End the era of mass financial surveillance

2.4.25

Editor’s note: This op-ed is part of a bigger package of crypto policy views. Find the rest here: “Making the U.S. the crypto capital: What it would take.”

While we often hear about mass surveillance in the context of national security, many Americans do not realize that their financial activities are subject to constant government surveillance. If people knew the extent of it, they would be outraged. It’s a system that puts all of us — and our data — at risk.

The system hinges on a small bureau within the U.S. Treasury, called the Financial Crimes Enforcement Network (FinCEN), which maintains a massive repository of people’s financial records thanks to an obscure piece of legislation passed by Congress in 1970 called the Bank Secrecy Act (BSA). Each year, this repository — the FinCEN Database — receives more than 25 million reports from financial institutions mostly on activity that carries no suspicion of illegality, such as withdrawing more than $10,000 in cash from a bank account. The dragnet barely discriminates.

Though the FinCEN Database was originally designed for the limited purpose of preventing Americans from using foreign banks to hide and launder money, today it puts ordinary Americans at risk by bulk-collecting their sensitive financial information and storing it in perpetuity. What’s worse, this giant stockpile of financial data is secured by one, small government sub-agency. With the recent news that China was able to hack the U.S. Treasury and gain access to the accounts of the former Treasury Secretary and her staff, it’s clear that the FinCEN Database is a ticking timebomb to the security of the American public. It must be abandoned in favor of newer and safer technologies such as blockchains.

Until the invention of blockchain technologies, financial institutions had to maintain their own private, transactional ledgers. This meant that Bank A could not see activity happening at Bank B, and vice-versa; neither did the government have any direct access to that transactional activity. This lack of visibility made financial institutions vulnerable to illicit finance. To illuminate the darkness of the traditional financial system, the BSA took a brute force approach and made each financial institution bulk report transactional and customer data to the government.

Fast forward 50 years. The BSA has spawned a massive regulatory-industrial complex that requires American financial institutions to conduct daily surveillance on their customers and then send it to the FinCEN Database. Thousands of federal, state, and local law enforcement agencies access the information — with little oversight. In just the last few years, government employees have been prosecuted for leaking reports from the FinCEN Database (including a senior advisor at FinCEN who leaked thousands of SARs to the media). While law enforcement over-accessing the database is a real concern, it’s equally troubling that for all of the effort required to create and maintain the database, the vast majority of reports are never used by law enforcement at all.

The BSA has other negative ramifications, too. To conduct surveillance on customers and prepare these reports that go into the FinCEN Database, financial institutions and other covered businesses spend hundreds of millions of dollars each year on compliance personnel and technology — all to appease regulators who often engage in check-the-box exercises rather than assessing the overall effectiveness of a compliance program. The costs of these programs are passed on to customers in the form of higher banking fees, overly burdensome account opening requirements, and even denial of financial services. This is especially true for low-income customers, who are more likely to transact in cash and have more difficulty proving consistent sources of income. These high compliance costs also pose formidable barriers to entry for smaller financial service providers — including fintech startups — who need to build a business before establishing million-dollar compliance programs.

There is a better way: Blockchain technologies offer a solution to these problems.

Blockchain transactions are made on shared, public ledgers, which anyone, including law enforcement, can view. While the identity of the transactors is not publicly available on blockchains — as their inherent design protects the identity of users — financial institutions know who their customers are, so they can track which blockchain transactions affect their customers. It also means that the government, with the help of blockchain analytics firms and their own developing methods, can see criminal activity happening in real time without having to know the names of the individuals engaged in the transactions. When the criminal activity touches a financial institution, the government can then submit a subpoena for specific customer records, without having to bulk-collect that data and store it. This approach is more targeted, rather than all-seeing and all-encompassing.

Blockchain-based systems in turn create more security for customers — whose information is not preemptively sent to the government — and they also make for faster, more effective law enforcement investigations. We do not need to accept the government’s pervasive invasion of our financial privacy. To afford Americans the protection they deserve, the government should encourage financial institutions to move to adopt blockchain technologies, so that the current outdated system can be phased out — ending an unfortunate era of mass financial surveillance.

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Grant Rabenn is the Director of Financial Crimes Legal at Coinbase, where he leads the company’s legal team responsible for advising on anti-money laundering, sanctions, and regulatory compliance and advocacy. He is a national expert on the intersection of technology, crime, and money laundering.

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