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Letter to Hon. Steve Mnuchin from Blockchain.com

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A letter from Blockchain.com CEO Peter Smith to Treasury Secretary Steve Mnuchin regarding recent proposed FinCEN rules, dated December 13th, 2020.

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Letter to Hon. Steve Mnuchin from Blockchain.com

  1. 1.     The Honorable Steve Mnuchin  Secretary of the Treasury  Department of the Treasury  1500 Pennsylvania Ave NW  Washington DC 20220        December 13, 2020     Dear Secretary Mnuchin,    I understand that the Treasury is proposing to introduce new emergency regulations which may  significantly restrict the way in which Money Services Businesses (​MSBs​) and other  know-your-client (​KYC​) regulated service providers are able to interact with self-custodied wallets  in the crypto-asset industry. I urge you to reconsider rushing these regulations through.    As the CEO of the provider of the world’s most downloaded self-custodied wallet - Blockchain.com  - I believe it is imperative that I outline my serious concerns in respect of the proposal.     Blockchain.com understands the need for US regulatory agencies to implement sensible,  meaningful and proportionate regulation. However, I am concerned that if the regulations are  implemented without a full administrative comment and review process, they may prove  unintentionally detrimental, compromising the ability of US-based law enforcement authorities to  continue tackling money laundering and terrorist financing activities.    Introduction to Blockchain.com    Blockchain.com, which has been in operation since 2011, is an established and trusted provider in  the industry, with over 60M self-custodied wallets downloaded. Blockchain.com is registered as  an MSB in the US and is in the process of obtaining money transmission licenses in a range of US  states. As an MSB, Blockchain.com must comply with the Bank Secrecy Act and have in place  adequate compliance processes and procedures to address money laundering and terrorist  financing risks. Blockchain.com has KYCed millions of users over the past 2 years.     In addition to its self-custodied wallet, Blockchain.com operates a crypto asset exchange, and a  range of other hosted services. In this way, Blockchain.com sits on both sides of the crypto  industry and has deep familiarity with the issues impacting the provision of hosted services, on the  one hand, as well as the unique nature of self-custodied wallets (effectively, software provision)  on the other.         Blockchain Luxembourg S.A. 9, rue du Laboratoire, L-1911 Luxembourg RCS B 190078
  2. 2. The importance of the self-custodied wallet    I understand that the Treasury will be receiving submissions from a range of industry participants  on the proposed regulations. As such, I do not propose to repeat the same arguments in detail.  However, I would emphasize the following:    ● The ability for self-custodied wallet users to transact on a peer-to-peer basis without the  involvement of intermediaries presents significant benefits to end users.  ● Innovation should be encouraged. Well considered regulation of self-custodied wallets is  necessary to avoid unintended and disproportionate effects on that innovation.  ● Cash payments are being gradually replaced by digital payments as technology evolves.  Cash-like payments (i.e., self-custodied wallets and peer-to-peer transactions) should  continue to benefit from the same freedoms, privacy and autonomy that cash payments  currently enjoy.    While each of these issues is critical, I have decided to focus the remainder of my response  outlining how the current ecosystem services the needs of US law enforcement authorities and  how the proposed regulations may curtail their efforts if not implemented in an appropriate  manner.    The effectiveness of existing regulation    It is important to note that, while transactions between self-custodied wallets are not regulated,  the interaction between peer-to-peer transactions (self-custodied wallets) and the regulated  ecosystem (of MSBs and money transmitters) means that an effective regulatory framework is  currently in place:    ● the activities of MSBs and money transmitters are subject to the Bank Secrecy Act and  each must meet strict KYC and anti-money laundering requirements (as outlined above,  Blockchain.com has KYCed millions of users over the past 2 years); and    ● third-party intermediaries (banks and payment services providers) are also regulated in  accordance with banking and financial services regulations.    At present, under existing regulation, prior to an individual user depositing assets with a hosted  service provider (i.e., the hosted wallet or exchange), the provider is required to collect information  about that user, which can then be passed on to US federal and state law enforcement authorities  in compliance with US law. The interaction between self-custodied wallets and the hosted  services industry empowers law enforcement to detect, disrupt and prevent money laundering and  terrorist financing activities. In addition, the blockchain itself provides transparency to law  enforcement in respect of crypto payment transactions which has not previously existed in the  context of cash-only transactions.        Blockchain Luxembourg S.A. 9, rue du Laboratoire, L-1911 Luxembourg RCS B 190078
  3. 3. Bifurcation of the crypto industry - a potential unintended outcome?    There is no doubt that the regulation of this industry (its nascent technology, rapid innovation and  global expansion) presents real challenges. However, I have real concerns that imposing  restrictions on the ability of a hosted service provider to transmit payments to the self-custodied  wallet space may result in a bifurcation in the industry. This may ultimately ring-fence the hosted  world from the self-custodied world, eroding the current transparency available to US law  enforcement authorities. In addition, unregulated offshore hosted-service providers may gain a  competitive advantage over AML/KYC-regulated providers. In doing so, US law enforcement  agencies may end up losing access to information that is currently readily available to them.    As the Blockchain Association concluded in their November 2020 report: Self-Hosted Wallets and  the Future of Free Societies:    The interaction between the hosted and self-hosted ecosystem is the foundation of law  enforcement’s ability to “tie” information to real world criminal activity and identities. Without overlap  between the self-hosted and hosted ecosystems, law enforcement would have much more difficulty  ascertaining the identity of individuals using self-hosted wallets for illicit purposes.    Blockchain.com’s financial crime department interacts with law enforcement authorities on a daily  basis. If we were not able to facilitate transactions between self-custodied wallets and our hosted  offering, that stream of transactional traffic would no longer be captured, nor could we provide  any requested details to law enforcement. It would simply be transacted elsewhere.    For these reasons, I think there is a real prospect that the proposed regulation may have the  unintended effect of diminishing the ability of US law enforcement to detect unlawful activity in the  crypto space and attribute it to criminal agents.    Is there a better focus for regulatory efforts?    Global regulatory authorities have acknowledged that the most significant money laundering and  terrorist financing risks exist in respect of over-the-counter exchanges and brokerages located in  countries that do not provide oversight and regulation of money movement activities. These  entities should be regulated but are operating either with deficient systems and processes or are  established offshore in locations where they can avoid such regulations entirely (as evidenced by  the case of BitMex which led to a series of indictments against its directors and officers earlier this  year).     The implementation of restrictive regulations targeted at self-custodied wallets located in  countries that require registration with FinCEN would have no impact on illegal activity conducted  on these off-shore OTC exchanges and brokerages. Imposing restrictions on self-custodied  wallets would, therefore, be disproportionate to the risks they represent.       Blockchain Luxembourg S.A. 9, rue du Laboratoire, L-1911 Luxembourg RCS B 190078
  4. 4. Conclusion    As noted above, the issue of regulation in this space is challenging and complicated. However, it is  critical to acknowledge that US law enforcement authorities have access to much of the  information which is needed in order for them to target criminal activity - currently required of  hosted providers located in AML- and KYC-regulated jurisdictions Given the inherent  complexities, any proposed regulation should be subject to a full consultation and review process.  Only in this manner, can we achieve a system of regulation that is sensible, meaningful and  appropriately targeted, preserving the transparency available to US law enforcement today.    I would be happy to discuss these matters with you further (you can reach me at  peter@blockchain.com).     Yours sincerely,    Peter Smith  CEO and Co-founder        Blockchain Luxembourg S.A. 9, rue du Laboratoire, L-1911 Luxembourg RCS B 190078 Blockchain.com Overview    Blockchain Luxembourg S.A. (the provider of the self-custodied wallet) is established in Luxembourg and has subsidiary  offices in the UK, the US and Europe. Its UK-based subsidiary, Blockchain Access UK Ltd is the provider of the  Blockchain.com Exchange and a range of other hosted services. Blockchain Access UK Ltd and another US-based affiliate,  Blockchain.com, Inc. are both registered as Money Services Businesses in the US.    Over the last 8 years and venture backed since 2014, Blockchain.com has built one of the leading brands in the crypto  industry by offering secure and reliable services to its customers.   

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