The US Treasury Department's Financial Crimes Enforcement Network (FinCEN) is formally withdrawing two proposed cryptocurrency reporting rules: one covering transfers involving self-hosted wallets, and another targeting transactions tied to virtual currency mixing.

Withdrawal notices for both proposals were placed on public inspection on October 5 and are scheduled for formal publication in the Federal Register, the official journal where US federal agency rules appear, on October 6, when the withdrawals will take effect (notice 1, notice 2).

The first proposal dates to 2020 and concerned transfers between customers of regulated financial institutions and wallets those customers control themselves. The second was issued in 2023 and would have applied special reporting and recordkeeping measures to certain transactions involving convertible virtual currency mixing with a foreign connection.

Though the two proposals dealt with different parts of the crypto market, both raised the same practical question for platforms: what information must a business collect when funds move beyond its own system?

The 2020 wallet proposal focused on transfers leaving an exchange

A self-hosted wallet is controlled by its user rather than by an exchange or another custodian. The 2020 proposal would have added duties for a bank, exchange or other regulated financial institution when its customer sent qualifying amounts to, or received them from, such an external wallet.

Released in December 2020, the proposal drew thousands of public comments and criticism from lawmakers in both parties during its comment period.

For certain transactions above $3,000, the institution would have had to collect and retain information about the counterparty. Qualifying transactions above $10,000 would also have triggered reporting requirements.

That created a difficult operational issue: an exchange can identify its own customer, but may have little independent ability to establish who controls a wallet address on the other side of a transfer. With the proposal withdrawn, firms will not need to build the specific verification and reporting process FinCEN outlined. Their own risk controls and existing legal duties still shape how they handle transfers to external wallets.

The 2023 mixer proposal would have added another reporting duty

FinCEN's 2023 proposal approached a different risk area. It would have required covered financial institutions to report transactions they knew, suspected or had reason to suspect involved convertible virtual currency mixing within or involving a foreign jurisdiction.

Mixing pools cryptocurrency from multiple users and blends the flows to obscure the trail between origin and destination — a technique US authorities have repeatedly tied to money laundering and sanctions evasion.

The measure focused on information gathered by institutions handling those transactions. It did not create a new criminal prohibition on every form of mixing, although the use of particular services can carry sanctions, criminal or compliance risks depending on the facts and the parties involved.

Its withdrawal means covered firms will not face that proposed special-measure reporting system. It does not alter existing laws that can require a business to review unusual activity, block prohibited dealings or report suspected financial crime.

Exchanges still operate under the same core compliance rules

For users, the most practical effect is narrower than the headlines may suggest. A custodial exchange can still ask for information about an external transfer, pause activity it considers suspicious and impose limits under its own compliance program.

Those decisions are shaped by existing Bank Secrecy Act requirements — the 1970 US anti-money-laundering statute obliging financial institutions to keep records and file reports such as suspicious activity reports — alongside sanctions restrictions and the platform's assessment of risk. Crypto platforms also have to respond when sanctions rules name particular services or entities. Binance's restrictions on transfers involving HTX and other platforms showed how compliance action can continue even without a new industry-wide reporting rule.

Self-hosted wallets remain a normal way to hold crypto, but moving funds between a private wallet and a regulated service does not place that transfer outside financial-crime controls. The same applies to mixing-related activity: FinCEN has removed one proposed reporting framework, while the duties already governing regulated institutions continue to apply to the activity they handle.

Any replacement would need a new rulemaking process

The October notices end the two proposals in their current form. If Treasury decides to pursue narrower reporting rules for external-wallet transfers or mixer-related activity in the future, it will need to issue a new proposal and open it to public comment.

For now, crypto businesses have a clearer answer about what they do not need to implement. The broader compliance obligations that govern exchanges, banks and other custodial firms remain the working rules of the market.

This article is for informational purposes only and does not constitute legal, financial or investment advice. Regulatory requirements can change and may depend on the facts of an individual transaction and jurisdiction.

Source: Coindoo