U.S. Treasury Secretary Steven Mnuchin foreshadowed the Trump administration’s plans for greater surveillance of cryptocurrency users during his testimony before the Senate Finance Committee on Wednesday. He noted that cryptocurrency was a “crucial area” for the Treasury Department to examine, and said:
We are working with FinCEN and we will be rolling out new regulations to be very clear on greater transparency so that law enforcement can see where the money is going and that this isn’t used for money laundering.
While we haven’t seen any draft proposals at this point, Mnuchin’s call for greater transparency—a euphemism for intrusive surveillance— definitely got our attention. One of the real risks of cryptocurrency is that it could become a technology of financial surveillance, especially in the case of open ledger protocols such as Bitcoin. These are cryptocurrencies that create unerasable, public lists of transactions that, should a pseudonymous wallet ever be associated with an individual person, can potentially link together a huge number of financial transactions. And those transactions can be deeply revealing, pointing to everything from your friend network to your sexual interests to your political affiliations. Indeed, researchers have already proven that this is not a theoretical risk.
Law enforcement has long been interested in having access to financial records during investigations. But law enforcement access isn’t the only value, let alone the most important value, regulators need to solve for. There are already laws that regulate financial institutions that hold and exchange funds (including cryptocurrencies) for consumers, and offer pathways for law enforcement seeking to learn about transactions. Before adopting new regulations in this space, it’s vital that the U.S. Treasury and others first ask:
- Do existing laws and regulations already provide access for law enforcement? If not, where specifically are there shortcomings, and how significant of an issue is that?
- How will any future proposals ensure that privacy and freedom of association are preserved?
- How might proposed regulations impact privacy-enhancing blockchain projects that are under development?
EFF has been watching the evolution of privacy-enhancing technologies such as privacy coins and decentralized exchanges. While not widely used today, these technologies hold the potential to bring some of the privacy-preserving attributes all of us already enjoy with cash into the digital world. It’s vital that future regulation doesn’t threaten these innovations before they’ve had a chance to find a foothold.
We appreciate that some federal officials are highlighting a need for privacy when commenting on cryptocurrency policy. Earlier this week, Federal Reserve Chairman Jerome Powell spoke to the House of Representatives Committee on Financial Services. When asked whether the Fed had visibility into China’s efforts to develop a state-run digital currency, Powell noted that China is “in a completely different institutional context. For example, the idea of having a ledger where you know everybody’s payments, that’s not something that would be particularly attractive in the United States context. It’s not a problem in China.”
While we don’t share Powell’s impression that financial surveillance in China is “not a problem,” we appreciate that he understands that Americans won’t stand for a system of complete financial surveillance.
As regulators and lawmakers consider the challenges we face around cryptocurrencies, we urge them to work closely with the human rights and civil liberties communities. We are concerned about a future in which every financial transaction is captured and saved forever, creating a honey pot for malicious hackers and law enforcement as well as a chilling government shadow over every purchase or donation. For thousands of years, societies around the world have thrived with privacy-preserving cash. Rather than be the generation that kills cash, we encourage the Treasury Department and other federal officials to think about ways we can bring the best attributes of cash into our digital future.