The Treasury Department has recently issued a notice of proposed rulemaking under the Bank Secrecy Act regarding the reporting of convertible virtual currency (“CVC”) mixing.[1]
Perceived Problems with CVC Mixing
The Treasury Department explains that “[t]he public nature of most CVC blockchains, which provide a permanent, recorded history of all previous transactions, make[s] it possible to know someone’s entire financial history on the blockchain.”[2] CVC mixing involves various methods “intended to obfuscate transactional information, allowing users to obscure their connection to the CVC.”[3] These methods include:
- “combining CVC from two or more persons into a single wallet or smart contract and, by pooling or aggregating that CFC, obfuscating the identity of both parties to the transaction by decreasing the probability of determining both intended”;[4]
- “splitting a single transaction from sender to receiver into multiple, smaller transactions, in a manner similar to structuring, to make transactions blend in with other, unrelated transactions on the blockchain occurring at the same time so as to not stand out, thereby decreasing the probability of determining both intended persons for each unique transaction”; [5]
- “coordinat[ing] two or more persons’ transactions together in order to obfuscate the individual unique transactions by providing multiple potential outputs from a coordinated input, decreasing the probability of determining both intended persons for each unique transaction”;[6]
- “use of single-use wallets, addresses, or accounts . . . that have the purpose or effect of obfuscating the source and destination of funds by volumetrically increasing the number of involved transactions, thereby decreasing the probability of determining both intended persons for each unique transaction”;[7]
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