Blockchain technology and cryptocurrency were on full display at the recent SXSW festival in Austin, Texas. For the Filecoin Foundation-sponsored track last Tuesday, privacy was a key topic and included a panel discussion titled, “Financial Surveillance in a Cashless Society.”
AML (Anti-Money Laundering) and KYC (Know Your Customer) requirements are ever-growing in the cryptocurrency space especially as the new distributed ledger technology and traditional finance worlds continue to merge. So, where does privacy fit in? A standing-room only audience wanted to know.
Marta Belcher, general counsel of Protocol Labs and chair of Filecoin Foundation, offered some initial thoughts in a crypto context: “There is this myth that privacy is bad and that tools that enable privacy and anonymity are illegal or enable illegal activity. And I think that is fundamentally a very important misunderstanding. Privacy is absolutely critical to civil liberties, as is the ability to transact anonymously.” She pointed to the importance of anonymity as it related to participants in the the Hong Kong protests of 2019-2020 and their anonymous purchase of subway tickets to get to the gatherings.
With policymakers in mind, Kristin Smith, executive director of The Blockchain Association, guided the discussion on how the crypto industry and her organization provide on and off ramps to crypto -particularly as it relates to present day and compliance with sanctions by nation states.
Panelist Sheila Warren, CEO of The Crypto Council for Innovation (CCI), cited the recent sanctions of Russia for its invasion of Ukraine. The insistence by some that Russian oligarchs would use crypto rails to go around sanctions was not realistic according to Ms. Warren given the amount of liquidity needed by oligarchs as well as the traceability of any transaction. Ultimately, she landed at the doorstep of the media, “What’s been disappointing is that even though we know policymakers are on board with our position and understand it, a lot of mainstream media isn’t quite there yet.”
The Blockchain Association head of policy Jake Chervinsky built on the importance of anonymity in the crypto sphere saying to the audience:
“People are using the concept of privacy or anonymity as a scare tactic to make people feel like, ‘If it’s anonymous, it must be bad.’ That’s not the case when it comes to crypto and sanctions.
The fact that there is an alternative payment system (crypto) does not give sanctioned Russian parties a way to evade sanctions. Nonetheless, we’ve had all these fears that come up because there is this stigma around privacy [and crypto] that the Russian oligarchs will be able to get away with doing business with people who would otherwise be prohibited from those those transactions just because there is privacy in the system.”
Chervinsky was adamant that this was not true: American companies are legally prohibited from doing business with a Russian oligarch whether it’s private or not. Also, the scale of crypto today is just not big enough to enable for a nation state to run their entire economy currently, he said.
Connecting financial surveillance and censorship, Electronic Frontier Foundation director Jillian York steered to the topic of centralization:
“As all of you know, most of the platforms that you use – financial platforms, social media platforms, internet service providers – are centralized. They operate on the business model of surveillance capitalism. And as we know, surveillance and censorship go hand in hand. If you’re being watched, you’re not going to feel free. Decentralization takes away that central control system and gives you more freedom and more power over what you can do and say.
…And so to link that back to financial surveillance, that’s an area where if you’re being watched in that way, if you’re being censored in that way, you can’t operate freely and I think that this is what brings us to the importance of cryptocurrency.”
Filecoin’s Belcher brought together the history of the financial regulatory environment in its collision with cryptocurrencies and what policymakers are encountering today:
“Beginning with the Fourth Amendment in the United States constitution which balances the privacy and civil liberties interests of citizens with the reasonable, legitimate needs of law enforcement by requiring that law enforcement must go and get a warrant if they want information about a citizen. Under the Fourth Amendment, you need to have reasonable cause and a judge that says you can go get this information about a citizen.
How is it that we’ve gotten to a place today where many of our financial transactions are turned over to the government by default, em masse, without a warrant in a system of mass surveillance?”
Ms. Belcher said it was due to affirmation of the third-party doctrine opined upon by the Supreme Court in the 1970s in a case related to the Bank Secrecy Act – i.e. once you’ve given financial information to a third party (a bank), you’ve lost your reasonable expectation of privacy for that information – the third-party doctrine.
“It’s my view that if we were to take this case back up to the Supreme Court today, it would actually come out very differently (…) my view is the financial surveillance that’s happening today is actually unconstitutional,” said Ms. Belcher.
Crypto Council’s Warren built on the Bank Secrecy Act conundrum and how risk tolerance and the caprices of executive-level bank personnel have over-time introduced complexities, hops and costs including the difficulties with sending money internationally.
The Blockchain Association’s Chervinsky took on the task of breaking down the recent Executive Order on cryptocurrency issued by U.S. President Joseph Biden on the panel.
“The executive order was framed, I think very positively. It recognized the promise of the technology while also doing a really reasonable job of flagging some of the risks and issues we need to address.”
The six main issues, according to Chervinsky are:
- Consumer protection
- Systemic risk
- Illicit finance risk
- Financial inclusion
The executive order calls for studies on a central bank digital currency (CBDC) as well. Mr. Chervinsky saw the potential for problems with CBDC including totalitarian tendencies which use digital currency for surveillance. He hoped that the private sector would be a part of the solution and pointed to the current growth of stablecoins as a bright spot.
Overall, Mr. Chervinsky was positive about the Executive Order saying that even though many feared harsh restrictions for cryptocurrencies out of the gate, “There’s going to be a real hearing for the future of crypto in the United States in DC.”