Like many other companies operating in the blockchain and cryptocurrency industry, Stellar Lumens has reached out to FinCEN for comment on the proposed encryption rule. However, this may not be the answer the Financial Crime Network is looking for.
Unacceptable Regulatory Measures for companies working with crypto
According to the FinCEN proposal, hostless wallets or wallets hosted on their own hosting must be controlled by a third-party intermediary, and must comply with the anti-money laundering (AML) procedures to which fiat currencies are subject.
FinCEN offers to take into account unallocated wallets, which is opposed by many in the blockchain industry. As FinCEN requested comments on its Notice of Proposed Regulations “Requirements for Certain Transactions Involving Convertible Virtual Currency or Digital Assets” (NPRM), Stellar Lumens, along with many other industry representatives, responded with their comment. The Stellar Development Foundation (SDF) said:
“New technologies deserve new approaches to regulation. FinCEN’s proposal aims to apply the regulatory framework developed for a centralized financial system based on intermediaries. This is not blockchain! Imposing outdated rules on completely new paradigms doesn’t work. And it won’t work here”.
FinCEN’s Crypto Rule May Do More Harm Than Good
Stellar criticized the regulator’s rule on unallocated wallets as a misconception of how unsecured wallets work, saying that the discussion of NPRM wallets with digital assets indicates a ” fundamental misunderstanding of the blockchain architecture”.
While acknowledging that FinCEN’s proposal is a preventative measure to combat covert criminal activity, Stellar pointed out that one of the main reasons for using offline wallets was that people had the necessary tools to protect against theft or crypto losses. Stellar explained that experts consider self-storage of digital assets to be the safest way to secure their funds, adding:
“Many cryptocurrency exchanges were hacked, resulting in losses of billions of dollars. Individuals may also want to be responsible for their own funds, and may not trust a third party to maintain an accurate and consistent ledger”.
The crypto company added that while the banking system in the United States was secure, many countries lacked it with “deep-rooted problems undermining trust in local governments and financial institutions”. Stellar Lumens expressed concern that financial inclusion would not be achieved with the new rule. Rather, it can harm those who do not have access to banking services, as offline wallets provide them with a viable solution, being almost free, with low transaction fees, as the need for a third-party intermediary decreases.
In addition, Stellar noted that the initiative proposed by the agency can serve exactly the opposite of what it is tasked to do, namely, the fight against illegal activities. Rather, that the proposed rules could complicate and derail law enforcement investigations “related to convertible virtual currency”.
Stellar’s concerns are shared by many representatives of the blockchain and crypto industry, in particular Circle and Coinbase, who have also expressed their disapproval. In addition, the fact that FinCEN abandoned the 15-day deadline for feedback right in the middle of the Christmas holidays was harshly criticized.