WASHINGTON, DC – The federal government could exploit the crypto sector’s potential for mass surveillance if it is not controlled by formal policies, said SEC Chairman Paul Atkins, who argued that the industry – alternatively – is also capable of designing systems that screen users for proper protection against illegal financing without jeopardizing their privacy.
“It’s not a big leap to imagine a steady migration toward a future where the government, in a constellation of intermediaries, can peer into almost every dimension of an individual’s financial life,” Atkins said at a roundtable on financial surveillance and privacy held at the agency’s Washington headquarters on Monday — the sixth crypto-related roundtable this year.
“While regulators may have a voracious appetite for data, this propensity is patently and fundamentally incompatible with the kind of free society that has made America great,” he said.
The chairman noted the agency’s own long-standing wrangling over the so-called consolidated audit trail (CAT) technology that was supposed to monitor U.S. markets with a more immediate snapshot and the post-2008 financial crisis rules that required more reporting by investment firms to the SEC.
“Unfortunately, the federal government’s insatiable desire for data has expanded these tools in ways that increasingly put the freedom of American investors at risk,” Atkins said. And the newer blockchain technology could be misused as history’s “most powerful financial surveillance architecture,” he said.
Government policies must protect the public’s legitimate financial transactions from “bulk surveillance”.
Surveillance and privacy in digital assets has often been more associated with the prosecutions of the US Department of Justice and the Treasury Department, particularly its Financial Crimes Enforcement Network (FinCEN) and its sanctions arm, as they seek to combat illicit financing. But the SEC will soon propose rules to regulate its corner of the industry.
The SEC under Atkins has been trying to drive forward to meet the crypto agenda set by President Donald Trump. His “Project Crypto” has moved forward with several initiatives, including narrowly defining the realm of crypto-securities, seeking standards for tokenization of securities, and establishing an “innovation exemption” that allows crypto companies to easily test new products.
He has routinely talked about how closely he hopes to work with the SEC’s sister agency, the Commodity Futures Trading Commission, on joint oversight of the crypto markets. He advocates a regulated system where crypto investors can seamlessly manage their business in convenient one-stop shops where the regulatory boundaries are not clear. However, Atkins – unlike predecessor chairman Gary Gensler – has also argued that most digital assets do not check the securities box and will be outside his agency’s reach.
The federal government has for years waged a legal conflict with the crypto space, particularly the developers of such privacy-shredding operations as Tornado Cash. While the regulators appointed by Trump have backed away from that fight, saying that software developers must be protected, some of those cases have already been resolved with verdicts from crypto insiders.
SEC Commissioner Hester Peirce, who has led the agency’s task force on crypto matters, said that “the government should avoid imposing regulatory obligations, including Bank Secrecy Act obligations, on a software developer that does not have custody of users’ assets with the ability to override users’ choices.”
Atkins warned about the government’s next move as crypto legislation and rulemaking are underway.
“If the government’s instinct is to treat every wallet as a broker, every piece of software as an exchange, every transaction as a reportable event, and every protocol as a convenient surveillance node,” Atkins said, “then the government will transform this ecosystem into a financial panopticon”—a kind of conceptual constant surveillance devised by an English prison.
