The Six-Year Tug of War Between Privacy and Regulation

The Trump administration withdrew two cryptocurrency proposals, but the regulatory boundaries and conflicts of interest remain unresolved.

Written by: Andjela Radmilac

Compiled by: Saoirse, Foresight News

On December 18, 2020, just a week before Christmas, Donald Trump was about to end his term in the White House. The U.S. Department of the Treasury, led by Steven Mnuchin, issued a proposal requiring cryptocurrency exchanges and other financial institutions to collect more information on transactions related to users' self-custodied private key wallets.

The public had only 15 days to submit comments, with most of that time coinciding with the Christmas and New Year holidays. The government claimed that cryptocurrencies were increasingly being used for financial crimes, and that shortening the consultation process was justified for "national security reasons."

Six years later, the Trump administration officially withdrew this proposal. The regulatory draft received thousands of opposing comments that year; during President Joe Biden's administration, the draft had already been marked for "withdrawal" on the federal regulatory agenda more than two years before the formal withdrawal announcement.

This policy reversal is quite rare: two diametrically opposed policy decisions were made by the same U.S. government.

But what is more noteworthy is the change that occurred during this time. Washington spent years debating how much personal information financial institutions should collect from cryptocurrency users whose assets are not held by banks or exchanges.

This policy initially attempted to extend banking regulatory rules into the cryptocurrency space, ultimately evolving into a significant debate over financial privacy, forcing regulators to confront the core differences between the two systems: banks can verify the identity of actual account holders; public blockchains can record transactions but cannot identify the real individuals behind wallet addresses.

Wallets That Washington Struggles to Trace

The original proposal was issued by the Financial Crimes Enforcement Network (FinCEN) under the Treasury Department, targeting non-custodial wallets—wallets where users control their private keys and can send and receive cryptocurrencies without the authorization of financial institutions.

For ordinary users, these wallets are not new; self-custody of private keys has been a core feature since the inception of cryptocurrencies.

However, for regulators accustomed to relying on banks for customer identity information, the rise of cryptocurrencies has highlighted the regulatory challenges posed by non-custodial wallets.

Banks hold customer identities and transaction records and are legally required to report relevant information to regulators. Cryptocurrency exchanges also enforce this rule for users on their platforms. However, once assets are transferred to a user-controlled wallet, financial institutions can no longer manage the asset holders.

Blockchains can record whether transactions occurred, when they occurred, the amount transferred, and the relevant wallet addresses, but the addresses themselves do not disclose the holder's name or actual residential address.

The Treasury hoped to enforce information reporting and record-keeping obligations by constraining financial institutions handling such wallet transactions, thereby filling this regulatory gap.

According to the December 2020 proposal, banks and money service businesses (including compliant cryptocurrency exchanges) were required to report transactions exceeding $10,000 on a single transaction or in a 24-hour cumulative amount; when the transaction amount exceeded $3,000, institutions were required to retain additional records and collect the counterparty's name and actual residential address.

Institutions needed to verify their customers' identities, but the proposal did not require identity verification for the counterparties corresponding to the collected information.

This seemingly minor difference gives rise to numerous practical challenges.

For example: a user transfers $5,000 to an independent designer through a cryptocurrency exchange, and the designer receives the payment using their non-custodial wallet. The transfer can be completed on the blockchain with just the designer's wallet address. However, according to the proposal's requirements, the exchange would also need to retain the designer's name and home address—even if the designer has never registered an account with that exchange.

Withdrawing cryptocurrency to one's self-custodied wallet is relatively straightforward, as the recipient's identity is known; however, when funds are transferred to a third-party individual, the institution must collect personal information unrelated to the transaction itself, which exchanges often cannot obtain.

The proposal does not prohibit users from self-custodying assets, does not require non-custodial wallets to register with the government, and does not directly constrain peer-to-peer transactions between two non-custodial wallets. It merely mandates regulated entities: whenever funds flow between their platform and external users' self-custodied wallets, they must collect additional user information.

This is precisely the core contention of privacy advocacy groups: the government does not need to directly control wallets; it merely needs to compel financial institutions acting as intermediaries in transactions to collect user identities, thereby indirectly obtaining personal data.

Mnuchin stated in the announcement on December 18 that the proposal could close loopholes that criminals exploit to evade financial reporting obligations and could be used to combat money laundering, terrorist financing, sanctions evasion, and other national security threats. The text of the rules specifically cited transaction cases involving wallets associated with North Korea's Lazarus Group, recording at least 17 transfers exceeding $10,000 between U.S. financial institutions and wallets linked to that organization between 2017 and 2018.

Regulators believe that allowing funds to flow outside the oversight of financial institutions increases the difficulty of investigating cases; this technology can be used for ordinary payments as well as for transferring illicit funds and paying ransomware ransoms.

However, privacy advocates disagree: even if such risks exist, they are not sufficient to justify forcing institutions to collect personal information from all parties involved in large transactions. The crux of the dispute lies in where the boundaries of regulatory obligations originally established for intermediaries should extend when one party to a transaction chooses not to use any financial intermediary.

Only 15 Days for Public Comment, Draft Stalled for Years

Once the Treasury's proposal was released, the rushed timeline for public comment immediately drew public criticism.

On December 23, 2020, FinCEN published this regulatory draft in the Federal Register, with the deadline for public comments set for January 4, 2021. This meant that the industry needed to study a new set of complex compliance obligations during the holiday period when companies were reducing staff.

Regulators defended the shortened consultation period by claiming there was an urgent national security risk—if the rules were delayed, criminals would have more time to transfer assets outside the regulatory scope.

The cryptocurrency policy organization Coin Center opposed this timeline and pointed out the core disagreements that were being obscured by the extensive discussion.

In their initial feedback, the organization acknowledged that drawing a parallel between large cash reporting logic and the cryptocurrency space was somewhat reasonable, as withdrawing $10,000 in cryptocurrency from an exchange could be likened to withdrawing the same amount in cash from a bank. However, their core objections were to the mandatory collection of counterparty information and the excessively short time given for the industry to assess the feasibility of the rules; especially when the recipient is not a conventional bank account but a program or transaction structure without a name or address, these rules are nearly impossible to implement.

Simply adding a column to the withdrawal form does not solve the real-world issues; exchanges often cannot obtain the third-party information required by the proposal.

As of January 14, 2021, FinCEN stated that it had reviewed over 7,500 public comments and subsequently reopened the comment period: an additional 15 days for feedback on the relevant provisions, while extending the remaining provisions to 45 days.

Less than two weeks later, Biden was inaugurated as president, and the agency extended the consultation period again, setting a uniform deadline of 60 days for comments.

The initiating government of the proposal had changed, and this draft, which was originally required to be expedited, fell into a lengthy regulatory process without ever formally becoming law.

During Biden's administration, this proposal became merely a historical regulatory document in the archives, and the reporting system envisioned during Mnuchin's tenure never materialized. By the spring of 2024, the status of this proposal on the regulatory agenda changed.

As early as April 12, 2024, the U.S. Unified Regulatory Agenda had already marked this wallet proposal as "completed, pending withdrawal," more than two years before FinCEN issued the formal withdrawal notice in October 2026.

This changed our understanding of the final decision. The announcement in the October 2026 Federal Register was an independent formal administrative action, explicitly abolishing the original proposal, with FinCEN no longer continuing to advance the draft.

Public documents record these two administrative nodes but do not explain why the formal announcement was published more than two years after the agenda was marked for withdrawal.

The final result is that the new compliance requirements in the 2020 proposal never came into effect, but the policy tug-of-war surrounding the proposal has never ceased in Washington.

Another Proposal Brings Privacy Issues to the Fore Again

In October 2023, just as this wallet proposal was about to be removed from the regulatory agenda, FinCEN initiated a new regulatory process, reigniting similar privacy controversies.

This regulatory target is cryptocurrency mixing technology: a series of technological tools that can sever transaction links and hinder the traceability of blockchain funds.

Mixing tools can indeed obscure the flow of illicit funds and have long been a focus of law enforcement; however, on public blockchains where all transactions are transparent, this technology can also meet the legitimate privacy needs of ordinary users.

For example: a Bitcoin recipient may not want the payer to trace their other transaction records, estimate their total assets, or pry into unrelated financial activities; businesses also do not want competitors to see their transfer records to suppliers or employees.

Regulators find it challenging to distinguish between legitimate privacy uses and malicious uses aimed at hiding illicit funds or evading sanctions.

FinCEN plans to invoke the powers granted by Section 311 of the USA PATRIOT Act, requiring financial institutions handling cross-border mixing-related transactions to fulfill additional reporting and record-keeping obligations.

This proposal differs in legal basis and transaction coverage from the 2020 wallet proposal, but the definition of "mixing" is overly broad, raising new questions: how many ordinary transactions will fall under financial monitoring?

This definition not only includes specialized mixing services; any behavior aimed at obscuring transaction trails, splitting transfers, using multiple addresses, or exchanging across currencies is considered mixing behavior.

Critics point out that an overly broad definition will force exchanges to classify difficult-to-interpret normal transactions as suspicious transactions; if institutions miss a judgment, they will face compliance penalties.

The two drafts belong to different regulatory documents but expose the same underlying contradiction. The 2020 wallet proposal: when funds flow out of regulated platforms, more identity information must be collected; the 2023 mixing proposal: when transactions use techniques that obscure fund traceability, additional reporting obligations are required.

Both proposals aim to rely on intermediaries that already bear reporting obligations to mitigate real financial crime risks; opponents argue that excessive information collection will harm legitimate financial privacy.

Washington's Policy Shift

In January 2025, Trump returned to the White House. The current administration's attitude towards cryptocurrencies stands in stark contrast to the end of his first term.

The cryptocurrency industry has grown into a powerful political and economic force. The new administration has prioritized digital assets as an economic direction, aiming to retain domestic businesses and developers while reducing regulatory uncertainty.

In January 2025, Trump signed an executive order establishing the Presidential Working Group on Digital Asset Markets, directing the group to review federal-level related policies and propose reform recommendations.

The working group released a report in July 2025 covering various topics, including market regulation, stablecoins, asset custody, taxation, and financial privacy. The report's stance on self-custody and privacy protection marked a significant shift from the statements made during Mnuchin's tenure at the Treasury in December 2020.

The report supports legitimate users conducting privacy transactions on public blockchains while acknowledging that the government still has a duty to investigate crimes such as money laundering. The report recognizes that mixing tools have legitimate privacy value, even though criminals may use similar tools for money laundering and hiding funds.

This provides a new perspective on balancing "financial transparency" with "protection of ordinary citizens' transaction privacy."

In March 2026, the Treasury submitted a report to Congress further clarifying that legitimate crypto users can use mixing technology to protect information related to personal wealth, business payments, charitable donations, and consumer spending.

The Treasury has begun to consciously distinguish between the privacy tools themselves and the illegal activities conducted using those tools. The government still views money laundering as a significant risk but acknowledges that individuals have legitimate reasons to engage in privacy transactions—especially since transaction records on public chains are permanently stored.

This policy framework forms the backdrop for FinCEN's decision made on October 5.

The next day, the Federal Register published an announcement that FinCEN officially withdrew both the 2020 proposal on non-custodial wallets and the 2023 proposal on crypto mixing.

The announcement regarding the wallet proposal links the withdrawal decision to the Trump administration's digital asset policy, confirming that it will no longer advance this draft introduced during the first term. The announcement regarding the mixing proposal further responds to external criticism: it acknowledges that the draft's definitions would stifle legitimate businesses and impose a heavy reporting burden on financial institutions.

FinCEN also clarified that regulatory agencies will continue to monitor the illegal uses of mixing tools and keep an eye on risks related to money laundering and terrorist financing, with the possibility of new rules being introduced in the future.

Coin Center, which has consistently opposed both drafts, views this withdrawal as a significant victory in the field of privacy protection. The government has abandoned the compliance obligation to expand the collection of sensitive financial information, including the collection of personal information from non-platform customers.

This outcome is the most formal reflection of the current government's shift in stance; however, from the perspective of policy evolution, the position has gradually evolved over several years rather than being a sudden turn due to a single decision.

Privacy Wins a Battle, but Regulation Remains in Place

The withdrawal of the two proposals does not mean that exchanges can stop collecting customer data, nor does it exempt crypto transactions from existing anti-financial crime laws.

Banks and compliant crypto businesses still need to adhere to the Bank Secrecy Act: implementing anti-money laundering mechanisms, verifying customer identities, retaining transaction records, and reporting suspicious transactions, among all statutory responsibilities.

This administrative decision in October will not change the direction of criminal cases related to crypto privacy tools. Criminal statutes related to fund transfers, sanctions, and money laundering are independent of the two withdrawn proposals.

A typical example is the case of Tornado Cash developer Roman Storm: even though the Treasury has abandoned the mixing reporting draft, federal prosecutors continue to pursue charges against him.

The government recognizes that privacy technology has legitimate uses, but this does not mean that all privacy services fall within the legal category, nor does it mean that operators can escape criminal liability.

For ordinary wallet users, the actual impact of the proposal withdrawal is far less than its political symbolic significance. The two drafts never came into effect, and there are no current enforcement rules to be abolished in October 2026.

What has truly changed is the official attitude of the United States: it will no longer advance two proposals that attempted to extend regulatory reporting obligations to crypto scenarios that are difficult for institutions to monitor.

This is crucial: financial privacy is not determined by a single draft; even without new reporting obligations, exchanges can still collect information, monitor suspicious transactions, and cooperate with law enforcement agencies to obtain data based on other laws.

Looking back at the complete history of the two drafts, we can see the dilemma faced by Washington: where exactly should the boundaries of regulatory obligations be drawn?

For decades, the U.S. financial reporting system has heavily relied on financial institutions that hold customer funds and retain transaction records. However, crypto technology has spawned a new model: users can directly hold and transfer value; transaction records are permanently stored on-chain, but these records do not expose the true identities behind them.

During Trump's first term, there was a desire to compel regulated institutions to obtain the identity information of users and wallets on the other end of transactions, bringing more on-chain transactions into the traditional reporting framework. The Biden administration attempted to enhance regulatory transparency regarding "fund obfuscation transactions"; however, before Biden left office, the wallet proposal had already been marked for withdrawal.

Trump's second term officially terminates the two regulatory drafts. The policy direction shifts to: placing greater emphasis on the legitimate demands for financial privacy while not abandoning the fight against illegal financial activities.

The withdrawal of the proposals is a victory for the crypto industry, but ironically, this government that defends crypto privacy is itself deeply involved in the crypto business and has earned substantial profits from it.

From late 2024 to April 2026, the Trump family, through World Liberty Financial, TRUMP Meme Coin, and other crypto projects, achieved approximately $2.3 billion in pre-tax profits; over one million external investors collectively suffered about $2.3 billion in paper and actual losses.

The family has hardly invested its own funds to bear risks, relying on token sales and business collaborations for profits, while all the downside risks are borne by token buyers. The crypto business has brought enormous profits to the Trump family, while ordinary investors who purchased their tokens have suffered significant losses.

Existing evidence does not prove that FinCEN withdrew the draft with the intention of benefiting the Trump family; the value of financial privacy itself will not be discounted due to the identity of policy supporters. However, when a family that relies on the crypto market to amass enormous wealth simultaneously controls the government that formulates regulatory rules for the crypto industry, the issue of conflicts of interest cannot be avoided.

Ironically, Washington has spent six years debating how much personal information of crypto wallet users should be collected; now, the most prominent question has become how much wealth this family in the White House has earned from the crypto market.

This policy reversal, which took nearly six years to settle, tells us that the core contradictions will not disappear simply because the proposals have been withdrawn.

The transaction records on public blockchains are publicly accessible, and financial institutions hold customers' true identities. When users choose to self-custody their assets, the regulatory level has yet to determine how much user information should be shared between the two systems.

This debate had already begun before Mnuchin's Christmas Eve draft was introduced; the withdrawal of the draft does not mean that Washington has put an end to it.