In a move that could redefine the landscape for crypto tumblers, the Financial Crimes Enforcement Network (FinCEN) has proposed a rule to classify the mixing of convertible virtual currencies as a primary money laundering concern. This action is set to impact crypto tumblers like Tornado Cash and privacy protocol users such as Bitcoin's CoinJoin. The proposed rule aims to enhance transparency and enforce compliance practices by introducing Know Your Customer (KYC), Anti-Money Laundering (AML), and Counter Terrorist Financing (CFT) requirements for operators of these services.
The proposed rule is justified under Section 311 of the USA Patriot Act, which empowers the Treasury Secretary to designate primary money laundering concerns and mandate special measures against those entities. Unless FinCEN receives substantial objections during its 90-day public comment period, these rules are likely to be enacted by Treasury Secretary Janet Yellen.
The new regulation could potentially make it more challenging for users to legally use tumbling services like CoinJoin. Operators might have to provide significant data to the government, with TRM Phoenix possibly assisting in this process.
This comes against a backdrop where entities such as Hamas and the Palestinian Islamic Jihad have reportedly received millions of Tron-based USDT through these services. The proposed rule is also designed to restrict access to the US financial infrastructure by states like North Korea and terrorist groups.
Despite being sanctioned by the Office of Foreign Assets Control (OFAC) in August 2022, Tornado Cash continues to operate on Ethereum. An Arkham report showed $77 million in digital assets sent through its contract in a recent 30-day period.
In response to these developments, Ethereum creator Vitalik Buterin has suggested a regulatory-compliant alternative using Zero-Knowledge proofs (ZK proofs). This alternative could potentially offer a solution that balances the need for privacy in cryptocurrency transactions with regulatory compliance requirements.
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