Just three words: Resistance against Censorship

One of the most essential qualities of cryptocurrencies for those caught under authoritarian regimes is their resistance to censorship. Where governments can use financial institutions to control or censor the public (e.g., bank account freezes, asset forfeiture, etc. ), cryptocurrencies provide a new way to secure one's money.

Traditional financial institutions have a difficulty in that they rely on the employment of third-party intermediaries, which creates a "choke point" that governments can exploit. For example, the United States government considers owning a bank account to be a surrender of one's Fourth Amendment right to privacy when it comes to financial records, according to the third party theory.

With contrast, the lack of a third-party intermediary in decentralized cryptocurrencies implies that the government has no one to pressure to divulge a person's information save the direct owner of that information, as previously stated. If the US government wanted to take action against such a direct owner, it would have to present its case and obtain a court order first.

A word of caution: keep your coins

However, the third-party theory does not totally exempt cryptocurrencies. In fact, bitcoin users frequently utter phrases like "Not your keys, not your coins" as a result of this reality. In a nutshell, the statement merely emphasizes the importance of self-hosted wallets. If you opt to entrust your wallet to a third party, you will be missing out on all of the benefits that cryptocurrencies have to offer.

With the introduction of Bitcoin and other cryptocurrencies like it, people were able to bypass intermediaries and electronically self-host their money. To put it another way, it allowed you to "be your own bank." However, this chance hasn't deterred consumers from utilizing a middleman. Kraken, Coinbase, FTX, and a slew of other exchanges have made it easier than ever to utilize cryptocurrencies, but this convenience comes at a cost: they, too, are subject to the third-party doctrine, just like traditional banks.

That truth was highlighted when Jesse Powell, the CEO of Kraken, replied to the situation in Canada by honestly stating that government orders to freeze accounts have occurred in the past and will most certainly occur again in the future where people employ intermediaries. "If you're concerned about it, don't keep your funds with any centralized/ controlled custodian," Powell advised. We are unable to safeguard you. Get your coins/cash out, and just [peer to peer] trade."

As if things couldn't get any worse in Canada, the Ontario Securities Commission sent Powell's tweet (together with one from Coinbase CEO Brian Armstrong) to law authorities on the grounds that he was providing instructions on how to circumvent the limits.

The Ontario Securities Commission's reaction demonstrates why it is critical for the United States to get ahead by providing self-hosted wallet protections. Representative Warren Davidson's (ROH) Keep Your Coins Act, for example, would make it illegal for government entities to ban the usage of cryptocurrencies in self-hosted wallets if it were enacted. Otherwise, regulators may enforce unattainable compliance demands and prohibit the use of self-hosted wallets.

Bank of England Contextualizing Digital Currencies

Trudeau's decision, on the other hand, did not simply support cryptocurrencies. It also argued against CBDCs, or central bank digital currencies.

If Canada had a CBDC, the process of freezing accounts would have been sped up and on a far larger scale, especially at the individual or retail level. Proponents of CBDCs have often praised the programming and surveillance capabilities of a CBDC. This kind of limited control would have put the Canadian government in direct contact with the protestors' financial resources. If a CBDC is adopted in the United States, it will have the same effect.

Representative Tom Emmer (R-MN) warned on February 8 at a Competitive Enterprise Institute event that "digital authoritarianism" would be utilized to suppress protests in the states. He said that he believes the Federal Reserve should be prohibited from issuing CBDCs at the retail level because of this risk.

Zooming In and Out

"Monday's edicts underline how hazardous it is to arm government with the kind of financial and emergency powers that can bypass due process, bring targets to their knees through economic incapacitation without trial, and rip privacy," wrote Walter Olsen. Whether you supported the convoy or not, this is an issue that everyone should be concerned about. "If the politicians you like can freeze the accounts of the protestors you detest, then the politicians you despise can freeze the accounts of the demonstrators you like," Jake Chervinsky wrote. How confident are you that the politicians you despise will never, ever return to power?"

Canada has begun to unfreeze protestors' bank accounts, but this is a decision that should not be forgotten anytime soon. It's a stark reminder of the power that governments wield, which they can employ at any time to control the public.

Taxing What Doesn’t Exist

The most intriguing aspect of the Infrastructure Investment and Jobs Act's cryptocurrency provision is the assumption that it would enhance tax revenue while also imposing a de facto prohibition on some of the lawful activity it aims to tax. To be honest, the law is unlikely to put an end to all cryptocurrency activity in the United States. Traditional brokers, such as Coinbase and Robinhood, already have the majority of the information needed to comply with the rule. However, since these brokers currently submit information to the IRS and send tax paperwork to consumers as part of their existing monitoring, it's unlikely that the provision would generate new money.

The requirement that bitcoin miners and software developers disclose information to the IRS is one area where the law might generate more income. However, because the legislation demands an unattainable reporting requirement, that is precisely what the law would likely remove.

Members of the bitcoin business have proved in the past that they will not hesitate to vote with their feet. In protest to the state's intrusive BitLicense, Kraken, Paxful, Bitfinex, BitQuick, BTCGuild, Eobot, Genesis Mining, GoCoin, LocalBitcoins, and Poloniex all departed New York in 2015. The BitLicense "comes at a price that surpasses the market potential of supplying New York people," Kraken stated in a blog post at the time. As a result, we have no choice except to leave the state's service."

If the Infrastructure Act is left unamended, there is little doubt that much of the industry will be left with no option but to withdraw their services from the nation as a whole. In fact, that is exactly what happened earlier this year when the Chinese government cracked down on cryptocurrencies. The Chinese government declared both cryptocurrency transactions and cryptocurrency mining illegal. In the months that followed, “fourteen of the biggest crypto mining companies in the world [moved] more than 2 million machines out of China,” according to the Financial Times (See Figure 1 below for where some of those machines were sent).

Asking Too Much?

Although the JCT was unable to comment on their methodology, it should not be unreasonable to expect the industry's response. In reality, the JCT has said that its models take into account how taxpayer behavior may alter in the future. This includes taking into account "changes in the legal form of conducting business" as well as "whether some taxpayers may find it easier to comply with its obligations than others." Both considerations should have caught the predicted departure, but the source of the anticipated tax income remains a mystery.

Predicting the future is not an exact science, but scientific approaches can help improve it. The spirit of transparency and citation is at the top of the list. Something is definitely wrong if a measure can become law without any public debate and one of its main selling points is an unsupported assertion.

Legislators should not, however, let the difficulty of dealing with the $28 billion projection derail the discussion. Whether they try to write an amendment that maintains the estimate intact or one that entirely ignores it, one thing is clear: a single, unaudited estimate should not be the determining factor in any policy––especially when it leaves so many concerns unresolved.

The Proposal

The administration’s original IRS reporting proposal would require banks (and non-banks such as Venmo and Coinbase) to report on accounts in which $600 or more is moved over the course of a year. That includes deposits, withdrawals, and transfers. However, after widespread criticisms, Senate Finance Committee Chairman Ron Wyden (D-OR) announced that the reporting threshold would be raised from $600 to $10,000––a change that would require reporting on fewer accounts.

Yet, even in the proposal’s new form, the question remains: How can such surveillance be considered constitutional under the Fourth Amendment in the United States?

The Fourth Amendment and the Third-Party Doctrine

The Fourth Amendment protects American citizens from “unreasonable searches and seizures.” As written, the Fourth Amendment states,

The right of the people to be secure in their persons, houses, papers, and effects, against unreasonable searches and seizures, shall not be violated, and no warrants shall issue, but upon probable cause, supported by oath or affirmation, and particularly describing the place to be searched, and the persons or things to be seized.

Although the Founding Fathers may not have anticipated the advancement of technology (and the mass-surveillance that has followed it), the Supreme Court has been clear: The Fourth Amendment applies to much more than just “physical” searches. In 2001, the Court recognized in Kyllo v. United States that technology used to surveil the inside of a home from afar (e.g., thermal imaging) was in fact a violation of the Fourth Amendment.

The Supreme Court's judgment in Kyllo v. United States, on the other hand, was based on a key premise: a reasonable expectation of privacy. When they are in the protection of their own house, it is safe to conclude that most individuals expect some sort of privacy. When lines blur, however, the privacy that one may expect becomes harder to define. Although a phone call may appear to be a private conversation, what if the call is made on a public street? What happens if someone uses the speakerphone to take a call? Is it still possible to expect privacy?

It’s questions like these, about the grey areas of privacy, that led to the decision in United States v. Miller back in 1976. When considering the case, the Court held that one cannot reasonably expect privacy when providing information to a third party. In the case of bank account information, the Court wrote, “The depositor takes the risk, in revealing his [or her] affairs to another, that the information will be conveyed by that person to the Government.” This ruling is what came to be known as the “third-party doctrine.” And it is this ruling that allowed the government to surveil bank accounts long before the $600 proposal came along.

The Current State of Financial Privacy

In a press release to address the criticisms that have been circulating about the proposal, the U.S. Treasury wrote,

In reality, many financial accounts are already reported on to the IRS, including every bank account that earns at least $10 in interest. And for American workers, much more detailed information reporting exists on wage, salary, and investment income.

It’s a curious defense strategy, but it’s true. The government has been closely monitoring bank accounts for quite some time. Such a low bar for reporting may be unprecedented, but financial surveillance is not.

Whenever someone attempts a cash transaction of more than $10,000 with a bank, the bank is required to file a currency transaction report (CTR). And although one might try to be clever and deposit $2,500 four times or $9,000 first and then $1,000 later, banks are required to report that too. In fact, that strategy even has its own name: “structuring,” and it is a federal crime. More so, if structuring, or any other criminal activity, is suspected, the bank must file a suspicious activity report (SAR).

The reason for these reports goes back 50 years to the Bank Secrecy Act (BSA), which was designed to curb financial crime. But the BSA came at a great cost. It effectively let the government access banking records without ever notifying the account holders or offering the opportunity to object. In fact, it was this type of surveillance that led to the 1976 Supreme Court decision in United States v. Miller, which ruled in favor of the government’s ability to surveil accounts.

It wasn’t until 2 years later in 1978 that the Right to Financial Privacy Act (RFPA) was established. Yet, even that failed to overpower the BSA. Under the RFPA, the government must receive consent from the account holder to access banking information without a warrant or subpoena. That requirement by the RFPA was a step in the right direction. However, it does not go far enough. In the list of exceptions to the protection the RFPA offers, federal authorities are given special exceptions for enforcing tax law and provisions under the BSA.

Conclusion

Whether it is $600 or $10,000, the new threshold for bank account surveillance would be difficult to challenge on the grounds of the Fourth Amendment, given the decision in United States v. Miller. However, critics are not wrong for being concerned about the proposal. As said by SEC Commissioner Hester Peirce last year, “Freedom of thought, expression, and action are key to unlocking each person’s unique potential to contribute to society. Untargeted government surveillance programs, even well-intentioned ones, threaten that freedom.”

Much has changed since 1976. Technology is no longer a quirky addition to our daily routines; it is integrated in every step of our day. From using credit cards for purchases large and small to acquiring loans directly from one’s phone, the advancement of technology over the past 50 years has created a new era of banking. So, maybe it’s time to reconsider the third-party doctrine. In fact, Justice Sonia Sotomayor said it herself in United States v. Jones in 2012,

More fundamentally, it may be necessary to reconsider the premise that an individual has no reasonable expectation of privacy in information voluntarily disclosed to third parties. This approach is ill suited to the digital age, in which people reveal a great deal of information about themselves to third parties in the course of carrying out mundane tasks.

Justice Sotomayor is right. The Biden administration proposal may be considered constitutional, but that does not mean the conversation about financial privacy rights should end here.