A couple of months ago, on the 50th birthday of the Bank Secrecy Act (BSA), I argued that the law should get a checkup. By that, I meant there should be careful consideration of its costs and benefits. It may have been clever only to me to suggest that a 50-year-old law might have a midlife crisis and “start popping steroids and racing around in shiny red sports cars to battle the perception of weakness and flab.” But the latter course is what the BSA seems to be taking. A rulemaking sprung on the public late last month would regulate cryptocurrency more heavily and detrimentally than any other form of value transfer. It is like the BSA saying, “I can still beat these new financial technologies on the basketball court.”

The scuttlebutt is that this midnight rulemaking is being hustled out at the end of the Trump administration because Treasury Secretary Steven Mnuchin wanted it done. It has all the hallmarks of a hasty, top-down initiative because the Financial Crimes Enforcement Network (FinCEN) in the US Treasury Department has been relatively circumspect about cryptocurrency. (That is not to say that its programs are actually good policy or constitutional under a better reading of the Fourth Amendment. Read on.)

The proposed rule would require banks and money services businesses to file a report with FinCEN when a customer’s transactions with another are worth $10,000 or more. That tracks the existing obligations placed on financial institutions to report larger cash transactions. But the proposed rule also requires reporting of the name and physical address of the recipients in transactions of greater than $3,000 in value if a recipient is using an “unhosted” wallet. That is a wallet maintained independently, outside of a regulated financial institution.

Parallels
are hard to draw, but this would be like requiring your bank to demand from you
who you are going to give the money to if you withdraw $3,000, then reporting
the information to the government. It’s a tremendous administrative burden and
it’s none of the government’s business in our land of innocence until proof of
guilt.

I elided the constitutional questions in my previous post, but if the government is going to flex its financial surveillance muscles quite so aggressively, it is worth noting that the legal precedents that supported BSA surveillance when it was in short pants stand on very shaky ground. In Carpenter v. United States (2017), the Supreme Court declined to extend the “third-party doctrine” to location records produced by cell phones. This, after Justice Sonia Sotomayor in United States v. Jones (2012) openly questioned the doctrine that the Court fashioned in the mid-1970s to uphold BSA surveillance. “It may be necessary to reconsider the premise that an individual has no reasonable expectation of privacy in information voluntarily disclosed to third parties,” she wrote. And if a person retains ownership rights in data about them held by third parties, as Justice Neil Gorsuch suggested in Carpenter, the BSA’s constitutional fitness is worse.

Is it in
good shape as a policy? Cost-benefit analysis suggests not. Financial
institutions spend billions of dollars per year implementing the BSA’s financial
surveillance regime. Add to these direct costs the indirect costs such as financial
exclusion and “de-risking” — avoiding customers, transaction types, regions,
and so on, even if they are law-abiding and legal. Perversely, de-risking
leaves some parts of the world economically backward, unable to support stable
governments, and acting as havens for security threats against the United
States.

For all these costs and lost privacy, do we get coordinate security gains? What are the multiple billions of loss our society would suffer in the absence of BSA reporting? A project called “BSA Value” would start to broach such questions. But judging by the lean of remarks by FinCEN director Kenneth Blanco on the topic in late 2019, an independent entity should probably conduct this type of study.

Finally, there are procedural questions. Coming out on December 23, the proposed rule has a 15-day comment period which closes on January 4. There is probably no period in the calendar more suited to minimizing public input, and the tiny window for comment is unjustified. If the premise that public input enlightens the federal government’s administrative processes was ever strong, this rule undercuts it. I could have much more to say with time, but a copy of this blog post submitted at regulations.gov will be my entire participation in the rulemaking.

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