On January 4, 2021, Paxos CEO and Co-Founder Charles Cascarilla submitted the following comment letter to the Financial Crimes Enforcement Network (FinCEN) of the US Treasury in response to a Proposed Rule relating to unhosted digital wallets – Requirements for Certain Transactions Involving Convertible Virtual Currency or Digital Assets.

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January 4, 2021
Via email and www.regulations.gov

The Honorable Steven Mnuchin
Secretary of the Treasury
U.S. Department of the Treasury
1500 Pennsylvania Ave., NW
Washington, DC 20220

Mr. Kenneth Blanco
Director
Financial Crimes Enforcement Network
U.S. Department of the Treasury
2070 Chain Bridge Road
Vienna, VA 22182  

Re: Requirements for Certain Transactions Involving Convertible Virtual Currency or Digital Assets, Docket Number FINCEN-2020-0020, RIN number 1506-AB47 (the “Proposed Rule”)

Dear Secretary Mnuchin and Director Blanco,

My name is Charles Cascarilla, and I am the CEO and Co-Founder of Paxos, a blockchain infrastructure platform. We power the cryptocurrency experiences for PayPal and Revolut US users, and we use blockchain technology to settle US-listed equities for clients including Credit Suisse, Instinet Nomura and Societe Generale. In 2015, Paxos became the first firm approved to operate in crypto and blockchain as a trust company by the New York State Department of Financial Services. We have consistently been the first, and in many cases the only, firm to be recognized as in full regulatory compliance in asset classes as varied as crypto, fiat cash, commodities and securities. From the creation of the firm in 2012, it has been core to our mission that we always seek the most rigorous regulatory authorizations and compliance and subject ourselves to the same full regulatory examination processes as banks. I appreciate the opportunity to provide Paxos’ comment on the Proposed Rule.

At Paxos, we believe digital assets are a key innovation that fosters and enables an open economy. In the United States alone, more than 65 million adults are unbanked or underbanked. Yet they can potentially access Bitcoin and other cryptocurrencies and tokenized assets, empowering them to safely transact at costs that are fractions of those available in the traditional banking system. As our business model has proven, these cost savings are possible even with the associated expenses of traditional regulatory compliance. From a technical point of view, these digital systems also allow for simultaneous settlement and nearly instantaneous transaction speeds, anywhere in the world, 24/7, unencumbered by banking business hours and procedures. Finally, enabling this speed and simultaneity of transactions could potentially free up trillions of dollars that are either locked up mid-transaction or being held to insure the risk of incomplete transactions.

It is because we are so passionate about the potential for this system that we have built Paxos with an eye toward regulatory compliance and a cautious, conservative approach whenever there has not been absolute regulatory clarity. We have always sought to be compliant with the regulatory frameworks that exist, and cooperative with policymakers who seek either to understand the potential of these technologies and systems or to further tailor the regulatory systems to ensure safety and soundness remain paramount. In fact, we have taken such a conservative approach that our compliance and risk procedures already cover much of what the Proposed Rule is mandating. In some ways, the Proposed Rule even enables us to open up some restrictions. For the first time, we could allow our customers to send digital assets to self-hosted wallets of their counterparties, which we do not currently allow. 

However, despite the fact that we are already largely compliant with the Proposed Rule, we have several issues with it, both as to the substance of the Proposed Rule as well as the process by which this rulemaking has taken form.

1. The Proposed Rule will cause American innovation in fintech and crypto to fall behind other nations, risking our economy and the reserve status of the dollar. Ultimately, we can expect that adherence to the Proposed Rule will be too onerous for many small startups, and impossible for many of the innovations of decentralized finance (DeFi). This dynamic could result in many of these services, which would otherwise be developed in the United States, to move their operations offshore. It could also result in many users of crypto moving their assets to non-American services or to self-hosted wallets so that they can access DeFi and other programmatic services. With business and assets shifting away, the industry in the US will inevitably suffer, and could lead to digital asset leadership elsewhere. Just as innovation and interest in digital assets, digitized assets and central bank digital currencies (CBDCs) are exploding, we would be pushing all the growth elsewhere. I expect that the reserve currency of the next generation will be digital. This could be a digitized version of the US dollar, but if we impose too many restrictions on digital asset usage in the US, it may end up being a native digital asset or digitized currency of another nation.
   
2. Law enforcement and oversight over digital asset activity will actually become harder. Ostensibly, the Proposed Rule is intended to increase tracking of digital asset usage for law enforcement purposes. However, if usage of American services shifts away from the US, this will actually decrease the fidelity of trackable information. Many services today can utilize blockchain monitoring services and report suspicious activities, but will have less power to do so if assets are moved off of custodial services.
   
3. This proposal calls for a greater invasion of financial privacy than is required of the regulated banking system. The Proposed Rule requires that money services businesses (MSBs) collect and report the names, addresses and other identifying information from entities that are not their own customers, not necessarily with the entities’ knowing consent. The Bank Secrecy Act only requires the identifying information of a bank’s own customer. This is a marked departure and an unprecedented step toward increased and unnecessary surveillance. Additionally, the Proposed Rule applies an unequal standard to the crypto industry, which should not have any greater restrictions than other financial institutions.
   
4. The database of crypto address owners will inevitably become a target for hacking. FinCEN proposes to collect the names and physical addresses of the owners of crypto addresses, forming one universal database. Blockchain data already reveal the entire transaction history and balance of any crypto address, so creating one database  that includes holdings and physical addresses of owners presents a considerable target for bad actors and hackers. This creates new and unprecedented risks for the personal and physical safety for holders and their families, whose physical addresses will now be digitally tied to their asset balances for the first time. Considering the recent hacking incident at Treasury, this is not merely a hypothetical risk.
   
5. Crypto should be treated either as currency or as property, not both. The Proposed Rule suggests that the US treat crypto as currency for the sake of this particular regulation, but in no other context. Yet the IRS already treats bitcoin as property, not as cash, and owners pay taxes on its conversion to cash. This inconsistent regulatory diversion is a quick way to cause confusion, create financial privacy issues and stifle innovation. We should not treat virtual assets as currencies under the BSA when they are not accounted for or taxed as currency.
   
6. Good policy takes time. The world of digital assets is complex and any policy changes have far-reaching implications. The development of these policies should be done with more deliberation and greater engagement with industry experts. The rushed timeline for the Proposed Rule is prohibitive to the development of good policy, and is inconsistent with the spirit of deliberative rulemaking, as well as potentially the letter of the Administrative Procedures Act.

We believe that regulation is important for this burgeoning industry to have clarity as it develops exciting innovations that can bring economic empowerment and services to many people around the world. However, we believe that the intention and the actual provisions proposed in this rulemaking are not aligned. We urge FinCEN to engage the industry in a much more meaningful way to develop policies that will help protect this country, our citizens’ assets and our place in the innovation economy. 

Respectfully,

Charles Cascarilla
CEO & Co-Founder
Paxos