For government officials who have come to expect sweeping financial surveillance to be the norm, cryptocurrencies have been a difficult subject to grapple with. The ability to conduct peer-to-peer transactions without the involvement of a third-party strikes at the entire foundation of the US financial surveillance regime.
To take a recent example, Harvard fellow Timothy Massad told Congress that this innovation presents a “challenge” because “our entire [Bank Secrecy Act, anti-money laundering, and anti-terrorist financing] framework relies on centralized intermediaries.”
As Massad went on to explain, “We’ve imposed obligations on [centralized] intermediaries—banks and others—to do the compliance checks that we want.” The “imposed obligations” Massad is referring to are the requirements that financial institutions identify their customers, monitor transactions, and report tens of millions of transactions that fit certain criteria. These compliance checks cost US financial institutions upwards of $59 billion a year. Yet, at the same time, the 26 million reports filed only led the Internal Revenue Service to initiate 372 investigations in 2023.
Although Massad acknowledged that cryptocurrencies are fundamentally different from traditional finance, he stressed that policymakers need to “creatively rethink” how to fence these innovations into the old process. To that end, he recommended “extending the regulatory perimeter” and requiring “stablecoin issuers to aggressively monitor transactions and freeze stablecoins.”
Yet, it is precisely because cryptocurrencies are fundamentally different from traditional finance that they should not be forced into the same, old system.
The problem dates back to the 1970s. The Supreme Court dealt a major blow to privacy with what is now commonly called the third-party doctrine. In short, the court held that so long as a third party is involved (e.g., a bank or credit union), customer records are not protected by the Fourth Amendment. However, to the extent third parties are not present, the Fourth Amendment should still apply.
This detail is important because there is no third party involved if a cryptocurrency is decentralized and exchanged with a self-hosted wallet. Given that Supreme Court justices have expressed concern over their original considerations of both the Bank Secrecy Act’s reporting requirements and the third-party doctrine, it’s hard to imagine how surveilling of transactions between two individuals without a warrant does not run afoul of the protections guaranteed by the Fourth Amendment.
It may seem like a fine line, but Congress should keep this distinction in mind. Financial surveillance should be pared back, not extended further. And in the end, that means strengthening financial privacy for both traditional finance and emerging finance, alike.
