It’s Time To Restore Financial Privacy Rights

SEC Commissioner Hester M. Peirce is seen during the House Financial Services Committee on oversight of the Securities and Exchange Commission in the Rayburn House Office Building on Capitol Hill in Washington, DC on September 24, 2019. (Photo by MANDEL NGAN / AFP) (Photo credit should read MANDEL NGAN/AFP via Getty Images)

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One of the best things about the first Trump administration is that Hester Peirce has served as a commissioner on the U.S. Securities and Exchange Commission since 2018. She has fiercely advocated improving financial regulation to help foster stronger and more competitive private capital markets.

Her speeches always project strong reasoning and principles, so this week’s financial privacy speech isn’t at all surprising. The substance of the speech gets into the weeds of the Bank Secrecy Act, and Americans everywhere should hope the rest of the Trump administration is listening.

Yes, this administration has been more crypto-friendly than the Biden administration. But it has, so far, been unwilling to directly tackle the privacy issues surrounding the BSA. There have been some good signs, but Americans will never realize the full potential of crypto-based technologies until Congress restores the Constitutional rights they infringed on with the BSA. And that’s why principles are so important.

Financial Privacy Rights Slowly Whittled Away

For those unfamiliar, the U.S. Constitution’s Fourth Amendment protects people from the government conducting “unreasonable searches and seizures.” It states that this right “shall not be violated” and requires law enforcement to obtain a warrant by demonstrating (to a judge) “probable cause” to suspect someone of committing a crime.

As a result, law enforcement cannot randomly search through our property. This protection was important to the authors of the U.S. Constitution because they recognized—even witnessed—what a chilling effect the government can have on someone’s ability to live their life with warrantless searches and seizures.

They had witnessed, among other things, British soldiers using general warrants (writs of assistance) to enter any place to search for anything deemed “prohibited.” The framers of the Constitution explicitly constrained that sort of blank-check power because it could so easily be abused. By right, they argued, people should be able to live their lives unmolested and without fear of such abuse.

So, the Fourth Amendment included a very high standard for law enforcement to meet before conducting a search. The Fourth Amendment did not include any footnotes, much less one that says, “Unless law enforcement officials need more tools.”

However, because of the BSA, a law Congress passed in 1970, the Fourth Amendment now has a huge footnote: It no longer applies to Americans’ financial records stored at banks and other financial institutions.

Third Party Doctrine Harms Financial Privacy

To make a long story short: After a few (split) U.S. Supreme Court decisions, including a blistering dissent by none other than Justice Thurgood Marshall, U.S. law makes an exception to the Fourth Amendment for Americans’ financial records due to something called the third-party doctrine. This doctrine basically says that because a customer gives their information to a financial institution (a third party), the customer can no longer expect a right to privacy.

Armed with this doctrine, the federal government has spent years building a surveillance operation that effectively deputizes financial companies—not just banks—as law enforcement investigators. The reason that crypto presents such a problem for the BSA regime is that the new technology’s very nature allows people to electronically transfer funds without those companies.

Put differently, crypto reduces the need to rely on those third parties, the same ones that the government has co-opted to enhance law enforcement’s ability to catch criminals.

That’s a big political problem, of course, because it means these new technologies are forcing Congress to confront what they created with the BSA. They must grapple with, for example, whether Americans are supposed to start reporting, as banks currently do, their friends and neighbors for “suspicious activity.”

Technology Can Protect Financial Privacy

Has technology finally outrun the BSA, so much so that the law endangers what’s left of our Fourth Amendment protections? That’s precisely what some of the Supreme Court Justices feared during those cases in the 1970s, and it certainly seems so. In the 1970s, the BSA amounted to requiring banks to store paper checks, but today’s financial records are an electronic gateway to virtually everything we do.

On principle, though, there really is no debate. For instance, as Commissioner Peirce argues in her speech, “For these and other new technologies to be able to play a role in protecting Americans’ privacy, government must guard jealously the ability of Americans to use them freely. Such protective measures may run counter to regulatory instincts, but overcoming those instincts is crucial to maintaining the freedom and prosperity of the American people.”

Peirce is spot on. And while it’s great that some in Congress have started waking up to problems with the BSA regime, most members remain preoccupied with tangential issues, such as the customer data private companies have. In many cases, even the members who are tackling the so-called debanking issue are still ignoring the role that the BSA plays in people having their bank accounts closed.

The BSA Regime Needs to Go

It is very easy to see that the BSA regime is an inefficient and ineffective tool for law enforcement. It relies on employees at financial institutions to function as if they were law enforcement officers, and it creates incentives for them to over-report. The result is a regime that collects almost 30 million reports per year (nearly 75,000 per day), even though law enforcement investigates fewer than 4,000 related cases per year.

Meanwhile, virtually everyone seems to be ignoring the potential for abuse of power by the government, the problem that the U.S. Constitution was created to protect people from in the first place.

There is no doubt that private actors can misuse information and misuse technology to commit crimes. But, as Peirce points out, that’s no reason to fear technology or treat it as a villain. The important thing to do is go after the real villains, something that can easily be done “while still ensuring widespread access to fundamental American rights.”

The BSA regime clearly has an imbalance, one that heavily favors law enforcement over citizens’ rights to financial privacy. But the proper balance between these competing needs is in the Fourth Amendment, so Congress should restore it. Doing so might be the single most important way to promote U.S. leadership in digital assets and financial technology.

Peirce gets it. Hopefully others in the Trump administration do too.