Personal data using digital money will be the means to set up a regime of absolute surveillance of citizens by governments. The issue has technical and political/institutional dimensions.
When it comes to designing digital currencies that protect the identity and transaction data of their users, developers have made great progress in a relatively short period of time. It is technically feasible to design a central retail bank digital currency — or CBDC — that promotes the privacy of financial transactions.
But one has to think about what is politically feasible. Unfortunately, there is little chance that the United States government will actually adopt a privacy-preserving CBDC.
If approved, a CBDC will eventually — if not initially — be used to track the transactions of American citizens — and all citizens worldwide after its adoption.
The government already uses existing technologies to track its citizens. There is no reason to believe that the government will give up its ability to monitor transactions with the introduction of a CBDC. Indeed, it seems much more likely that the government will seize the opportunity to expand its capabilities.
Therefore, it is absolutely essential that a firewall be maintained on behalf of the private banking system between the government and our transaction data.
Let’s start with the status quo
The government has effectively forced the private banking system to monitor customer transactions. Banks keep records of customer transactions, which the government can access with a subpoena.
The government also requires banks to report suspicious activity and currency transactions above $10,000 (or €5,000 in Europe).
As research by Nick Anthony at Cato has shown, real (inflation-adjusted) benchmark thresholds have gradually declined over time. When the Bank Secrecy Act rules were introduced in 1972, banks had to report foreign exchange transactions of $10,000 or more. If that limit were adjusted for inflation, it would be about $74,000 today.
Since it has not been adjusted for inflation, banks must report many more today for transactions of much lower value than would have triggered a reporting requirement in the past.
Other thresholds are even lower. For example, credit bureaus must receive and record information on transactions worth as little as $3,000.
The government strongly defends its ability to monitor transactions. It prosecutes those who trade just below the thresholds – a separate crime called structuring.
It includes reports of cash or other items of value, which make it more difficult to track transactions, even in cases where there is no evidence of criminal activity. And it undermines new privacy technologies.
What is happening with cryptocurrencies?
Consider the government’s response to cryptocurrencies, some of which offer a high degree of privacy.
The Financial Crimes Enforcement Network requires cryptocurrency exchanges to register as credit businesses and comply with de-privacy requirements.
If transactions can eventually be traced through the blockchain on these platforms in and out, then the financial privacy afforded by cryptocurrencies is greatly eroded.
The involvement of security agencies such as the FBI
Why would a government work so hard to ensure it can track transactions just to turn around and issue a CBDC that protects financial privacy?
Again: it seems much more likely that the government will issue a CBDC that enhances its ability to monitor transactions.
The ostensibly private messaging service ANOM serves as a useful comparison. ANOM was not private.
Unknown to its users, ANOM was actually the central tool of the Federal Bureau of Investigation’s (FBI) Operation Trojan Shield.
Messages sent using the ANOM app were not only delivered to recipients, but also to the FBI’s database. The FBI maintains it did not technically violate the Fourth Amendment by using a “backdoor” in the messaging app to track US citizens.
The FBI developed the ability to spy on US citizens, promoted the use of digital surveillance technology, and then turned over the data collected from it to foreign nationals in order to circumvent constitutional restrictions intended to protect US citizens from such activities.
These efforts not only undermined the due process afforded to those accused of crimes — though that would be bad enough. It also made it easier to spy on perfectly legitimate messages.
Some of these messages included intimate details shared between romantic partners. Others involved protected conversations between lawyers and their clients.
If the government builds a backdoor into one messaging app — and has been… caught trying to convince engineers to install others — then we should expect it to build a backdoor into a payments app as well.
Americans don’t have much financial privacy today. They would have even less financial privacy if it weren’t for the firewall of the private banking system between the government and their transaction data.
This firewall is not perfect. But it’s better than nothing. To see how such a firewall promotes financial privacy, consider the Internal Revenue System’s efforts to gain access to Coinbase’s customer data in 2016.
The case of Coinbase
At the time, Coinbase boasted that it had 5.9 million customers — far more than those who had reported crypto asset ownership to the almighty financial service, the IRS .
Citing this discrepancy, the IRS ensured it could obtain information from the platform. Basically, the IRS wants all the information Coinbase has so they can examine it for the slightest hint of misreporting. It has requested account registration information for all Coinbase account holders, including confirmed devices and payment methods.
This included any agreements or instructions giving third parties access to or control over any account, records of all payments processed by Coinbase for investors, and all correspondence between Coinbase and its users regarding the accounts. Recognizing the duty—and, perhaps more importantly, the profit motive—to protect its customers, Coinbase sued.
Ultimately, the courts ruled that Coinbase would have to hand over some data on about 13,000 users with high-value transactions.
Kraken also resisted an overly broad subpoena to hand over customer data to the IRS, with similar effect.
In a liberal democracy, the government would have to demonstrate a legitimate public interest before gaining the power and ability to examine citizens’ financial records.
The degree of financial privacy provided by the current system certainly falls short of this standard. However, it provides much more financial privacy than one could reasonably hope for if the government kept the data, as would likely be the case with a CBDC.
The free society – and its enemies
Financial privacy is very important to a free society. To exercise our freedoms, we must be able to selectively share the details of our lives with others—and to withhold such details from those who would otherwise use them to harm us.
We should take steps to strengthen financial privacy in the United States. Introducing a retail CBDC would be a step in the wrong direction.