Action Required: FinCEN has a proposed rule that tramples our 1st and 4th amendment liberties, continuing the expansion of unwarranted search and seizure on law abiding Americans.
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@skwp Yan | swan.com
Recently we announced that some of the banks and qualified custodians that Swan works with have been freezing or terminating accounts involved in mixing Bitcoin. Today I’d like to help the industry get perspective on what’s going on, and what steps we are taking to do the right thing for Bitcoin and Bitcoiners.
Swan offers a wide variety of services from Bitcoin onramp, self custody and collaborative custody with Swan Vault, and a rapidly growing institutional arm that provides a variety of services to institutions.
Swan does not have any anti-mixing policies and continues to serve clients that mix their coins for privacy. In fact, we have written and published privacy guides that encourage mixing, and promoted companies like Wasabi and Samourai. https://swanbitcoin.com/bitcoin-privacy-best-practices/
We believe that mixing is normal, privacy is not a crime, and that using unmixed Bitcoin is similar to bringing your whole paycheck to the grocery store to pay for an apple. You should absolutely have the right to turn that paycheck into individual dollar bills before spending it to avoid revealing the size of your paycheck to the clerk.
In order to offer the Bitcoin onramp component, our clients interface with qualified custodians and banks. Today, Swan works with two qualified custodians, with a third coming online this quarter, and a fourth, under our control, expected to launch in 2024. These custodians individually interface with multiple banking institutions to provide fiat services. The number of banking institutions that will provide services to companies in our space is small and shrinking.
The current political climate has pushed a lot of fear into the banking sector, with most banks simply refusing to do business with anything in “crypto,” and other banks tightening their KYC/AML requirements in order to stay in business (https://spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/banks-pump-the-brakes-on-cryptocurrency-as-regulators-signal-growing-concern-74222452).
Swan has committed the majority of its engineering and business development efforts over the last two years to the expansion of our footprint in the financial space, so that we are not beholden to the whims of just a few players, and the launch of these new additions to our stack is a major step in that direction.
Let’s be clear: there is no way to process USD in the United States if you do not use a bank or Money Services Business (MSB), and all such Financial Institutions (FI’s) are subject to rules and guidelines from FinCEN, FATF, and other unelected bodies. Even individuals performing currency exchange on peer-to-peer exchanges have been classified as MSBs by FinCEN, and are required to collect and store information about their clients, and several peer-to-peer exchangers have been charged with violations for not keeping such records. https://fincen.gov/news/news-releases/fincen-penalizes-peer-peer-virtual-currency-exchanger-violations-anti-money.
Today, FI’s file SARs (Suspicious Activity Reports), which were required by the 1970’s Bank Secrecy Act, with additional guidelines enacted by the PATRIOT act of 2001. Given the asymmetric effort it requires to investigate suspicious activity, the path of least resistance for banks appears to be that they file as many SARs as possible. In 2020, BuzzFeed broke a story that showed that the SARs effectively went nowhere (https://en.wikipedia.org/wiki/FinCEN_Files), allowing trillions of dollars of money laundering to occur in the traditional banking system. These reports are filed indiscriminately and gratuitously by banks because their best option is to defensively file a report rather than not to file it and face fines. We believe this to be a 4th Amendment violation, offering the government a way to perform unwarranted search and seizure on law abiding American citizens.
Instead of putting a meaningful dent in any financial crimes, the BSA/PATRIOT acts have created honeypots of financial data, which has been repeatedly stolen by hackers, affecting hundreds of millions of Americans in incidents such as the Equifax breach of 2017 (https://ftc.gov/enforcement/refunds/equifax-data-breach-settlement), the Capital One breach of 2019 (https://capitalone.com/digital/facts2019/), among others.
The pace of SAR filing has been growing 20% year over year over the last two years, in no small part due to inflation and monetary debasement as well as increased online crime https://thomsonreuters.com/en-us/posts/investigation-fraud-and-risk/special-report-suspicious-activity-reports/. As the dollar loses value, more transactions fall into the reporting threshold, which can be as little as $2000 for MSBs. That means financial surveillance is increasing rapidly. From 1970 to today, SAR report filing and surveillance has increased by a minimum of 800% simply because of monetary inflation.
Recently, a news story filled with inaccurate information grossly exaggerating Hamas funding from crypto. https://x.com/SenLummis/status/1719421971354595565. This story reported a funding amount of $100m, which was in fact $500k, an insignificant amount relative to the trillions of dollars of illicit activity that goes on. Because Bitcoin is still poorly understood in Washington and by the media, it is an easy scapegoat for the failings of the system to stop much actual financial crime.
Despite expert testimony by Dr. Shlomit Wagman that funding was coming from traditional fiat channels (https://twitter.com/SamLyman33/status/1717587105709167097), several members of congress have used this opportunity to push for a harder look at Bitcoin.
A new rule, proposed by FinCEN was launched. (https://federalregister.gov/documents/2023/10/23/2023-23449/proposal-of-special-measure-regarding-convertible-virtual-currency-mixing-as-a-class-of-transactions) The rule is poorly written and covers a huge amount of Bitcoin activity ranging from using addresses only one time (a normal and even default practice of Bitcoin wallets), to mixing funds from multiple people (multisig with your spouse), programmable transactions of any sort (lightning channels), and of course, mixing services. The mixing services are painted with a scary brush instead of the reality of what they are: a common way to break large bits of Bitcoin into small ones so that you can spend them without revealing your balance.
Anti-mixing behavior in the financial industry is not new. The FATF, another unelected non-lawmaking body, has been pushing anti-mixing guidance for a while. (https://fatf-gafi.org/content/dam/fatf-gafi/guidance/Updated-Guidance-VA-VASP.pdf.coredownload.pdf). Businesses in the past have shut down or frozen accounts for engaging with mixers. For example, BlockFi recalled loans after detecting mixing activity in 2022 https://twitter.com/zer0factor/status/1493759567343149057, Binance froze a user for mixing with Wasabi in 2019 https://cointelegraph.com/news/binance-returns-frozen-btc-after-user-promises-not-to-use-coinjoin.
There is no anti-mixing law, or anti-mixing regulation, yet. The new proposed FinCEN rule does not make mixing a crime. It does, however, push for much more reporting. Banks and FIs operate on a gradient of risk. It is this behavior that leads to the decision to freeze or terminate accounts that mix. It is simply easier to do so than to do the investigative work and decide that such accounts are simply engaging in normal Bitcoin privacy behavior.
We are now starting to see this pressure come from the banking sector down into companies in our space. Game theoretically, this behavior is expected and obvious. Why should a bank have to do extra work to prove innocence when the government has been telling them for years that they don’t want to see mixing?
FinCEN does not operate by the constitutional principle of “innocent until proven guilty.” They operate by a presumption of guilt, that everything should be surveilled and reported, and that the burden of proof of innocence is on the end client. In such an environment, we expect all FIs to act swiftly to stop interfacing with clients that mix. Allowing clients to engage in behavior that is indistinguishable from money laundering brings them almost zero upside, and unlimited downside.
What can we do to fight back?
First, we must educate everyone on the principles of self custody and privacy, which Swan continues to do in our publications and shows. We must continue to press the industry to reduce the amount of KYC required to open accounts. Swan expects to go live with a lighter KYC option over the next quarter.
We must continue to educate clients on other options for Bitcoin purchasing, including peer-to-peer options. That said, many clients looking to achieve sizable positions in Bitcoin will not be able to get to size using peer-to-peer exchanges. We must recognize that peer-to-peer exchanges are already regulated by FinCEN, just with very light enforcement. While we recommend Bisq (https://swanbitcoin.com/choose-bitcoin/) as a peer-to-peer option, we expect some headwinds here, especially if FinCEN starts pressing on sellers to enforce the same requirements as banks, as it has been since 2019.
Second, we must acknowledge a reliance on the banking sector for the conversion of dollars to Bitcoin. In order to fight back against pressure from banks, we must have a large selection of banks willing to do business with Bitcoin companies. This requires Bitcoin-only companies to become big enough to be relevant negotiators at the table with banks. Swan has been doing exactly that, with accelerated growth and achieving annualized revenues of $100M, Swan is on a trajectory to achieve formidable size and even access the public markets.
Third, we must build our own financial institutions that can interface directly with regulators. Swan has announced a joint venture with BitGo to build a trust company scheduled to launch in 2024. While we think this will give us finer grained control over policy, it is likely not going to solve the problem entirely until poorly designed government regulation is addressed.
Fourth, we must get Bitcoiners in government. Not just digital asset, blockchain, or crypto people. Actual Bitcoiners, who understand the technology, understand how important free speech and due process is to American society, and are willing to fight against entrenched interests that want to expand the scope of surveillance.
Finally, we must embrace the Bitcoin circular economy. The Bitcoin network is obviously completely unaffected by any regulations or squeezes from banks. Businesses will acquire Bitcoin from financial institutions, but many individuals can acquire Bitcoin by earning it, and smaller businesses can acquire Bitcoin by accepting it in payment. The more pressure there is on onramps and offramps, the more the incentive there is to continue to stay on the Bitcoin superhighway by interfacing purely through non-custodial self-sovereign Bitcoin and Lightning wallets.
Fight Back
To join us in the fight against the current FinCEN proposed rule, please visit this tweet https://twitter.com/skwp/status/1719025440663261376 and please refer to this show for a discussion: https://twitter.com/skwp/status/1723098514672976198
1. Source a list of objections. Here’s a nice list of bullets: x.com/HodlsSherlock/. Or look at the bottom of this post for my full text, which was generated from my own bullets using OpenAI.
2. Go to chat.openai.com, paste your bullets, alter them as you wish, add the prompt at the top: “Reformat the following in a voice appropriate for submission as a FINCen proposed rule making comment”.
3. Go here to comment: IN 3 EASY STEPS federalregister.gov/documents/2023 and paste your letter.
Example text generated from my own input of issues: — snip — I am writing to express concerns regarding the proposed rule that pertains to the reporting of Bitcoin transactions. I believe it’s crucial to reconsider certain aspects of this rule to ensure that it aligns with the principles enshrined in the 4th Amendment. Address Reuse in Bitcoin: Bitcoin, by design, promotes the use of unique addresses for each transaction to maintain user privacy. Repeatedly using the same address exposes one’s entire transaction history to any recipient. Such a practice compromises user privacy, a concern that the proposed rule might inadvertently encourage. Mixing and Privacy: Mixing is an essential privacy-enhancing technique in the Bitcoin ecosystem. Without it, users would inadvertently reveal their entire Bitcoin balance every time they transact. It’s akin to sharing one’s bank balance each time they make a purchase, a scenario that’s clearly problematic. The proposed rule might deter users from using mixers, leading to unintentional privacy breaches. The Programmability of Bitcoin: Bitcoin’s architecture allows for various transaction structures, such as joint wallets or lightning channels for small-value exchanges. The current draft of the rule may inadvertently categorize these standard practices as reportable events, leading to an overwhelming number of reports that might be challenging to process effectively. Concerns about Terrorism Financing: While the intent behind the rule is understandable, it’s essential to note that there’s limited evidence to suggest that Bitcoin plays a significant role in financing terrorism. Most illicit financing activities still occur through traditional fiat channels. Implementing rules that might be perceived as infringing on the 4th Amendment could unintentionally diminish FINCEN’s standing as an institution grounded in democratic principles. Geographical Implications: It’s vital to recognize that while these rules might be applicable within the U.S., a significant portion of cryptocurrency activities occurs outside our borders. Implementing stringent rules might inadvertently push more users to platforms that are less transparent and harder to oversee. I kindly urge the commission to evaluate the potential unintended consequences of the proposed rule, especially concerning the preservation of civil liberties and effective oversight. It’s essential to strike a balance between national security and individual rights. Thank you for your time and consideration.