A recent article in @theragetech, "US Government to Bring Patriot Act to Digital Assets" suggests that the Treasury is in the process of banning privacy tools.

There are important issues raised here but I want to offer some nuance and color about what exactly is happening and Coin Center's past and ongoing work on Patriot Act Section 311 and the mixer rule-making at FinCEN.

1. These sections of the Patriot Act are part of the BSA and therefore they have always applied to trusted crypto businesses. So while that application may evolve under a recently proposed FinCEN rule (begun at the end of the last admin, possibly finalized soon), the general application of these laws to crypto is not new.
2. Treasury (even under the last admin when the rule-making began) was not contemplating a ban on privacy tools. It was classifying their use as a “primary money laundering concern” that would trigger a “special measure” at financial institutions in the form of increased record-keeping and reporting obligations. So even if that rule went forward, you’d still be able to use the tools but when you bring assets back to a regulated exchange you could be flagged and reported for further investigation.

It’s true that there is another Section 311 special measure that could be used to ban financial institutions (though not ordinary persons) from engaging in those transactions entirely, but to implement a ban FinCEN would need to engage in an entirely new rule-making with notice and comment. FinCEN has shown no indication that that is their intention at the moment.

3. The President’s Working Group report mentions the rule-making, asking FinCEN to contemplate next steps while being mindful of the privacy harms that could come from over-regulating the space. Coin Center was disappointed in this section of the report because we had hoped the PWG would simply and directly call for an end to the rule-making. It is, however, an overstatement to say that the PWG wants the 311 rules applied as they were contemplated in the original notice of proposed rule-making during the Biden admin.
4. The article’s claim that FinCEN is definitely finalizing that rule-making is based on FinCEN Director Gacki’s recent congressional testimony, specifically her responses to questions about mixers from Rep. Liccardo. In talking about the rule-making and whether they will finalize it, she said that they need to take a careful approach to only flag actual illicit usage of these tools and not sweep in legitimate usage like persons protecting themselves from authoritarian regimes. The article does point that quote out but I would have made more of it.
5. Coin Center’s original response to the mixer rule-making was that it would be constitutionally and statutorily improper unless the 311 powers were strictly limited to only cover actual foreign transactions with a real connection to illicit activity. We argued that it would be a violation of due process and the limits of the statute to flag legitimate or domestic usage of privacy tools. We said that if such a limited approach is unfeasible (because, for example, foreign and domestic usage can’t be disambiguated), then the entire rule-making must be abandoned.

We don’t know what FinCEN will ultimately do in response to our comment but Gacki’s remarks about being cautious with regard to legitimate tool usage sounds to me like they are taking the privacy and liberty risks of their original proposal to heart. We're not out of the woods, but I'm cautiously optimistic.

6. Towards the end, the article also brings up the Special Measures to Fight Modern Threats Act, a bill in the House from 2022 that sought to remove the notice and comment process from Treasury’s 311 authority altogether. The article quotes me and Jerry criticizing that prior legislative effort, as we did at the time.

Obviously, the only reason we can even discuss these ongoing mixer rule-making issues at FinCEN is because the PATRIOT Act currently obligates the Treasury to go through this public process whenever it wants to use its 311 authority. If the notice and comment process had been removed, as was proposed in the 2022 bill, much damage could be done to our legitimate privacy interests in secret and without public comment. On this topic, I’m happy to report that in large part because of work Coin Center did in 2022, Congressman Jim Himes—the original sponsor for the bill—reversed course, and no such amendment to strike notice and comment made it through Congress. Nor, to my knowledge, is anyone currently advocating for that policy change today.

For now at least, the notice and comment process is not going away for implementing 311 powers. I'm very proud of Coin Center's role in its defense back in 2022; we're seeing real benefits of that work today as we all get to publicly debate this mixer rule rather than it being something regulators can do in secret.

So in all, Section 311 is a powerful and dangerous part of the Patriot Act that already applies to crypto businesses, but we are not yet at a point where the admin is leveraging it to ban privacy tools.

Ty for sharing Peter - will add your comment on removing notice process to the article.

To clarify, the Treasury is taking next steps on mixer rule according to Gacki, and her comments on being cautious are great, but the original proposal would still ban almost all privacy tools as it stands today. I am unclear as to why you wouldnt consider this a ban on privacy tools, as it factually bans any and all privacy preserving software and behavior as outlined in the NPRM.

Additionally, Castens did state to begin dialogue with the FinCEN Director on way forward re Modern Threats Act on record at Hearing.