FinCEN, the Financial Crimes Enforcement Network, is one of the least scrutinized financial agencies in the US government. If you’ve ever transacted an amount over $10,000—say, you’ve bought a car or a house—FinCEN has a file on you. The agency requires banks and other financial institutions to file a Currency Transaction Report for every deposit, withdrawal, exchange, payment, or transfer of that amount or more. It is no exaggeration to say that FinCEN is spying on Americans.
“Spying” is a loaded term; perhaps such vigilance on FinCEN’s part is warranted. After all, isn’t money laundering a serious concern? Alas, the criminalization of opaque financial transfers causes more problems than it solves. Money laundering charges often carry greater penalties than the (frequently white-collar) crimes that are supposedly being covered up. The potential for prosecutorial abuse is severe. And as a matter of common sense, the charges at best seem redundant. It is as if a defendant were charged not just with murder, but also with trying to get away with it.
Monday was not the first time that FinCEN has issued public guidance. In March 2003 and September 2010, it released similar advisories concerning “informal value transfer systems” such as hawala. Hawala is a centuries-old South Asian and Middle Eastern money brokering system primarily used for international remittances. However, and despite the fact that the September 11 attacks were financed via an ordinary inter-bank wire transfer, hawala transfers have become a target for Terror Warriors in the Bush-Obama era, because they may be used to fund terrorism. Hawala remains legal in the United States, provided that brokers comply with FinCEN regulations, which target the anonymity of large transfers.
The example of hawala provides good reason to be concerned about FinCEN’s interest in Bitcoin. The FinCEN guidance for decentralized virtual currencies says that operators of Bitcoin exchanges are similarly subject to regulation as money transmitters, which seems to mean that they are required to register as Money Services Businesses and report large transactions. But the guidance also includes this passage:
In addition, a person is an exchanger and a money transmitter if the person accepts such de-centralized convertible virtual currency from one person and transmits it to another person as part of the acceptance and transfer of currency, funds, or other value that substitutes for currency.
What concerns me is that this language sweeps in—and reveals as the real target of the guidance—Bitcoin mixing services. Contrary to some popular accounts, Bitcoin is not completely anonymous, but pseudonymous. The entire Bitcoin ledger is publicly shared so that the same coins can’t be spent twice. Bitcoin “mixers” take coins from multiple pseudonymous actors, shuffle them around, and return them to their original users under new pseudonyms. In other words, mixers help anonymize a system that is not truly anonymous.
If the government were to succeed in regulating mixers, it would not destroy Bitcoin as a payment mechanism or even hurt Bitcoin’s price, which has now reached an all-time high of $60, but it would ruin one of the chief advantages of using it—the quasi-anonymity that it affords. The destruction of anonymity in payments has important free speech consequences. For example, in response to pressure from the US government, Bank of America, Visa, MasterCard, PayPal, and Western Union blocked payment to WikiLeaks on December 7, 2010. However, WikiLeaks remains able to this day to receive donations via Bitcoin—in large part because anonymous donors do not fear government reprisals.
If there is any silver lining in an era in which the government is so paranoid that it feels it must stamp out financial anonymity online, it is that it is unlikely to completely succeed. There may be a few exchanges and mixers that register and report as FinCEN requires. But it seems improbable that the US and its allies are willing to engage in the blatantly repressive behavior necessary to ensure full compliance. Nevertheless, it is regrettable that FinCEN has designs on Bitcoin. It is yet another reason that the Wars on Drugs and Terror cannot end soon enough.