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Privacy Advocates React After FinCEN Targets Crypto Mixers in Anti-Money Laundering Crackdown

Published October 20, 2023 3:29 PM
James Morales
Published October 20, 2023 3:29 PM
Key Takeaways
  • US lawmakers have called for stricter rules to prevent the illicit use of cryptocurrencies.
  • FinCEN proposed to oblige financial institutions to report any transactions they suspect passed through a crypto mixer.
  • As global regulators target tools aiding anonymous transactions, privacy advocates defend their legitimate use.

Depending on your political sensibility, technologies that enable anonymous transactions are either critical guards against surveillance, or dangerous criminal tools with few legitimate uses. In recent weeks, the seemingly endless debate between privacy advocates and security hawks has become increasingly heated as the use of cryptocurrencies by Hamas has entered the conversation.

Following calls for stricter anti-money laundering and counter-terror financing (AML/CFT) rules, the US Treasury Department’s Financial Crimes Enforcement Network (FinCEN) has moved to sanction crypto mixers, citing their use by criminal actors.

FinCEN Moves To Curb Use Of Crypto Mixers

In a proposed rulemaking published on Thursday, October 19, 2023, FinCEN has suggested using provisions contained within the Patriot Act to designate crypto mixers as money laundering tools that pose a threat to national security.

Using an acronym for Convertible Virtual Currency (CVC), FinCen stated that “because CVC mixing is intended to make CVC transactions untraceable and anonymous, [it] is ripe for abuse by, and frequently used by, illicit foreign actors that threaten the national security of the United States.”

Under the proposal, huge swathes of the US financial services sector, including crypto exchanges and traditional financial institutions, would be obliged to report any transactions they suspect may have passed through a crypto mixer.

Although the latest proposal represents one of the strongest regulatory crackdowns on the use of crypto mixers, the technology has long been the target of US enforcement efforts.

For example, in October 2020, FinCEN issued Larry Dean Harmon with a $60M fine  for his role in developing Helix and Coin Ninja, two prominent Bitcoin mixers.

More recently, the 2024 National Defense Authorization Act (NDAA ) included provisions that could restrict access to crypto mixers and privacy coins.

Privacy Advocates Defend Legitimate Uses

While they don’t refute the evidence that crypto mixers are used by criminal networks, privacy advocates argue that this doesn’t justify their prohibition, nor erase the genuine privacy needs of many crypto users.

Given the transparent nature of Bitcoin transactions, for example, using a mixer allows people to hide how they spend their money from public view.

What’s more, there will always be a hardcore contingent of crypto-libertarians who oppose any government surveillance and support the rights of individuals to access privacy-enhancing tools.

Of course, the US has not outlawed crypto mixers entirely, but FinCEN acknowledged that no existing mixers have come forward to register with the regulator, a move that would require them to collect personal information about their users.

Anonymity Tools Sidelined By Prohibitive Regulation

In the end, FinCEN’s latest proposal points to a growing tendency among global regulators to enforce the same level of  “Know-Your-Customer” (KYC) controls on crypto platforms as are currently standard in the traditional financial sector.

Just as it is impossible to legally open a bank account without verifying your identity, an emerging global AML/CFT regime seeks to deanonymize crypto wallets and transactions by imposing similar KYC requirements. 

But whereas banks must answer to governments, decentralized protocols have so far proven difficult to control. And despite the rising mainstream adoption of cryptocurrencies, the doctrine of anonymity that reigned supreme in the early days of the space may prove difficult to stamp out entirely.

Ultimately, shutting down crypto mixers is like a game of whack-a-mole. If authorities take out one, another is always ready to take its place.

Instead, regulators like FinCEN have increasingly focused on gatekeepers that oversee passages in and out of the shady world of anonymous finance. 

Comment 
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For example, consider the fate of privacy coins in the UK, where the implementation of the “travel rule” for crypto transactions has led to the delisting of tokens such as Monero by many regulated exchanges

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