Crypto proponent Preston Pysh claims that the Financial Crimes Enforcement Network (FinCEN) has proposed rules for crypto companies that violate citizens’ 1st and 4th Amendment rights. His widely circulated analysis of the US Treasury bureau’s proposal explains the crypto industry’s concern about governmental overreach into the private affairs of its constituency.
FinCEN’s new proposal is titled unambiguously, “Proposal of Special Measure Regarding Convertible Virtual Currency Mixing, as a Class of Transactions of Primary Money Laundering Concern” (emphasis added). So right off the bat, the bureau’s stance is clear: crypto privacy services are a risk factor for anti-money laundering enforcement.
Of course, it’s no coincidence FinCEN proposed special measures for crypto privacy services around the time of Binance’s record-setting $4.3 billion settlement. FinCEN was a party in that settlement. It fined Binance for its egregiously lax implementation of controls for countering the financing of terrorism and money laundering.
Pysh found these FinCEN crypto rules particularly concerning
Pysh says many of FinCEN’s proposals violate the 1st Amendment of the US Constitution, which states that no law may “abridge the freedom of speech, or of the press; or the right of the people peaceably to assemble.”
FinCEN’s first section proposes reporting requirements for digital asset transactions. It refers to digital assets as convertible virtual currencies (CVCs) and “legal tender digital assets,” such as central bank digital currencies (CBDCs) or other crypto stand-ins for fiat.
As justification for demanding reports about CVCs and CBDCs from certain crypto companies, FinCEN cites United States v. Miller which found that bank records fell outside the scope of the 4th Amendment. In that case, the Supreme Court ruled that Miller had no “legitimate expectation of privacy” when it came to bank checks and deposit slips. A similar expectation should apply to CVCs and CBDCs, argues FinCEN.
The 4th Amendment of the US Constitution states:
“The right of the people to be secure in their persons, houses, papers, and effects, against unreasonable searches and seizures, shall not be violated, and no Warrants shall issue, but upon probable cause, supported by Oath or affirmation, and particularly describing the place to be searched, and the persons or things to be seized.”
However, Pysh cited shifting attitudes in other lawsuits, especially Carpenter v. United States in which the Supreme Court ruled that obtaining cell phone location data qualifies as a “search” under the 4th Amendment. In most situations today, querying cell phone location data requires a court-approved search warrant.
Anonymity-enhanced crypto regulations
Pysh also objected to FinCEN’s record-keeping demands regarding “anonymity enhanced CVCs.” These refer to digital assets with enhanced privacy protocols like Monero.
To FinCEN’s credit, malicious actors like North Korea’s Lazarus Group have certainly used Monero to launder money while covering their tracks. However, everyday US citizens also use Monero for legitimate purposes, like purchasing art, video games, or even gifting presents when the sender wants the gift to be a surprise even for tech-savvy recipients.
One interesting aside: the IRS once offered a bounty of up to $625,000 to anyone who could crack Monero’s privacy algorithms.
Pysh also expressed concern about FinCEN’s expansive reporting requirements for digital assets. He called them a “precarious slope” that could contradict important Supreme Court rulings regarding financial free speech. These rulings include Citizens United v. Federal Election Commission in which the Supreme Court overturned limitations on corporations’ funding of electioneering communications.
Pysh also cited McIntyre v. Ohio Elections Commission which overturned Ohio’s requirement to put the name and address of the person issuing campaign literature on the literature being distributed. Requirements like this can have a chilling effect on a variety of activities, including discouraging campaign staffers and volunteers from designing, printing, and distributing campaign literature in a charged political environment.
According to Pysh, FinCEN’s proposed crypto rules will also impact individuals’ right to keep their financial lives private – especially requirements to automatically report transactions involving digital assets. Pysh says FinCEN’s proposals violate the 4th Amendment in addition to the Right to Financial Privacy Act of 1978. The Supreme Court has repeatedly upheld individuals’ right to financial privacy, such as the right to buy everyday items with cash without reporting anything to the government.
Comments are open to the public
As required by law, FinCEN currently has a comment period open on the proposed new regulations. Anyone can submit comments via the Federal Register. Comments are due by January 22, 2024.
FinCEN’s proposed reporting requirements on digital assets are already facing pushback, including Preston Pysh’s analysis. According to privacy advocates, the proposals might violate the 1st and 4th US Constitutional Amendments.