The rise of cryptocurrencies has made a new generation of people aware of the need for financial privacy reform in America. It’s not only citizens who have taken notice, and not only calls for positive change that have been proposed. Government officials have slowly recognized that cryptocurrencies challenge the assumption that only governments are fit to issue money, and defy the 50-year-old financial surveillance regime born out of the Bank Secrecy Act.
Yet, government officials have read this challenge as a signal to double down, when they should recognize it as a signal that the American people want change.
A prime example of US government officials’ taste for financial surveillance can be seen in the recent cryptocurrency reports written by the Department of the Treasury (Treasury) and the Department of Justice (DOJ). Two significant takeaways were the recommendation to expand the Bank Secrecy Act further, and the recommendation to push forward on central bank digital currencies (CBDCs).
With those two objectives, the departments are united in connecting the past and future of financial surveillance.
First, consider the recommendations to expand the Bank Secrecy Act. In its report, the Treasury called for expanding Bank Secrecy Act reporting, strengthening the Financial Crimes Enforcement Network (FinCEN), further deputizing the private sector as law enforcement investigators, and exporting US laws to other countries through “bilateral engagement.” Likewise, the DOJ called for expanding the laws barring financial institutions from notifying customers that the government is collecting their records, and lowering the reporting thresholds for international transactions.
Regardless of how it’s achieved, there must be a full stop to expanding financial surveillance until this regime is proven effective. For years, FinCEN has said that it cannot provide data on the success (or failure) of its financial surveillance. Acting Director Himamauli Das openly acknowledged this issue to Congress, saying, “It’s clear that we need to do a better job in terms of communicating how effective FinCEN’s work is.”
Despite Acting Director Das’s claim that the program is effective, it appears to have high costs with little or no benefits. The current regime is estimated to have cost US businesses $26.4 billion in 2019. And while FinCEN has not reported any numbers regarding how many criminals the regime stopped, FinCEN has shared that it received 20 million reports in 2019. Separately, the Bank Policy Institute found in 2018 that law enforcement only followed up with banks on 3.85 percent of suspicious activity reports (SARs) and 0.44 percent of currency transaction reports (CTRs). Moreover, Norbert Michel and David Burton found in 2016 that money-laundering investigations by the FBI had fallen between 2001 and 2011, despite the number of suspicious activity reports rising significantly.
The issue isn’t just one of government waste, though. As the government gathers more data, there continues to be a greater risk that it will use the data. For example, as noted by Lawrence White, “Innocent family businesses have been charged with structuring, and had tens of thousands of dollars seized by the federal government, merely for making repeated deposits or withdrawals below the $10,000 [CTR] threshold.” Moreover, Operation Chokepoint, Canada’s freeze on protestors’ bank accounts, and ICE’s recent collection of money-transfer data all showcase how this data is being used to target citizens.
So, businesses are forced to spend billions of dollars to file millions of reports on Americans, merely for using their own money. And millions of these reports likely have nothing to do with actual crimes. With that in mind, it should be no surprise that a national survey by the Cato Institute found that 79 percent of Americans say it’s unreasonable for banks to share financial records with the government as required by the Bank Secrecy Act.
Still, the departments want greater financial surveillance powers.
Having expanded on updating past laws, the reports turned to the future, pushing for CBDCs, and it looks like some policymakers are rushing to launch one before alternatives gain greater popularity. Anyone in doubt need only look at how the CBDC debates skyrocketed after Facebook published the Libra whitepaper, or how officials have touted the ability to precisely control how a CBDC is used.
To be clear, these reports tried to list the potential benefits of CBDCs, but like other proponents, they largely failed to list benefits not already offered by the private sector. As it stands, the only “benefit” a CBDC brings is its surveillance and control capabilities. Where banks and other financial institutions offer a limited buffer for protecting financial privacy, CBDCs would offer an unrivaled opportunity to increase financial surveillance by streamlining the connection between government agencies and Americans’ financial activity. In effect, it could mean that government officials would no longer be bound by the requirement to secure a warrant, the Right to Financial Privacy Act requirements, nor even the formality of working with the legal counsel at a financial institution. And that’s precisely why 66 percent of the comment letters to the Fed were concerned about, or outright against, the idea of a CBDC.
Instead of continuing down this path of ever-increasing financial surveillance, the US government should start listening to the public’s concerns. It’s time to end the 50-year erosion of financial privacy in the United States, not jumpstart it in the digital era.