Proposed Cryptocurrency Regulations: Increase in Reporting Transparency

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Proposed Cryptocurrency Regulations Increase Reporting Transparency

Proposed Cryptocurrency Regulations Increase Reporting Transparency

Proposed Cryptocurrency Regulations Increase Transparency

Proposed Cryptocurrency Regulations Increase Reporting Transparency: On December 18, 2020, FinCEN proposed certain regulations involving cryptocurrency disclosure and transaction reporting. The crux of the proposed rule is to enhance transparency by requiring certain transactions to be reported. This is similar to the CTR and SAR rules designed to reduce financial anti-money laundering crimes such as smurfing and structuring. This may become a serious consequence of offshore cryptocurrency. For several years, it has been our opinion that sooner or later overseas cryptocurrency will be reported on the FBAR and Form 8938. In general, it seems that that crypto reporting is being heightened, and especially with the introduction of hybrid Fiat/Virtual Currency accounts and crypto investment accounts — along with the new 2020 1040 tax return crypto question — the U.S. Government really wants crypto out in the open.

Let’s review thee Proposed Cryptocurrency Regulations:

As Provided by FinCEN:

Introduction to Crypto Reporting Rule

    • “FinCEN is issuing this notice of proposed rulemaking to seek public comments on a proposal to require banks and money service businesses (“MSBs”) to submit reports, keep records, and verify the identity of customers in relation to transactions involving convertible virtual currency (“CVC”) or digital assets with legal tender status (“legal tender digital assets” or “LTDA”) held in unhosted wallets (as defined below), or held in wallets hosted in a jurisdiction identified by FinCEN.
    • FinCEN is proposing to adopt these requirements pursuant to the Bank Secrecy Act (“BSA”).
    • To effectuate certain of these proposed requirements, FinCEN proposes to prescribe by regulation that CVC and LTDA are “monetary instruments” for purposes of the BSA.
    • However, FinCEN is not proposing to modify the regulatory definition of “monetary instruments” or otherwise alter existing BSA regulatory requirements applicable to “monetary instruments” in FinCEN’s regulations, including the existing currency transaction reporting (“CTR”) requirement and the existing transportation of currency or monetary instruments reporting requirement.”

Crypto Reporting Rule Overview 

    • This proposed rule would adopt recordkeeping, verification, and reporting requirements for certain deposits, withdrawals, exchanges, or other payments or transfers of CVC or LTDA by, through, or to a bank or MSB20 that involve an unhosted or otherwise covered wallet.
    • FinCEN is proposing to define otherwise covered wallets as those wallets that are held at a financial institution that is not subject to the BSA and is located in a foreign jurisdiction identified by FinCEN on a List of Foreign Jurisdictions Subject to 31 CFR § 1010.316 Reporting and 31 CFR § 1010.410(g) Recordkeeping (the “Foreign Jurisdictions List”).
    • Initially, FinCEN is proposing that the Foreign Jurisdictions List be comprised of jurisdictions designated by FinCEN as jurisdictions of primary money laundering concern (i.e. Burma, Iran, and North Korea).
    • First, this proposed rule would require banks and MSBs to file a report with FinCEN containing certain information related to a customer’s CVC or LTDA transaction and counterparty (including name and physical address), and to verify the identity of their customer, if a counterparty to the transaction is using an unhosted or otherwise covered wallet and the transaction is greater than $10,000 (or the transaction is one of multiple CVC transactions involving such counterparty wallets and the customer flowing through the bank or MSB within a 24-hour period that aggregate to value in or value out of greater than $10,000).
    • Second, this proposed rule would require banks and MSBs to keep records of a customer’s CVC or LTDA transaction and counterparty, including verifying the identity of their customer, if a counterparty is using an unhosted or otherwise covered wallet and the transaction is greater than $3,000.

What does this Mean?

In general, it means the US Government is seeking to avoid crypto going the way of Swiss Bank and Numbered Accounts. The general purpose of the rule is for recordkeeping and verification purposes, with a reporting requirement for certain transactions such as deposits or withdrawals. FinCEN seeks to track the transactions with reports such as CTR and SAR for more than $10,000 in transactions within a 24-hour period along with certain transactions in which an unhosted or otherwise covered wallet transaction exceeds $3,000 (aka personal wallets).

In conclusion, the proposed cryptocurrency regulations reflects the U.S. Government — and specifically FinCEN — stratefy of ramping up enforcement of cryptocurrency compliance. FinCEN proposes to require reporting of transactions similar to cash transactions such as CTR and SAR.

Golding & Golding: International Tax Law Firm

Golding & Golding specializes exclusively in U.S. & international tax, and specifically IRS offshore disclosure and compliance.

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