New stablecoin legislation could significantly impact financial privacy, as proposed bills introduce anti-money laundering measures that extend surveillance requirements to some transactions.
Stablecoin Legislation Must Ensure Financial Privacy
Stablecoins are crypto tokens pegged to the value of another asset, like the U.S. dollar. The general idea is that the stable value of these tokens will promote their use as a digital medium of exchange. However, conversations about the dollar, financial services, and crypto seem to go hand-in-hand with conversations about preventing illicit finance.
Regulators worldwide are increasingly scrutinizing stablecoins, digital assets pegged to traditional currencies.
The lack of clear guidelines has raised concerns about market manipulation and consumer protection.
In the US, the Securities and Exchange Commission (SEC) is exploring regulatory frameworks for stablecoins.
Meanwhile, the European Union's Markets in Financial Instruments Directive (MiFID II) may apply to stablecoin trading.
As the stablecoin market continues to grow, regulatory clarity is essential to maintain investor trust and prevent potential disruptions.
Anti-Money Laundering Measures in Stablecoin Legislation
Both the U.S. Senate and House are considering bills creating a regulatory framework for stablecoins. The GENIUS Act and STABLE Act tackle illicit finance concerns by stating clearly that a permitted stablecoin issuer “shall be treated as a financial institution for the purposes of the Bank Secrecy Act.” “shall be treated as a financial institution for the purposes of the Bank Secrecy Act”. Designating a permitted stablecoin issuer as a financial institution is comparatively non-controversial.
Surveillance Concerns
The BSA’s surveillance framework requires financial institutions to “know their customers” and to monitor transactions taking place through the institution. However, such surveillance does not extend to transactions that take place between individuals without the involvement of an institution. For example, the BSA doesn’t apply when cash changes hands between two people, allowing individuals to transact privately.
BSA (Branch Security Agency) surveillance refers to the monitoring and gathering of intelligence on individuals, groups, or organizations by government agencies.
This can include online activities, phone calls, emails, and physical movements.
BSA surveillance is often used for national security purposes, counter-terrorism efforts, and law enforcement investigations.
In some countries, BSA surveillance is regulated by laws that require warrants and oversight to protect citizens' privacy rights.
Statistics show that the use of BSA surveillance has increased in recent years due to growing concerns about terrorism and cyber threats.
Stablecoins can be tracked across a blockchain as they move between holders, even when the transfers happen between wallets that are unhosted by intermediaries. This characteristic is tempting to those who may want to extend BSA surveillance beyond its already expansive boundaries. Fundamentally, digital asset transactions that are genuinely peer-to-peer should not be subject to greater government surveillance than peer-to-peer transactions in cash.
Limiting Surveillance Requirements
Both the GENIUS and STABLE Acts make clear — to varying degrees — that stablecoin issuers must have customer identification programs only for customers who either hold accounts “with the permitted payment stablecoin issuer” (GENIUS) or who are “initial holders” of a payment stablecoin (STABLE). However, other BSA requirements the bills would impose on stablecoin issuers, including maintaining anti-money laundering compliance programs, retention of records of stablecoin transactions, monitoring and reporting suspicious activity, are not so clearly limited.
Fortunately, the sponsors of both bills seem to read the surveillance obligations narrowly. Representative Bryan Steil (R-WI) explained during the bill’s markup that requiring BSA surveillance of “every single self-hosted wallet” would “be a dramatic invasion of personal liberty.” And Senator Bill Hagerty (R-TN) said during that bill’s markup that “[r]equiring issuers to monitor transactions on various blockchains would be costly and . . . time-consuming.”
Preserving Financial Privacy
Financial privacy preservation involves safeguarding personal financial data from unauthorized access.
This includes sensitive information such as bank account numbers, credit card details, and social security numbers.
According to a study, 63% of consumers have experienced identity theft at some point in their lives.
To preserve financial privacy, individuals can use secure online banking platforms, enable two-factor authentication, and regularly monitor credit reports for suspicious activity.
Preserving financial privacy is not simply a gift to criminals. Easy government access to financial information poses risks to everyone, particularly those with unpopular political views or anyone otherwise in the minority. Such surveillance is at odds with the rights of free people (including rights recognized in the U.S. Constitution) to live without unwarranted governmental monitoring.
One step to ensuring that those rights are not further infringed is to guarantee that the stablecoin legislation under consideration unequivocally protects from surveillance stablecoin transactions occurring without a financial intermediary.
- coindesk.com | Stablecoin Legislation Must Ensure Financial Privacy
