CMT Digital Comment Letter to FinCEN Proposed Rule: “Requirements for Certain Transactions Involving Convertible Virtual Currency or Digital Assets”

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January 4, 2021

Via Federal E-Rulemaking Portal and Via Email:
Policy Division
Financial Crimes Enforcement Network
P.O. Box 39
Vienna, VA 22183

To Whom It May Concern:

CMT Digital Holdings LLC (“CMT Digital”) is a subsidiary of the CMT Group[1], which was founded in 1997 by Scott Casto and Jan-Dirk Lueders. The CMT Group is a proprietary trading and investments firm that has operated in 20 countries across 5 continents and has been regulated in numerous international jurisdictions.[2] Approximately 75% of the CMT Group’s activities are in traditional finance, including proprietary trading in global equities and commodities markets as well as private equity investing. The CMT Group is headquartered in Chicago and has additional offices in London and Frankfurt. The remaining 25% of the CMT Group’s activities are conducted by its subsidiary, CMT Digital[3], which was co-founded by the founders of the CMT Group and Colleen Sullivan. CMT Digital has been involved in the crypto assets / blockchain space since 2013 and has two primary business lines: operating a proprietary crypto asset trading desk and investing in the crypto asset / blockchain industry on a venture basis. With respect to the latter, CMT Digital has invested in over 40 portfolio companies.[4] CMT Digital has also spent a significant amount of time working with, and educating, regulators and policymakers in the United States and abroad, primarily through its affiliation with the Chamber of Digital Commerce, the world’s largest blockchain trade association.[5]

This letter is CMT Digital’s comment on the FinCEN Notice of Proposed Rulemaking regarding “Requirements for Certain Transactions Involving Convertible Virtual Currency or Digital Assets” (the “Proposed Rule”). The Proposed Rule would implement a new recordkeeping rule for convertible virtual currency (“CVC”) transactions over $3,000 and new transaction reporting requirements similar to currency transaction report (“CTR”) requirements for CVC transactions over $10,000.

Part 1 will focus on a handful of process, risk, privacy, and technical deficiencies inherent in the Proposed Rule and Part 2 will focus on the practical import of adopting the Proposed Rule, specifically, the unintended consequence of stifling the growth and development of Web 3.0.

Administrative Process, Privacy, Money Laundering Risk, and Technical Deficiencies

Administrative Process

CMT Digital supports the important goals of FinCEN in combating money laundering, terrorist financing, and other illicit acts. Detecting and preventing bad actors from using blockchain and distributed ledger technology is both the right thing to do and essential to the long-term growth and success of the industry. As noted above, CMT Digital has been regulated in many jurisdictions and, specific to cryptocurrency / blockchain technology, has spent significant time educating and working with regulators and policymakers over the last seven years. We, along with many other industry participants, have done this work because we believe that industry collaboration with regulators and policymakers should result in well considered and thoughtful regulation that appropriately balances consumer protection and Treasury’s stated goals on the one hand with encouraging and supporting growth and development of nascent technologies in the United States on the other hand.

Notwithstanding our support for Treasury’s goals, we have serious concerns with respect to the Proposed Rule, including the strikingly truncated process adopted by Treasury, giving commenters just 15 days over the Christmas and New Year’s Day holidays to respond — which really amounts to a mere 8 business days after taking into account two federal holidays and two weekends. The breakneck speed at which this is occurring also fails to take into consideration the convening and consultation limitations brought about by the global pandemic. Such a limited period of time over the holidays and in the midst of a pandemic is wholly inconsistent with the potential impacts of the Proposed Rule and all but guarantees a substantively flawed final product that is sure to further push innovation offshore, ultimately damaging both the U.S. economy and Treasury’s own goals in working with financial institutions to combat illicit financial activity. A poorly considered and ambiguous rule that lacks meaningful industry input and collaboration will likely result in blockchain technology — which has the ability to support cross-border transactions in all forms of crypto assets and central bank digital currencies (“CBDCs”) over its rails outside of the SWIFT system — being developed, overseen, and monetized by a non-US jurisdiction like China. In our opinion, the foregoing is more of a threat to the national security interests of the United States than those noted in the preamble to the Proposed Rule.

Because the fundamental flaws in the process by which FinCEN intends to promulgate the Proposed Rule have been well articulated by others, we hereby incorporate by reference the Administrative Procedure Act (“APA”) concerns raised by:

- Paul D. Clement, Partner at Kirkland & Ellis and former Solicitor General of the United States in his letter dated December 30, 2020 to the Secretary of the Treasury, Steven Mnuchin[6]

- CoinCenter, an independent nonprofit research and advocacy center focused on the public policy issues facing cryptocurrency technologies such as Bitcoin, in its letter dated December 22, 2020 to the Policy Division of FinCEN on pages 2–10[7]

- The Chamber of Digital Commerce in its letter dated January 4, 2020 to the Policy Division of FinCEN on pages 4–11 (the “Chamber Letter”)

- Congress members Emmer, Schweikert, Davidson, Budd, Foster, Soto, DelBene, and Gabbard as well as Senator Cotton in their joint letter to the Secretary of the Treasury, Steven Mnuchin dated December 31, 2020 [8]


Although the preamble to the Proposed Rule states that FinCEN is establishing these new requirements to essentially seek parity between the treatment of cash and CVCs, that is far from accurate when it comes to privacy. When a large cash transaction happens in banking, a CTR is filed, but law enforcement cannot “track the cash” once the customer leaves with it. For example, if the customer then spends that cash at Starbucks, Walgreens, the dry-cleaners, a local charity, and/or a gas station, the government is unable to generate a “payments map” to surveil where the customer’s cash has been spent after the cash leaves the bank.

As the Chamber Letter notes,

“By combining information contained in CVC transaction reports including the name, physical address, and blockchain address of the customer and the counterparty, FinCEN will be able to create a constantly updating map of who owns which public addresses on relevant blockchains and be able to track every transaction those wallets owners make, whether below or above the reporting and recordkeeping thresholds. The magnitude of this information cannot be understated — it includes not only the information related to the transaction at hand, but also every transaction that counterparties to the transaction make both before and after that one transaction. The information is publicly available on the blockchain, for example, and vastly exceeds the amount of information the government currently has with respect to cash. To spell this out more clearly, this means that a counterparty to a transaction, who never had an account relationship with the bank or MSB, will have its entire wallet history and future transactions exposed to both that financial institution and government. This is an extraordinary expansion of the amount of information provided to third parties about non-customers. It is also worth emphasizing that such government visibility into private financial activity is well beyond anything that exists in the fiat context.”

Ben Davenport, co-founder of Bitgo and currently a venture partner at Blockchain Capital raises similar concerns in Section (i) of his comment letter to FinCEN dated December 30, 2020 (the “Davenport Letter”), which we incorporate herein by reference.[9]

Bolstering the Chamber’s and Davenport’s points, we note that the preamble to the Proposed Rule states that the rule would require banks and MSBs to generate reports containing the transaction hash[10] and identity of persons holding wallets engaging with unhosted wallets, which is obviously unprecedented and does not occur with cash transactions.[11] Further, it is currently unknown what additional information Treasury may require:

With respect to counterparty information for which banks and MSBs would be required to collect records pursuant to 31 CFR 1010.410(g), the proposed rule would require banks and MSBs to collect, at a minimum, the name and physical address of each counterparty, and other information the Secretary may prescribe on the reporting form implementing the proposed CVC/LTDA transaction reporting requirement.[12] [Bold emphasis added.]

It is challenging to comment on, or fully understand, the scope of the Proposed Rule’s creep on privacy rights when FinCEN has not provided the industry with the applicable reporting form and uses the broad catch-alls — at a minimum and any other information the Secretary may prescribe. From our standpoint, it is clear that we are only at the start and nowhere near the middle or end of the cryptocurrency related privacy discussions that should be occurring collaboratively across industry, constitutional law scholars, regulators, policymakers, and academia. Additionally, Treasury’s new term LTDA appears to include CBDCs issued by the United States Federal Reserve and other non-US central banks further exacerbating these critical privacy concerns. We would like to understand what type of legal review FinCEN commissioned to ensure that the reporting and recordkeeping requirements set forth in the Proposed Rule do not violate US citizens’ privacy rights.[13] Surely FinCEN is aware of that many discussions are actively taking place in the United States right now with respect to the intersection of CBDCs and privacy, in particular with heightened sensitivity to the United States not building a payments surveillance system similar to the digital yuan, which is already being piloted in China[14] and will allow the Chinese central bank to view transactions between users.[15] In testimony before Congress on February 11, 2020, Chairman Powell was asked whether the Federal Reserve had any “visibility” into China’s progress developing a CBDC, to which he replied:

“Yes, we certainly have that, but they’re in a completely different institutional context. For example, the idea of having a ledger where you know everybody’s payments, that’s not something that would be particularly attractive in the United States context. It’s not a problem in China.”[16] [Bold emphasis added.]

The Proposed Rule gives FinCEN and other government entities with which it may share information collected under the Proposed Rule just that — the ability to create a ledger or map of users’ blockchain based payments. If United States citizens’ privacy rights are such a critical factor with respect to the development of a US CBDC, which seems to be included as a LTDA, then such privacy rights should be afforded the same thoughtful consideration — including a robust analysis of Fourth Amendment and privacy protections — in the context of the information that will be collected by FinCEN under the terms of the Proposed Rule.

Further, as the Electronic Frontier Foundation (the “EFF”) stated in a post last year[17]:

As regulators and lawmakers consider the challenges we face around cryptocurrencies, we urge them to work closely with the human rights and civil liberties communities. We are concerned about a future in which every financial transaction is captured and saved forever, creating a honey pot for malicious hackers and law enforcement as well as a chilling government shadow over every purchase or donation. For thousands of years, societies around the world have thrived with privacy-preserving cash. Rather than be the generation that kills cash, we encourage the Treasury Department and other federal officials to think about ways we can bring the best attributes of cash into our digital future.

Lastly, as referenced in the EFF’s comment above, if the Proposed Rule moves forward as drafted, FinCEN will be sitting on a massive honey pot of identity data.[18] FinCEN’s ability (or lack thereof) to protect data are well documented, including the so-called FinCEN Files leak from earlier this year.[19] The potential for this type of data to be misused against US citizens is tremendous and, even if only for its own self-interested protection, FinCEN should welcome more than 8 business days for industry, constitutional law scholars, academia, policymakers, and other regulators to weigh in on the potential implications of the Proposed Rule on such a fundamental human right as U.S. citizens’ right to privacy.

Money Laundering Risk

Although the text of the Proposed Rule itself makes no mention of “unhosted wallets,” the preamble to the rule devotes significant time and attention to the potential risk associated with “unhosted wallet” transactions. However, from a risk-based perspective, there is reason to believe that self-hosted-to-hosted transactions (and vice versa) are among the safest in the blockchain ecosystem. Indeed, the interaction between the hosted and self-hosted ecosystem is the foundation of law enforcement’s ability to “tie” information to real world criminal activity and identities. Transactions in the self-hosted-to-hosted context allow for use of blockchain analytics tools and the compliance resources of BSA-regulated entities, making them highly desirable transactions to encourage (rather than discourage) in the blockchain ecosystem.

By contrast, over-regulating transactions between regulated financial infrastructure and the unhosted wallets that serve myriad legitimate purposes and accommodate significant legitimate commerce would serve only to push more activity to an entirely self-hosted environment and/or to offshore, unregulated exchanges, both of which evade the involvement of the robust know your customer (“KYC”) and monitoring procedures of BSA-regulated entities. We recognize that it is important that regulated financial institutions know their customers, but if FinCEN attempts to expand that role with the type of unworkable requirements reflected in the Proposed Rule, FinCEN will learn less, not more, about transactions that occur outside of a purely hosted environment.

Technical Challenges

There are also technical challenges with the Proposed Rule, which are best summarized in the Davenport Letter as well as by Matt Corallo, the 10th publicly recorded individual to contribute to the Bitcoin codebase, in his letter to FinCEN[20], both of which are incorporated herein by reference. Technical challenges with respect to the Proposed Rule include, but are not limited to:

- The challenges with respect to proving ownership of an address.

- UTXO-based cryptocurrencies like Bitcoin (i.e., cryptocurrencies based on an unspent transaction output rather than account-based model) do not have a “sending address” / “from address” and most cryptocurrencies do not require a recipient’s acceptance to finalize a transfer to their wallet.

- There is no generally available and fully effective method for banks and MSBs to identify if a user-provided cryptocurrency address is a bank or MSB.

- Inability to KYC an automated, non-human system to which cryptocurrency may be sent to or received from (e.g., smart contracts) in the traditional “name and physical address” context, which we address more thoroughly below.

Impact of the Proposed Rule on the Growth and Development of Web 3.0

While all of the above deficiencies are expected to impact CMT Digital in the operation of our business, perhaps the most significant impact will be on our ability to invest in the growth and development of Web 3.0[21] technologies from, or within, the United States. It is a glaring omission of the Proposed Rule that the current and future benefits of blockchain technology are mentioned only once in the 72-page Proposed Rule.[22] Accordingly, while the Proposed Rule attempts to highlight all the risks associated with CVCs, it fails nearly entirely to address the many benefits of blockchain technology based systems, in particular with respect to how the United States is positioned to benefit from these innovations. Further, FinCEN seeks comments on 24 separate subjects and questions, some with multiple subparts, but not one directly asks for feedback regarding the potential impact of the Proposed Rule on the development of blockchain technology in the United States and / or the risks of that development not happening in the United States, which we have touched on above. In short, nothing in the preamble to the Proposed Rule suggests that FinCEN has considered the impact of the Proposed Rule on the innovation of blockchain technology in the United States, let alone the impact on burgeoning decentralized economies. That impact could be devastating for the growth of these new economies in the United States and for the ability of the United States to continue to play a leading role in their evolution.

The income inequality gap in the United States as well as its further exacerbation by the pandemic, is well understood and does not need to be repeated in this letter. What does need to be brought to light, however, is the potential for Web 3.0, built on blockchain technology, to empower everyday people to become owners and operators of, and participants in, decentralized economies, which will help them earn a better living and hopefully start to close the equality gap. The Proposed Rule creates a roadblock that will impair the ability of all forms of decentralized economies from interfacing with the traditional financial system in the United States at exactly the wrong time, just as the industry is starting to implement scalability and user interface (UI) / user experience (UX) enhancements that technologically enable these decentralized economies and make them easier to access and use.[23] This roadblock is created due to the confluence of two factors:

(i) the existing and increasingly unsupportable ambiguity with respect to which crypto assets are CVCs; and

(ii) the creation of additional regulatory burdens such as the Proposed Rule on top of the unstable CVC definition.

With respect to the first factor, what is a CVC? In the Proposed Rule, FinCEN defines CVC as a “medium of exchange, such as cryptocurrency, that either has an equivalent value as currency, or acts as a substitute for currency, but lacks legal tender status.”[24] This is a broad and amorphous definition that, without more detailed guidance, will leave banks and MSBs with significant uncertainty over the status of many crypto assets, which we have illustrated by example below. Indeed, if there is even one decentralized exchange where a user can move from a particular crypto asset to an acknowledged CVC like bitcoin, the question may then be asked whether that asset, which then by definition is convertible into a CVC, also itself now “substitutes for currency.”

We would argue that mere convertibility should not be deemed to convert a crypto asset into a substitute for currency; indeed even most physical assets can be converted to currency via auction sites like eBay. Similarly, many crypto assets do not function like cash, even if they are used as a means of exchange in a closed network. For example, FinCEN originally adopted the term CVC in March 2013, which predates the issuance of the Ethereum whitepaper in November 2013, and therefore likely considered only crypto assets with the essential function of the broad facilitation of commerce through value intended to be used broadly in the market as a substitute for currency. By contrast, Ethereum and other similar blockchains enable the creation of decentralized economies whereby crypto assets are issued to, or are purchased by, participants in order to attribute value to economic activity within a closed system, but are not generally designed to support commercial activity separate from the platform. Unfortunately, notwithstanding the ongoing evolution of this technology since 2013, FinCEN has neither updated its definition nor explained how the definition does or does not apply in a variety of settings.

As blockchain technology continues to scale and better UIs / UXs are developed, decentralized business models are being enabled, in much the same way that YouTube evolved from early Web 1.0 interactions via technology enhancements that facilitated the sharing of video data packets. Crypto assets are similarly composed of their own data packets; bits of information representing content or value can be moved in a manner similar to how the bits of information themselves are moved. Turning money into pure bits also allows software developers to creatively design new services around money the way they have with photos and text. Just as Web 1.0 enabled the democratization of information and Web 2.0 facilitated the creation of social networks, Web 3.0 will add value at the protocol layer of the internet and transforms networks into economies. Web 3.0, which was not possible before the invention of the Bitcoin system, turns centralized applications into decentralized protocols powered by crypto assets.

An Illustration of Web 3.0: Decentralized “Creator Economies”

To help illustrate where this technology is going, it is instructive to examine how “creator economies” are evolving. In today’s creator economies like YouTube, TikTok, Spotify, and Instagram, the users are the producers, but they generally do not profit from the products they create (e.g., videos, dances, music, photos, etc.), even though it is the creators’ products which make such platforms popular, scalable, and profitable. Generally, the very top creators are incredibly successful, while long-tail creators barely get by.[25] On Spotify, for example, the top 43,000 artists, or approximately 1.4% of those on the platform, receive 90% of royalties and make, on average, $22,395 per artist per quarter. The rest of Spotify’s 3 million creators, or approximately 98.6% of its artists, make just $36 per artist per quarter.[26] Stated differently, today’s creator economies are lacking a middle class.

As blockchain technology scales and evolves, centralized creator platforms will become decentralized. As a hypothetical, what if a platform like TikTok was owned, maintained, and governed by its creators instead of a corporate entity (the decentralized version of TikTok being called the “Creator Owned System” or “COS”)?

- Every time a creator creates and uploads a dance (like they would on TikTok), that creator automatically receives a predetermined amount of COS tokens from a smart contract

- Every time a creator’s original dance is “liked,” “shared,” or “viewed,” the creator automatically receives a predetermined amount of COS tokens from a smart contract

- Every time any other community member uses the original creator’s dance in a Creator Owned System upload (or anywhere else, including on Instagram, YouTube, Facebook, or any other social media platform), the original creator would automatically receive COS tokens and a portion of any additional revenue generated by any other user in connection with the original creator’s dance

- The original creator may also choose to create a non-fungible token (“NFT”) of any original dance and receive a certain amount of COS tokens from other users by offering a limited release of a certain number of NFTs of that original dance

- A creator could even allow his / her dance to be used by avatars in the Creator Owned System network and create special merchandise that those avatars could wear — like a t-shirt — which other community members could obtain through the provision of COS tokens

- The Creator Owned System community could determine to have Bruno Mars perform a special concert within the Creator Owned System platform and Bruno Mars would be compensated by the community through COS tokens

- Creator Owned System community members, represented as avatars, could spend COS tokens on specially created merchandise created by other designers in the Creator Owned System platform, which they can wear to the Bruno Mars concert. Special edition Bruno Mars concert t-shirts could be represented in the form of NFTs with any revenues generated being allocated to the t-shirt designers

- CMT Digital could display Creator Owned System dance NFTs that it obtained through COS tokens on a special screen used to display digital content in its conference room along with other NFT art that CMT Digital has collected

- Creator Owned System community members will be able to use COS tokens to vote on changes to the Creator Owned System

- Creator Owned System developers, owners, and operators from all around the world will receive COS tokens in exchange for maintaining and securing the Creator Owned System network (including securing user data) and implementing changes desired by the voting Creator Owned System community members

- If a Creator Owned System community member desires to port the data he / she has uploaded to the Creator Owned System network, he / she can do so with a single button click

- Anyone, anywhere in the world can fork (essentially, copy / paste) the Creator Owned System network in order to build a new creator owned system (“New COS”) and attempt to create network effects for the New COS by bootstrapping initial growth through using New COS crypto assets as an economic incentive for participation and developer contributions

- Anyone, anywhere in the world can build applications on top of the open source technology of the Creator Owned System

The above example illustrates the type of automation that can be done with blockchain software and crypto assets to ultimately remove a corporate entity like TikTok as the middleman and create a decentralized version of the TikTok platform. The automation of a decentralized network like TikTok is an example of Web 3.0, where the users, who are providing the value to the platform, also become the owners of the platform. It is equally important to note that the users of the Creator Owned System will not be incentivized to contribute to the platform if they are unable to extract value for the content they create and, generally, the only way to do that is to have the ability to exchange COS tokens for other crypto assets or fiat. In this example, the COS token is designed to have attributes separate from exchangeability and the primary purpose of the COS token is not to act like money outside of the Creator Owned System platform. The risk is that crypto assets like the COS tokens, which are designed with a purpose different than bitcoin (the original 2013 CVC), are considered CVCs and the recordkeeping and reporting requirements of the Proposed Rule are therefore applicable, which is impractical to implement with respect to COS tokens and therefore may ultimately stifle the innovation in the United States that we anticipate in decentralized economies.

It was not possible before the invention of the Bitcoin system to distribute value, like data, to anyone, anywhere in the world without an intermediary in a trustless manner and with minimum friction. There is no Ethereum Inc or Ethereum LLC that is extracting value from the Ethereum system; rather, all of the value of ETH is held by the millions of global owners of the system. These decentralized user owned and operated systems will move into social, gaming, collectible, and creator economies (and more) as the underlying technology stack scales and blockchain elements are abstracted away so they become more accessible and easier to use, all of which should lead to better economic alignment between platforms and participants and ultimately, greater financial inclusion. As noted above, much like closed-loop stored value, the crypto assets that power these systems, even if exchangeable for cash or CVCs, should not be treated like a currency in their own right.

It is also important to keep in mind that these systems are open and permissionless, meaning that innovation in this space is happening at the speed of software development. At the beginning of the commercialization of the internet, it was common for people to think the potential of the internet was a faster form of mail, or a vast, easier to access content library. No-one really imagined Facebook or Fortnite at that time because those types of online social experiences were in a paradigm that did not yet exist. That is the same type of opportunity that exists with blockchain technology. It is hard to fully imagine where it will take us because we have not been there yet and, of course, that makes a regulator’s job incredibly challenging and highlights why industry and regulator collaboration is absolutely critical. Regulators need to continue to learn from industry and industry needs well-considered rules and regulations so this technology can reach its full potential.

Insufficient Time to Consider the Impact of the Proposed Rule on SEC and CFTC Regulations

Additionally, these very issues — how crypto assets should be categorized from a legal standpoint — are being actively discussed by other U.S. regulators, including the U.S. Securities and Exchange Commission (the “SEC”) and the U.S. Commodity Futures Trading Commission (the “CFTC”). A CVC, regulated by FinCEN under this Proposed Rule, may also be regulated by SEC and CFTC recordkeeping and reporting requirements, which may provide for overlapping and conflicting compliance obligations. The foregoing highlights again why 8 business days is not sufficient time for the industry to comment on how FinCEN’s Proposed Rule intersects with the rules and regulations currently in place or contemplated by the SEC and/or the CFTC that relate to crypto assets.

Potential Impact on Innovation in the United States if Traditional Finance is Forced to De-Risk due to Ambiguous Rulemaking

Does it stifle innovation in the United States if all COS tokens and/or NFTs like the ones mentioned in the above example are deemed CVCs and therefore banks and MSBs in the United States would be required to apply the recordkeeping and reporting requirements in the Proposed Rule to transactions dealing with COS tokens and NFTs? US dollars are exactly that, US dollars, but do COS tokens and NFTs have equivalent value as currency or act as a substitute for currency? How will banks and MSBs make these types of CVC determinations in order to figure out whether or not to apply the Proposed Rule to these types of crypto assets? With significant sanctions and reputation damage flowing from alleged failure to comply with anti-money laundering regulations, sanctions which have been significantly augmented by the National Defense Authorization Act, there is a significant risk that, without guidance from FinCEN, MSBs and banks in the United States may err on the side of treating many crypto assets as CVCs, whether deserving of that treatment or not. This very narrow decentralized Creator Owned System example should help illustrate that not all crypto assets are financial instruments. As such, FinCEN should take the time to interact with the industry to get to know the differences among crypto assets that are products and services versus those that are simply used as a store of value or medium of exchange and therefore should be regulated as CVCs. The unintended consequence of not doing so will be the development of these creator economies and the financial inclusion we hope they will bring occurring outside of the United States, where the rules of the road may be clearer. While this is a problem inherent in the definition of CVCs, that problem is significantly exacerbated by the continued layering of additional obligations on regulated entities that could be triggered by dealing with new forms of crypto assets. Accordingly, we respectfully suggest that it is essential that FinCEN seek notice and public comment on the basic terms that underlie its latest regulatory foray into oversight of crypto asset activities before launching a significant expansion of regulatory obligations predicated on the shaky foundations of its virtual currency guidance.

As noted above, it is also unclear under the Proposed Rule if / how MSBs and banks in the United States can interact with smart contracts and still comply with the Proposed Rule. As a result of that ambiguity, it is likely that MSBs and banks will again be forced to de-risk and ultimately cut off transactions between regulated hosted wallets and smart contracts. This is because absent guidance from FinCEN, of which there is presently none, smart contracts are impossible to KYC in the traditional sense given that they are not human and therefore do not have human identities or physical addresses, are not legal entities with corporate identities or physical addresses, do not have direct owners, and could have hundreds or thousands of counterparties if participants in smart contract liquidity pools are deemed “counterparties.” In our example, that means that decentralized creator economies are cut off from the traditional financial system in the United States and, again, will likely cause development of decentralized economies to occur offshore where there is less ambiguity and more support for fostering innovation.


As it stands, the Proposed Rule will not achieve Treasury’s goals and will result in law enforcement in the United States seeing less rather than more information regarding transactions in crypto assets. Additionally, the type of regulatory uncertainty included in the Proposed Rule will result in continued regulatory arbitrage in the crypto / blockchain industry, which is very real and happening at a rapid pace. From an economic standpoint, it is critically important for the United States to participate in this new asset class and technology just as it did with respect to the internet. What if the United States had over regulated the internet from the start and it was not the United States that participated in that technology as it did from a standards setting, security, and economic standpoint? What if that had occurred in China instead? If the regulatory environment in the United States continues to be so fragmented and unclear, then the United States will not participate in the growth of this new asset class and technology, which means that the economics as well as the associated standards and the security considerations will all take place offshore. Unlike prior industries, generally, there is nothing that physically tethers a crypto business or developers to the United States and we are seeing many companies and individual talent leave and go to jurisdictions where the regulatory environment is clearer. These technologies are open source and accessible to the world’s entire population; we have no idea where this industry and technology will go tomorrow, which is why it is so critically important for FinCEN to collaborate with industry so that any ill-considered and rushed regulation like the Proposed Rule does not stifle innovation in the United States today. SEC Commissioner Hester Peirce in her recent speech, Liberty’s Loss[27], sums up nicely some of the challenges a regulator faces when dealing with crypto assets and why a thoughtful approach is required:

Regulators, however, are used to dealing with intermediaries, because they are easy to grab hold of and regulate. So crypto poses new challenges. Those challenges are only growing as crypto evolves. The SEC is wrestling with issues such as whether digital assets are securities, how registered entities can custody digital assets in compliance with our rules, and whether regulated investment products holding bitcoin can meet our standards. The explosion of decentralized finance, or “DeFi,” applications designed to displace regulated entities such as exchanges and broker-dealers will pose thorny questions and decisions for us in the coming years.

As this technology gains adoption outside and now inside the legacy financial system, we should figure out a way to embrace the personal liberty principles undergirding it. If we were instead to steamroll the technology’s liberty-enhancing features under the weight of regulation, we would lose a lot of the power of the new technology to afford opportunities to people whose autonomy has previously been curbed by, for example, limited access to the traditional financial system, geographic location, social standing, or subjection to a repressive government.

In light of the issues we have raised in this letter, we respectfully request that the comment period for the Proposed Rule be extended to at least 60 days.


Colleen Sullivan, Co-Founder / CEO, CMT Digital


[2] CMT Group companies have been, and currently are, regulated in many different international jurisdictions, including: (i) CMT Asia LLC was formerly regulated by the Financial Services Agency of Japan / Discretionary Investment Manager (DIM License); (ii) CMT APAC Advisors Pty Limited was formerly regulated by the Australian Securities and Investments Commission / Australian Financial Services License; (iii) CMT Advisors Asia Limited was formerly regulated by the Securities and Exchange Board of India (SEBI) / Foreign Institutional Investor (FII) License as well as the Securities and Futures Commission (SFC) of Hong Kong / License to engage in Type 9 asset management activities; (iv) CMT Asset Management LLC is currently regulated by the US Securities and Exchange Commission as a Registered Investment Advisor; (v) Capital Markets Trading UK LLP is currently regulated by the Financial Conduct Authority (FCA) as an authorized firm licensed to carry out certain regulated activities under Part IV of the Financial Services and Markets Act of 2000; (vi) CMT Trading LLC is currently regulated by the US Securities and Exchange Commission as a Broker-Dealer; and (vii) CMT Digital Trading is a money services business registered with the Financial Crimes Network (“FinCEN”) and licensed in certain states for certain digital assets activities.


[4] Certain of CMT Digital’s portfolio companies are included here:

[5] CMT Digital is an executive member of the Chamber of Digital Commerce and Ms. Sullivan sits on its Advisory Board. CMT Digital is also a member of the Association for Digital Asset Markets (




[9] A draft of the Davenport Letter can be found here:

[10] It is noteworthy, however, that this requirement, like several other critical elements of the Proposed Rule, appear only in the rule’s preamble and not in the Proposed Rule itself.

[11] Proposed Rule at 13.

[12] Proposed Rule at 31.

[13] We strongly encourage FinCEN to read: “Deconstructing the Digital Dollar: Protecting Financial Privacy from Surveillance Capital” by Justin C. Steffen and Ellen Pactor, which will soon be published in the International Business Law Journal and is available upon request from Mr. Steffen (

[14] Helen Partz, China’s digital yuan pilots have processed $300M so far, says PBoC head, COINTELEGRAPH (Nov. 2, 2020),

[15] Zou Chuanwei, A full analysis of DC/EP, HashKey Hub (Apr. 17, 2020),

[16], starting around the 1:53:00 mark


[18] Please see the Davenport Letter, Section ii.

[19] Generally, the FinCEN files leak included more than 2,500 documents, most of which were files, including suspicious activity reports (SARs) that banks sent to US authorities between 2000 and 2017. The files were leaked to Buzzfeed News and shared with a group that brings together investigative journalists from around the world, which distributed them to 108 news organizations in 88 countries. For more information see:

[20] A copy of the Corallo Letter can be found here:

[21] As noted below, Web 1.0 enabled the democratization of information and Web 2.0 facilitated the creation of social networks, Web 3.0 will add value at the protocol layer of the internet and transforms networks into economies. Web 3.0, which was not possible before the invention of the Bitcoin system, turns centralized applications into decentralized protocols powered by crypto assets.

[22] Proposed Rule at 6.

[23] CMT Digital anticipates bridges being built from MSBs, banks, and other regulated financial institutions to decentralized economies and the industry is at the very early stages of seeing exactly that happen. In Spencer Noon’s December 4, 2020 newsletter, he notes that as of November 27, 2020, the number of unique Compound users had grown 290% since the launch of Coinbase Earn Advanced Tasks and that ~174k Coinbase users supplied $3.00 worth of USDC to Compound, representing nearly 87% of all active users. ~23k of those users also supplied additional assets, demonstrating how MSBs like Coinbase can be an effective onboarding user mechanism for decentralized protocols. That type of liquidity — from MSBs, banks, and traditional finance — coming to fruition in decentralized economies is certainly a component of CMT Digital’s crypto trading and investment thesis. See: For further background: Coinbase Earn allows eligible Coinbase customers to educate themselves about new developments in crypto and earn crypto assets as rewards. In July 2020, Coinbase customers could start learning about Compound and earning COMP by watching lessons and completing quizzes about the Compound protocol and its governance token, COMP. Compound is an Ethereum token that governs the autonomous Compound protocol. The protocol allows anyone to borrow and lend Ethereum tokens through a decentralized market. Lenders earn interest on the crypto they supply to the protocol and borrowers pay interest to borrow it. See:

[24]Proposed Rule at 4.

[25] For an excellent summary on the lack of a creator economy middle class, please see:



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CMT Digital, a division of the CMT Group, is focused on crypto asset trading, blockchain tech investments, & legal/policy engagement.

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