The Bank Secrecy Act Regime Threatens Trump’s Crypto Progress

Donald Trump campaigned to become the first “crypto president,” and the early stages of his new administration have been much better for the crypto industry than the previous administration. Between the Biden era Securities and Exchange Commission and federal banking regulators, industry participants were constantly exposed to high compliance risk and kept mostly on the financial market sidelines.

On January 23, President Trump started delivering on his promise. He signed an executive order to “promote United States leadership in digital assets and financial technology while protecting economic liberty.” Among other items, the administration’s official policy is to protect and promote “the ability of individual citizens and private-sector entities” to “transact with other persons without unlawful censorship and to maintain self-custody of digital assets.”

Unfortunately, this portion of the executive order seems to have been pushed aside lately for shiny objects, like last Friday’s crypto summit and the creation of a digital asset reserve fund.

That’s all fine for now, and the administration deserves enormous credit for reversing course on the outwardly hostile approach to crypto of the previous administration. But the reserve fund does nothing to address the single largest roadblock for crypto: The financial surveillance regime that the United States has created for the financial industry.

BSA Regime Threatens P2P Transactions

This regime is exactly why people can no longer “transact with other persons” without censorship, so it is a great sign that the January executive order acknowledges the issue. But it is critical that the administration works with Congress to fix it, and so far there are very few signs of any such effort.

For those unfamiliar, the existing financial surveillance regime is built on the Bank Secrecy Act of 1970. The regime is outdated, poorly designed, costly, and rests on shaky legal grounds. It’s also clearly ineffective.

In 2023, for example, the regime resulted in approximately 300,000 financial institutions filing close to 30 million BSA reports. From all those reports, “approximately 1,575 cases referred for prosecution involved BSA filings.” Separately, the IRS “opened about 372 investigations as a result of BSA filings.”

One problem is that bankers, brokers, and car dealers are not law enforcement professionals. Yet, the government forces them, under threat of criminal liability, to report customers who might be criminals. So, it’s unsurprising that they tend to err on the side of over reporting.

BSA Regime Ignores Rights

But it’s worse than simply requiring a huge number of useless reports. The current regime assumes that everyone should be surveilled because they’re either guilty or potentially guilty of committing crimes. It ignores the core presumption of innocence on which our judicial system is supposed to be built, and that personal and financial privacy are key components of life in a free society.

Plainly, it ignores the protections guaranteed to Americans by the Fourth Amendment to the U.S. Constitution. The Fourth Amendment generally requires the government to obtain a warrant upon a showing of probable cause to obtain access to an individual’s person, house, papers, and effects.

However, that protection no longer applies to Americans’ financial records when transacting through a third party, such as a bank or a broker. Nor does it apply to any individuals who engage in “large” cash transactions with each other.

The BSA regime has been controversial from the start, and its reach has only grown through the years, expanded both by Congress and federal agencies. But as Justice Neil Gorsuch recently wrote in a 2018 dissent, “just because you have to entrust a third party with your data doesn’t necessarily mean that you should lose all Fourth Amendment protections in it.”

Aside from whether the Supreme Court is ready to revisit the BSA, Congress could easily fix this problem.

Trump Should Work with Congress on BSA Reform

Congress could amend the BSA to maintain its record-keeping requirements while scrapping its reporting requirements. They could then ensure that law enforcement can only access those records with a valid search warrant. This reform would merely reaffirm the importance of the Fourth Amendment, something that shouldn’t be too controversial in the United States.

But that’s not at all consistent with the “reforms” most officials have been pushing.

For instance, one former regulator recently testified to Congress that its members should “creatively rethink” how to expand the existing regime to include crypto transactions. He, like many in Congress, favors “extending the regulatory perimeter” and requiring (at least some) crypto firms to “aggressively monitor transactions.”

But this view is precisely backward. Crypto has helped sharpen the focus on what’s fundamentally wrong with the current financial surveillance regime and why it needs to be scrapped, thus restoring and reaffirming Americans’ Constitutional rights.

Again, it’s a great sign to see such rights-affirming language in President Trump’s executive order, but there’s a long way to go.

Congress Should Restore the 4^th Amendment

Fortunately, some members of Congress have been determined to fix the damage done by the BSA regime. For instance, in the 118^th Congress, Rep. John Rose (R-TN) introduced (with three cosponsors) the Bank Privacy Reform Act, a bill that would reaffirm Americans’ Fourth Amendment protections. (Rose is a House Financial Services Committee member and, presumably, will reintroduce the bill in the 119^th Congress).

On February 27, Senator Mike Lee (R-UT) introduced similar legislation, a bill titled the Saving Privacy Act. Oddly enough, no similar legislation has come from the Senate Banking Committee, a group most noted for Sen. Elizabeth Warren’s constant attacks on the crypto industry. Still, Sen. Lee deserves credit for standing up for Americans’ rights.

The current regime clearly has an imbalance, one that heavily favors law enforcement over citizens’ rights to privacy. But the proper balance between these competing needs is in the Fourth Amendment, so Congress should restore it. Doing so might also be the single most important policy change for Trump to promote U.S. leadership in digital assets and financial technology.