The U.S. Treasury Department said Friday it is proposing new requirements involving convertible virtual currencies that would require banks and other intermediaries to maintain records and submit reports to verify customer identities for certain transactions.

The Financial Crimes Enforcement Network -- a unit within Treasury that guards against money laundering -- requested comments on the proposed rules, saying they were aimed at closing loopholes that can be exploited.

“The rule, which applies to financial institutions and is consistent with existing requirements, is intended to protect national security, assist law enforcement, and increase transparency while minimizing impact on responsible innovation,” Treasury Secretary Steven Mnuchin said in a statement.

The Treasury said it will take public comment for 15 days on the plan, which is certain to draw widespread criticism from the cryptocurrency industry. The added restrictions would place a series of new burdens on crypto exchanges and other firms involved in the transfer of digital assets.

The focus of the rule is on so-called unhosted wallets that are not held on a registered exchange or by a bank. The new regulation would effectively require exchanges sending money to one of these self-hosted wallets, which are not held in an exchange or bank, to take a series of compliance steps which could be costly and time consuming.

“The ability for individuals to engage in digital peer-to-peer transactions is the foundation of the crypto economy,” said Kristin Smith, head of the Blockchain Association. “Undercutting that ability with last-minute rulemaking in the twilight days of an outgoing administration is not the way to make the type of long-lasting, responsive regulations that will support the safe growth of this industry in the U.S.”

“Whether regulators acknowledge it or not,” she added, “crypto is here to stay.”

The Republican Party -- particularly its libertarian wing -- is regarded as relatively friendly to the digital coin industry, whereas Democrats are seen as taking a dimmer view, analysts say.

Neither Joe Biden nor Donald Trump highlighted the issue on the campaign trail, but it might important as digital currencies such as Bitcoin gain greater visibility.

Bitcoin climbed to US$20,000 earlier this week for the first time, before quickly surging to almost US$24,0000 just a day later. Investors seeking higher returns have been piling into the cryptocurrency this year in the wake of the record level of accommodation by global central banks following the COVID-19 pandemic.

Matt Maley, chief market strategist at Miller Tabak + Co., said regulators are trying to force cryptocurrency transactions to be more transparent.

“It means there’s more regulation coming to these cryptocurrencies,” Maley said. “This shouldn’t be a big surprise, but given how much Bitcoin has rallied recently, it could be a reason for a pullback in this asset class.”

Key Details:

Banks and exchanges would need to keep records and verify identity of recipients of transfers over US$3,000 if they have an unhosted wallet

Rule would add compliance requirements for transactions over US$10,000

Regulation would force banks and exchanges to keep records of recipients of crypto currency using so-called unhosted wallets

--With assistance from Vildana Hajric.