One of the highest values of cryptocurrency is the privacy from prying government organizations. The problem individuals run into is when they use services that have become big enough that the U.S. government has puts in its crosshairs wanting to know who exactly is running digital currency through their servers. Crypto companies then have to decide to either go rogue (which usually means off-shore and a team of lawyers to make sure everything is air-tight) or to cooperate. Based on a recent press release, the cryptocurrency trading exchange Poloniex has opted to cooperate:
We are a Money Services Business (MSB). Accordingly, we are bound by the rules and regulations defined by the Financial Crimes Enforcement Network (FinCEN), and regardless of how other businesses operate, we are legally obligated to follow the rules of FinCEN to the best of our ability.
Starting on May 21, 2015, we will require your name and country for all withdrawals. To withdraw more than $2,000.00 USD equivalent within 24 hours, we will require your address and phone number. It is only if you need to withdraw more than $7,000.00 USD equivalent in a 24-hour period that we will require identity verification such as your social security number or photo ID. We are taking these measures to protect ourselves and you from potential criminal activity that could force a shutdown of our services.
To be clear, any and all profile information we collect from you is collected in order to be compliant and to discourage people from using Poloniex unlawfully. None of the recent changes are to share or sell your data for marketing or advertisement purposes.
Poloniex is now being required to ask for identity verification because of FinCEN regulations (Poloniex is based in the US). Crypto currency is considered property and treated as such by the IRS. And the IRS has already makes no distinction between fiat money <-> crypto currency transactions and crypto <-> crypto transactions which are the ones that occur on Poloniex.
Poloniex’s level 1 verification requirement is only a name and your country of residence which is not really a big deal. And although level 2 verification is a bit more demanding, you could still retain your privacy but using a proxy phone number (like Google Voice or RingCentral). You could also (theoretically – I’m not advocating this) use a fake name & address and still withdraw as no hard identification documents are required until you withdraw past the $7,000 level.
Some salient points regarding these verification requirements:
• Don’t be foolish and take $2k a day over a longer multi-day duration just to stay within the level 1 verification requirements. The IRS looks at this as trying to skirt federal structuring laws that were enacted with the Banking Secrecy Act of 1974. The magic number is $10k as far as what forces a bank to report the transaction to the IRS, but don’t make your deposit history an easy thing to flag for the IRS.
• Your trading data is likely going to be sent to the IRS where it will be (eventually) cross-checked against your tax returns.
• The staying power of exchanges in crypto hasn’t been great (Mt. Gox & MintPal are two of the larger ones to bite the dust). The real problem comes if Poloniex goes belly up, you’re hit with a tax bill in the future for trading you did in 2016 but have no way of either proving or disproving the charges. So make sure you keep careful records of your crypto trades, even going as far as to screen-record you logging in and checking your end of month balances.
• Being in the government’s cross-hairs isn’t good for your privacy, but it does help build the legitimacy of the exchange and bodes well for its staying power.