Financial institutions report large cash and crypto transactions differently. This gap led to a controversial rule proposal by the Financial Crimes Enforcement Network (FinCEN) late last year, an official said Monday.

Speaking at a virtual panel hosted by compliance firm TRM Labs, FinCEN Deputy Director Michael Mosier was referring to a rule that would require crypto exchanges to report transactions to private wallets (sometimes referred to as unhosted wallets) worth over $10,000 per day, as well as collect counterparty information for wallets that receive over $3,000 in crypto per day. 

If crypto is like cash, “why does the CTR, the currency transaction reporting requirement, apply to cash and banks and money services businesses but you have this gap with crypto,” he asked.. “… There’s a concern at the senior government level, including political leaders here and abroad.”

The proposed rule, which was introduced on Dec. 18, 2020, would impose stringent data collection requirements on exchanges within the U.S.

While the CTR aspect is in-line with requirements on cash transactions, the industry pushed back heavily against the counterparty information requirement, noting that among compliance burdens, it would prevent U.S. crypto holders from sending funds to smart contract wallets, which by their nature don’t have names or addresses tied to them.

According to fellow panelist Jai Ramaswamy, the head of risk, compliance and regulatory policy at cLabs, one issue is that much of the U.S.’s financial regulations are centered around using intermediaries in financial transactions. 

Ramaswamy is a former head of the U.S. Department of Justice’s money laundering section, and wrote an opinion piece on how unhosted wallet restrictions might backfire last year for industry organization Coin Center.

In Monday’s talk, he said the Bank Secrecy Act’s core regulation focuses on these intermediaries identifying malicious or illegal activity and reporting that to the federal government.

“When you move to a world where those financial intermediaries are no longer the gatekeepers, if you will, and individuals are transacting peer-to-peer, it raises concerns about ‘okay what do you do in a disintermediated world when the regulatory regime is focused on having those financial intermediaries play a pretty important and crucial role in managing the risk of bad money in the system,’” he said.

Read more: DC Magistrate Judge Calls Unhosted Wallet ‘Horror Story’ a ‘Fiction’

He later added that in his view, it’s not clear whether the Bank Secrecy Act’s clauses can map well onto a system based on peer-to-peer transactions. 

However, he said that “even criminals” would need to convert their crypto funds back to fiat to use them, hinting that regulations around these points of conversion may be sufficient to meet the law’s requirements. 

“At some point in the value chain they need to get cash, to get currency because that is legal tender,” he said.

Mosier said FinCEN staff realized the rule’s 15 day comment period was not going to cut it – the public needed more time. They first added 15 more days. With the arrival of the Biden administration, FinCEN tacked on another 60. 

The additional time gives industry members a window to more fully comb through – and critique – a rule proposal as complex as it is controversial. Many have already submitted detailed rebuttals that bemoaned the proposal’s original expedited comment period. Coin Center has even filed a second volley.

Read more: State of Crypto: Unpacking the Trump Presidency’s Crypto Legacy

Mosier said that finding the distinction between cash and crypto is a key target of the ongoing comment period. The comment period discussion can help FinCEN apply the old guardrails where applicable and develop new safeguards for new technology.

He also emphasized that the proposed rule has multiple components, and encouraged responders to discuss the different aspects. 

“It’s a proposal, it’s not all or nothing, tell us about what works,” and what doesn’t on the technical and conceptual front, Mosier said.

Comments that used practical and technical examples would be more helpful than just comments focused on conceptual issues, he said. 

The rulemaking process could also help FinCEN stay ahead of lawmakers who Mosier said might “overreact” to headline-grabbing incidents with a seemingly suspect cryptocurrency bent. 

An example is the $500,000 bitcoin payments made to far-right figures one month before the Capitol siege. That payment, which federal law enforcement agencies are investigating has little to do with unhosted wallets, but it plays into the same overarching angle that crypto can be used for crime.

“That’s the kind of low-probability high-impact event that could cause lawmakers and others to overreact in terms of laws and regulations, and we want to be ahead of that,” Mosier said.

Read more: 7K Comments and Counting: Crypto Industry Fights ‘Arbitrary’ Treasury Rule

Some lawmakers are already calling for a closer scrutiny of the digital asset space as a result of the Jan. 6 insurrection. Rep. Josh Gottheimer (D-N.J.) published a statement earlier this month asking for the Department of Justice to investigate the bitcoin transaction. 

“Are foreign entities paying far-right extremists to try to overthrow the U.S. government? Are there other cryptocurrency transfers to extremist groups we don’t yet know about?” the Congressman said in a statement.