Legislation for Stablecoins Must Prioritize Financial Confidentiality

The U.S. Senate and House of Representatives are currently considering bills that would establish a regulatory framework for stablecoins, with the usual concerns about cryptocurrency being used for illicit activities being raised. For example, Senator Elizabeth Warren warned that the Senate's GENIUS Act could facilitate the financing of terrorism, while Representative Brad Sherman expressed concerns about the use of unhosted wallets to evade anti-money laundering provisions during the debate on the House's STABLE Act. Both the GENIUS and STABLE Acts include provisions to prevent illicit finance, such as subjecting stablecoin issuers to the Bank Secrecy Act. However, lawmakers must ensure that these measures do not lead to unchecked financial surveillance of stablecoin users. Stablecoins are digital tokens pegged to the value of another asset, like the U.S. dollar, and are intended to promote their use as a digital medium of exchange. The Senate and House have advanced bills to create a regulatory regime for permitted stablecoin issuers, aiming to ensure the stability of stablecoins. The Bank Secrecy Act requires financial institutions to help federal agencies detect and prevent money laundering by keeping records of transactions and filing reports with the government. Both the GENIUS Act and the STABLE Act address illicit finance concerns by designating permitted stablecoin issuers as financial institutions for the purposes of the Bank Secrecy Act. While this designation is relatively non-controversial, it is not without complications. The Bank Secrecy Act's surveillance framework requires financial institutions to know their customers and monitor transactions, but this surveillance does not extend to transactions between individuals without the involvement of an institution. Stablecoins, however, can be tracked across a blockchain as they move between holders, even when transfers occur between unhosted wallets. This has led some to propose extending BSA surveillance beyond its current boundaries. Digital asset transactions that are genuinely peer-to-peer should not be subject to greater government surveillance than peer-to-peer transactions in cash. Applying anti-money laundering provisions to unhosted wallets would be a significant expansion of financial surveillance and an unwelcome intrusion into Americans' financial lives. Both the GENIUS and STABLE Acts require stablecoin issuers to have customer identification programs for customers who hold accounts with the issuer or are initial holders of a payment stablecoin. However, other BSA requirements, such as maintaining anti-money laundering compliance programs and monitoring suspicious activity, are not clearly limited. This leaves the door open to broader surveillance requirements on stablecoin transactions that take place away from the issuer, which would be a major encroachment on Americans' rights to transact privately. Fortunately, the sponsors of both bills seem to interpret the surveillance obligations narrowly. To definitively close the door to more expansive future interpretations, this sentiment must be clearly reflected in the text of both bills. Preserving financial privacy is not simply a gift to criminals, as easy government access to financial information poses risks to everyone, particularly those with unpopular views or in the minority. Such surveillance is at odds with the rights of free people to live without unwarranted governmental monitoring. Ensuring that stablecoin legislation unequivocally protects stablecoin transactions from surveillance is crucial to safeguarding these rights.