record of and report information about a transaction when they know, suspect, or have reason to suspect it involves virtual currency mixing within or involving jurisdictions outside the United States. Covered financial institutions include banks, securities brokers or dealers, money services businesses, casinos, telegraph companies, card clubs, mutual funds, and other persons/entities. The covered financial institutions would be required to report to the Treasury Department within 30 days of the suspected transaction the:

  1. Amount of virtual currency transferred and its U.S. dollar equivalent when the transaction was initiated;
  2. Type of virtual currency;
  3. Virtual currency mixer that was used;
  4. Virtual currency wallet address associated with the mixer;
  5. Virtual currency wallet address associated with the customer;
  6. Transaction hash;
  7. Date of the transaction;
  8. IP addresses and time stamps associated with the covered transaction; and
  9. Narrative describing the activity observed, investigative steps taken, and context of the transaction given the customer’s normal pattern of transactions.

The practical goal of the NPRM is to make it easier for law enforcement to trace transactions involving mixed virtual currency. While the proposed record keeping regulations would not eliminate the anonymity provided by the mixing, it would create detailed records of transactions involving virtual currency that was mixed outside or involved individuals/entities/state-actors outside of the United States.

The NPRM is open for public comment until January 22, 2024, and has already received over one thousand responses. We will continue to monitor this rulemaking process.