The Securities and Exchange Commission (SEC) has proposed ending quarterly reporting and allowing public companies to submit financial reports on a semiannual basis. This proposal has been a long time coming. Last September, President Trump announced his disdain for quarterly reporting on Truth Social, with SEC Chairman Paul Atkins quickly seconding the president’s vision.

Both the president and the chairman share the same vision for quarterly reporting mandates (ending them), though not the same reasoning. Trump calls for semiannual reporting to reduce short-termism—executives’ pursuit of short-term results over long-term financial health. Atkins, on the other hand, stands on the more principled case that the SEC’s rules have “prevented companies and their investors from determining for themselves the interim reporting frequency that best serves their business needs.”

Does Quarterly Reporting Cause Short-Termism?

While short-termism is a politically convenient justification for reducing reporting mandates, the empirical case for short-termism rests on shaky ground. For starters, US financial markets and corporate investment (research and development) have grown significantly since the modern introduction of quarterly reporting in 1970. Although that relationship is surely overly simplistic, a 2018 review of the empirical literature finds that the macro predictions of the short-termism hypothesis are “largely undemonstrated, implausible, or untrue.” Even the proof most commonly cited as evidence of short-termism—share repurchases—fails to support the cause. Recent work by Harvard’s Elliot Tobin and Charles Wang, for example, finds that, across 17 countries, legalizing buybacks is followed by an 8 to 10 percent rise in corporate investment, not a decline.

It is also somewhat surprising that the administration would rest on short-termism as the reasoning for reducing reporting mandates. Some lawmakers have used short-termism to justify increased government oversight, enhanced reporting mandates, and even higher taxes. 

Nevertheless, the record against short-termism does not undermine the case for reducing reporting mandates.

Should the SEC Even Set the Frequency?

Chairman Atkins, in his statement accompanying the release, framed the proposal to move to semiannual reporting as restoring self-determination. In other words, if companies and investors wish to report quarterly, they should be allowed to. And if they wish to report semiannually instead, they should be allowed to do so. That argument follows the right principle.

However, this principle extends beyond the proposal. Disclosure has historically arisen from self-interest, exchange listing rules, or statute. Before Congress wrote interim-reporting authority into Section 13(a) of the Securities Exchange Act of 1934, it was already common for companies listed on the New York Stock Exchange to report quarterly (albeit the content of financial reports was quite different).

More recently, the United Kingdom’s experience supports letting financial markets calibrate themselves. The UK mandated quarterly reporting in 2007, then dropped the mandate in 2014. Roughly 91 percent of UK firms continued to report quarterly through the end of 2015. By 2017, about 40 percent of Financial Times Stock Exchange 100 firms had moved to semiannual. And what happened? Well…nothing. A Goldman Sachs report found that reporting frequency had no impact on valuations.

But reporting frequency has impacted costs. The SEC’s own economic analysis estimates that reporting semiannually would save a company roughly $198,000 per year. And those savings won’t fall evenly, as the SEC also finds that “smaller issuers may face relatively higher compliance burdens” that scale poorly with revenue. 

Where the Debate Should Go

Quarterly reporting hasn’t produced the short-termism President Trump has claimed. The SEC’s own analysis shows quarterly reporting adds significant costs for no measurable benefit, and evidence from the UK reveals that giving companies more freedom to choose didn’t affect company valuations. Yet even with this evidence, short-termism remains a political scapegoat.

To their credit, Chairman Atkins and the SEC have taken a principled approach. Rather than debating whether short-termism is real, the proposal rests on the principle that reporting frequency is a question companies and investors should answer for themselves. Atkins is correct: How often a company reports to its investors should be a decision between the company and its investors, not the government. 

Newly appointed Federal Reserve Chairman Kevin Warsh wants to shrink the size of the Fed’s balance sheet. This is a worthy goal and something we have advocated for several times in the past. Unfortunately, the Fed’s balance sheet and financial footprint are as large as they are only because previous leadership failed to normalize operations after the past two crises. Given the size of the balance sheet (now over $6 trillion) and the cost of the current policy regime, Warsh should waste no time implementing a credible plan to reduce the Fed’s asset holdings.

Warsh will face resistance from defenders of the current regime, many of whom are his colleagues at the Fed. Present and former Fed officials have often advocated for the large balance sheet, but the arguments they rely on do not hold up. Ultimately, the Fed’s balance sheet should be used for traditional monetary policy, not fiscal or banking policy. In this article, we explain why the main arguments used by supporters of the Fed’s current regime are flawed. 

Here are five common arguments by supporters of the current regime, along with our responses:

1. Reserves are costless to create, so a large balance sheet with abundant reserves is the efficient policy choice.
   
   Fed officials have argued that since reserves can be created at a zero marginal cost, economic efficiency requires that their opportunity cost to banks also be zero. While the accounting cost of creating these reserves may be zero, their economic costs are high. For starters, every dollar in created reserves must be backed by asset holdings. If the rate of return on those assets does not match the cost of paying banks interest on reserves (IOR), the Fed can suffer losses. The Fed accrued nearly $200 billion in operating losses in 2023 and 2024 in this manner—losses ultimately borne by taxpayers through forgone Treasury remittances. 

   Among other potential costs, the abundant reserve framework enables fiscal quantitative easing (QE), allowing Congress to fund spending programs through the Fed’s balance sheet without going through the appropriations process. (For a more detailed analysis of the costs associated with the current regime, see this post.) A balance sheet of this size also distorts financial markets. The Fed’s decision to purchase nearly $3 trillion in mortgage-backed securities preferentially allocated credit to the housing market and amounted to a backdoor bailout of Fannie Mae and Freddie Mac, one that relieved Congress of its responsibility. 

2. Market volatility increases when reserves dip below their ample level.
   
   Supporters of the large balance sheet point to the September 2019 repo market episode, when overnight repo rates briefly spiked above 10 percent in a single day, as evidence that reducing reserves risks financial instability.
   
   This incident is poor justification for a permanent policy change, even ignoring that the market currently functions as it does partly owing to the Fed’s current policy regime. The September 2019 spike resulted from a one-day coincidence of corporate tax payments and a large Treasury auction settlement that simultaneously drained reserves from banks. At the same time, postcrisis liquidity rules, specifically the liquidity coverage ratio, made banks unwilling to lend reserves they held for regulatory compliance—that is, the volatility resulted from regulatory choices made after 2008, not from having too few reserves. The Fed has since addressed this vulnerability by establishing the Standing Repo Facility. 

   Still, there is a deeper problem with this argument. The Fed expanded its balance sheet dramatically under QE and, when partial drawdowns created stress, concluded that the balance sheet must remain large to stave off financial stress. This reasoning is circular. The Fed created the conditions for this problem and now cites the problem as justification for maintaining those conditions. Such episodes were rare in the decades before 2008, when the Fed operated under scarce reserves without recurring money market dysfunction.

3. Shrinking the balance sheet is tantamount to quantitative tightening and may lead to unintentionally tight credit conditions.
   
   There is concern that reducing the balance sheet necessarily tightens financial conditions and that such tightening could conflict with the Fed’s monetary policy stance. But this concern is about implementation, not principle. 

   No serious proponent of balance sheet reduction advocates doing so overnight, so the risk is easily mitigated. Given a clear policy statement and a long enough horizon to draw down the balance sheet, market participants will be unlikely to view the gradual downward trend in asset holdings as a signal of tightening conditions. We have argued that the simplest way to achieve this is for Congress to mandate an end to IOR payments 10–15 years in the future—roughly the time it has taken to build the balance sheet up to its current level. Even with a shorter timeline and no congressional mandate, setting a clear end date for IOR will signal that the Fed must wind down its balance sheet by that date.

4. Monetary policy is too difficult to implement without abundant reserves and IOR.
   
   Fed officials have argued that reverting to a scarce-reserves corridor framework would make it significantly harder to conduct monetary policy, as the Fed would lose its primary lever (IOR) for maintaining the federal funds rate within its target range.

   It is true that the Fed currently exercises more control over the federal funds rate using IOR and that it would need to conduct more frequent open market operations in its absence. But this is exactly how the Fed operated for decades before 2008, and precise control over the federal funds rate is something of an illusion. Nor has this better control over short-term rates translated into better macroeconomic outcomes. The Great Moderation, a period of low and stable inflation and unemployment that lasted from roughly the mid-1980s to the mid-2000s, coincided with the scarce-reserves framework. Meanwhile, the recovery from the 2008 recession was prolonged and post-pandemic inflation surged despite the abundant-reserves regime. 

   Moreover, the current setup’s apparent precision comes at a cost. To begin with, the Fed sets the IOR rate directly and simply adjusts a target range for the federal funds rate accordingly. However, the federal funds market, where banks lend reserves to each other, is all but devoid of the private lending that occurred there prior to 2008 because reserves are so abundant. Thus, the Fed has eliminated a key private source of bank liquidity and the price signals that would otherwise emerge from that interbank lending, a high cost for the apparent rate-setting precision. Those interbank lending signals carried real-time information about liquidity conditions and financial risks that the Fed cannot fully observe or replicate. 

5. The Fed’s balance sheet must structurally backstop the Treasury market, which has grown too large for dealers to absorb under stress.
   
   The March 2020 Treasury market disruption is frequently cited in support of a large Fed balance sheet. During that episode, bid-ask spreads widened dramatically in Treasury markets. Defenders of the large balance sheet argue that this shows the Fed must remain a standing buyer of last resort.

   The cause of this disruption is misidentified. The Treasury market’s inability to absorb stress without Fed intervention was largely a function of regulatory constraints on primary dealers, specifically the supplementary leverage ratio (SLR). Strangely, the SLR treats Treasury holdings as risky for leverage purposes, making it costly for dealers to warehouse Treasuries during periods of stress even when they have adequate capital. This is a regulatory problem that requires a regulatory solution and the Fed’s balance sheet should be used for monetary policy, not banking policy. Reforming the SLR to exclude Treasuries from the leverage calculation would substantially restore dealers’ capacity to intermediate the market. 

   A permanently large Fed balance sheet is not the right answer to a poorly calibrated regulation, and it comes with its own costs: It entrenches the Fed as a structural participant in government financing, undermining the fiscal discipline that market mechanisms would otherwise impose. Ultimately, the Fed should not be a standing buyer of last resort—it should be a lender of last resort that provides emergency liquidity only when nobody else can.

Conclusion

Kevin Warsh’s chairmanship offers a rare chance to seriously reform the Fed. Key among these reforms is shrinking the balance sheet. Most arguments supporting the permanently large balance sheet seem to exhibit a fundamental misunderstanding of the appropriate role of the central bank—some Fed officials seem to think that it should provide general bank lending instead of emergency lending. But the Fed is supposed to be a lender of last resort to markets, not a buyer and lender of any resort, actively participating in what amounts to government-supported credit allocation.

Regardless of policy preferences, both critics and supporters of the Fed must admit that the central bank now has many responsibilities that Congress never intended. The Fed is now tasked with achieving specific macroeconomic goals, providing fiscal support to the federal government, regulating thousands of banks and other financial institutions, engaging in credit allocation to private institutions, and operating core components of the payment and settlement system. Ideally, Congress will start to reverse this trend and shrink the Fed’s responsibilities so the central bank’s footprint will be more compatible with a limited government and a free-enterprise economy. 

The Fed serves the US public best when it does less, not more, and an overly active central bank undermines free enterprise and increases risk within the financial sector. The new Fed chair has an excellent opportunity to improve economic outcomes by putting the Fed on this path.

New Fed Chairman Kevin Warsh has committed publicly to reducing the Fed’s financial footprint and reverting its balance sheet to a sensible size. This is a worthy goal that should be paired with Congress ending the Fed’s ability to pay interest on reserves (IOR). These reforms are critical for shrinking the Fed’s footprint in financial markets and for maintaining a clear line between monetary and fiscal policy. 

The latter of these benefits, maintaining a clear line between fiscal and monetary policy, is often ignored in this debate, especially by those who oppose shrinking the balance sheet and ending IOR. In fact, Warsh will face resistance by some members of the Federal Open Market Committee who mistakenly argue that maintaining a large balance sheet and the IOR framework are necessary and costless. This claim is based on faulty arguments that wrongly attribute certain benefits to the current policy regime and ignore its true economic cost.

Large Balance Sheet Supporters Are Mistaken

In February 2025, at the Bank of England, Dallas Fed President Lorie Logan gave a speech that justified maintaining the Fed’s existing policy regime. The speech framed this decision as one that would maintain an “efficient and effective” balance sheet. (Ironically, the Bank of England has explicitly identified shrinking its balance as necessary to reduce the risk associated with maintaining a larger footprint.) For instance, the speech argues that “the central bank’s marginal cost of supplying reserves is typically small,” so “efficiency calls for money market rates to land close to the interest rate on reserves.”

It is true, of course, that the Fed’s cost of adding a dollar of reserves is incredibly small. But that fact is essentially irrelevant to this debate, and it ignores the full economic cost of the current policy regime. It’s also dangerously close to suggesting that the Fed should use the IOR rate to “set” money market rates wherever it likes, something it cannot accomplish without even greater cost. It also ignores that reserve requirements are a deliberate policy choice (effectively the equivalent of a tax on banks), as was the decision in 1980 to require all banks to hold reserve accounts at the Fed. (Prior to the 1980 Depository Institutions Deregulation and Monetary Control Act, fewer than 40 percent of banks were members of the Federal Reserve System, and the number had been declining.) 

Just as important, Logan ignores key elements of the current policy regime that render her arguments circular at best. In particular, she ignores how and why the Fed enlarged its balance sheet in the first place. For instance, Logan’s efficiency argument culminates with the following:

While it remains conceptually possible to implement monetary policy today with scarce reserves, developments since the GFC [global financial crisis] would complicate the task of fine-tuning reserve supply to hit a point on the steep portion of the demand curve. Changes in regulations and banks’ own risk management have made reserve demand larger, more volatile and more difficult to predict. In the U.S., fiscal flows also create more reserve volatility than previously.

While that’s an interesting philosophical discussion, I don’t see much of a practical argument for the U.S., at least. When the U.S. banking system has excess reserves, they tend to accumulate at the largest money-center banks. The regulations applicable to such banks disincentivize unsecured lending to other banks. As a result, only very large spreads between money market rates and interest on reserves would likely suffice to revive the U.S. interbank market—and that would be very inefficient.

The biggest problem with this reasoning is that the “developments since the GFC” that “complicate the task of fine-tuning reserve supply” are the Fed’s own creation. These developments are the Fed’s active decision to make large-scale asset purchases and to ask Congress to accelerate its authority to pay IOR to keep a lid on the new reserves those purchases created. In fact, when Congress originally enacted the IOR authority, hardly anyone (if anyone) contemplated implementing monetary policy with IOR, especially not by paying interest on excess reserves because banks rarely held any.

In July 2025, at the Federal Reserve Bank of Dallas, Fed Governor Chris Waller made a similar self-serving argument to justify the current policy regime. Waller stated that: 

…we consciously changed our implementation framework for providing liquidity to the banking system by moving from a scarce-reserves system to an ample-reserves system. This change was necessary because there were shortcomings with the scarce-reserves approach—short-term rates were harder to control and required daily interventions in the markets by the Fed, and these problems were made worse when rates were at or near zero.

The problem, of course, is that these shortcomings existed only because the Fed decided to purchase such large quantities of securities. In his book The Courage to Act, sitting Fed Chairman Ben Bernanke acknowledged that the Fed was “facing what might prove to be a critical question: Could we continue our emergency lending to financial institutions and markets, while at the same time setting short-term interest rates at levels that kept a lid on inflation?” The Fed chose to keep buying more assets and realized that it could use IOR to “keep a lid on inflation,” conscious policy decisions that literally made the interbank lending market irrelevant because those purchases flooded the market with reserves. In other words, the change to an abundant-reserves system is what caused the shortcomings with the scarce-reserves approach—banks stopped using the interbank lending market because the Fed injected so many reserves into the system. 

This circular reasoning by Logan and Waller would be bad enough, but Logan goes even further by arguing that the current policy regime is more efficient because it simplifies the Fed’s ability to influence interest rates. Specifically, Logan argues:

The ample-reserves regime simplifies rate control because fluctuations in reserve supply and demand don’t require frequent and precise offsetting central bank actions. You might say this makes the ample-reserves regime efficient for a second reason. Not only does it avoid the inefficiencies associated with a liquidity premium on reserves, but it also saves some forecasting and operational effort. The ample regime requires gradual forecasting and operations to approximately track demand for central bank liabilities over periods of months and years. The scarce-reserves regime requires the much heavier lift of actively managing reserve supply on a daily basis to precisely match demand.

Aside from the strangeness of a member of the Federal Open Market Committee arguing that it’s too difficult to conduct open market operations and that her committee should avoid that “heavier lift,” this statement also ignores that the Fed does not have precise control over “interest rates” in the first place. Yes, it can administer the IOR rate, but history clearly shows that market rates move in ways the Fed can’t stop, especially when monetary policy is severely at odds with private borrowing markets. 

Regardless, all the above arguments assume, as do many supporters of the current policy regime, that the IOR framework is a perfect substitute for open market operations, with no additional cost. That view is completely wrong, and even former Fed Chair Ben Bernanke acknowledged the costs of this new regime, including impairing the functioning of securities markets, degrading liquidity and price discovery, reducing the public’s confidence that the Fed would reverse its overly accommodative stance, creating more financial instability, and incurring financial losses if interest rates rose. Arguably, each of these costs have already come to fruition. (One major example: In 2023 and 2024, the Fed lost nearly $200 billion paying IOR—money that would have otherwise been remitted to Treasury.)

Bernanke also argued that the hurdle for using the nontraditional policies “should be higher than for traditional policies” because “nontraditional policies have potential costs that may be less relevant for traditional policies.” One of the most obvious potential costs is the one that seems to be most often ignored: the risk that the current regime will be used in the funding of backdoor government spending. Simply put, the current policy regime, an abundant-reserves system with IOR, blurs the lines between monetary and fiscal policy. It allows the Fed to purchase as many assets as it would like, all while paying firms to hold on to the excess cash that these purchases create, thus providing a built-in check on inflation. (It’s also inaccurate that Treasury securities and reserve balances are interchangeable assets that banks would hold at identical yields and quantities.)

The new regime can allow the Fed to be a pawn of the US Treasury for the simple reason that its asset purchases no longer directly threaten its price-stability mandate—the Fed’s operating framework is designed to pay interest on reserves for the express purpose of preventing asset purchases from funding broader money creation. Prior to 2008, the Fed was able to legitimately warn Treasury (or Congress) that such moves would be inflationary. Under the current regime, it can no longer do so. (At least in the short run; in the long run, once enough debt accumulates, it will lead to disastrous consequences as people realize what the government is doing.) As a result, the Fed is more susceptible to pressure for funding all kinds of projects and new borrowing. 

Conclusion

Kevin Warsh, the new chairman of the Fed, is committed to reducing its financial footprint and shrinking its balance sheet. Warsh should waste no time implementing a plan to shrink the balance sheet, and Congress should follow up by revoking the Fed’s authority to pay interest on reserves (IOR). These reforms would help shrink the Fed’s footprint in financial markets and restore a brighter line between monetary and fiscal policy. The Fed’s balance sheet should be used for monetary policy, not banking policy or fiscal policy.

Financial surveillance is getting worse every day. Although many legislative expansions have not passed, the wheel keeps turning. Inflation, geographic targeting orders (GTOs), and executive orders have greatly expanded the Bank Secrecy Act.

Inflationary Surveillance

Most Americans have felt the pain of inflation in recent years. However, what they don’t often see is that inflation also erodes financial privacy. The Financial Crimes Enforcement Network (FinCEN) adjusts its penalties for inflation, but it does not adjust reporting thresholds. In the most egregious case, the $10,000 reporting threshold now used for currency transaction reports (CTRs) has not been changed since the number was first established in 1945 by an executive order. That’s equal to around $180,000 today (Figure 1). When the Bank Secrecy Act was ultimately passed in 1970, you could buy two new Corvettes for $10,000. Today, you could spend all of that on just the engine.

In practice, that means the Bank Secrecy Act regime is swallowing up more transactions every year as inflation decreases the value of the dollar. No bills are passed; no regulations are open to the public. Yet, the wheel is turning, and financial surveillance increases without any checks or balances.

When the Supreme Court effectively signed off on the Bank Secrecy Act, it only did so because $10,000 was considered “abnormally large” in the 1970s. However, Supreme Court Justices Lewis Powell and Harry Blackmun warned that “A significant extension of the regulations’ reporting requirements … would pose substantial and difficult constitutional questions for [us.] At some point, governmental intrusion upon these areas would implicate legitimate expectations of privacy.”

We have hit that point. In fact, that point was crossed a long time ago. Recognizing what has happened, Representatives Joyce Beatty (D‑OH), Barry Loudermilk (R‑GA), French Hill (R‑AR), Bryan Steil (R‑WI), and Roger Williams (R‑TX) all pointed out the need for change during a 2022 oversight hearing. Yet, FinCEN has been silent.

Targeting the Border

Beyond inflation, FinCEN has dramatically expanded financial surveillance at the southern border through geographic targeting orders by lowering the $10,000 threshold to just $200. One small business estimated that it would likely go from filing nine reports per week to filing 50,000 reports per week under the initial order. That is nothing short of an impossible standard to comply with. In effect, both entrepreneurs and customers will suffer, likely pushing more people into illegal markets. 

Reflecting on the geographic targeting orders, a Texas court described the $200 surveillance order as “unreasonable” because it “overreaches,” “defies common sense,” and “likely violates the Fourth Amendment.” “It appears the Government did not think,” wrote the court. The “tactic employed here is akin to using a blunderbuss to target a fly.”

The court issued an injunction to put the geographic targeting order on ice until each side could make its case. A similar injunction was issued in California. This news was welcome until FinCEN went around the courts and reissued the order at a higher threshold and over a vastly greater area—affecting 3.2 million people living across 126 zip codes in Arizona, California, and Texas.

FinCEN Director Andrea Gacki said, “The reports generated by this Geographic Targeting Order will continue to help law enforcement investigate powerful illicit networks operating along the southwest border and beyond.” Yet strangely, when Director Gacki appeared before Congress just a few days later, she was unable to say how many criminals were caught because of this surveillance regime.

Trump’s Latest Executive Order

Were these expansions not enough, President Donald Trump has also called for the Bank Secrecy Act to be expanded under executive orders. 

Most recently, President Trump issued an executive order that said banks need to start acting as immigration agents and report people they suspect of being in the country illegally. This reporting would be done through suspicious activity reports (SARs). In doing so, President Trump also created another new avenue for debanking by instructing the Consumer Financial Protection Bureau (CFPB) to warn all banks that undocumented immigrants pose a credit risk because of their “potential deportation.” In other words, he said that anyone suspected of being undocumented should be debanked. 

President Trump made a similar move in 2025 when he designated Antifa as a domestic terrorist organization. The White House then published a memo outlining how the Bank Secrecy Act should be used to “identify and disrupt financial networks that fund” Antifa to “ensure such activity is rooted out at the source.”

People have certainly done wrong under the Antifa banner, but this designation poses a problem because Antifa is not a formal group with official members. Instead, it’s more akin to a political ideology. With that in mind, it is unclear how banks are supposed to avoid Antifa. Should banks blacklist anyone who comes in wearing an Antifa pin? Should they review photos of protests to identify potential Antifa-aligned customers? Should onboarding documents include a questionnaire about a customer’s feelings about fascism? In any event, this executive order will likely result in more people being debanked.

Conclusion

Contrary to concerns, restoring financial privacy will not stop law enforcement from investigating and prosecuting crimes. Rather, it would just make the process outlined in the Constitution the official standard. Congress has multiple options to restore financial privacy. Indexing reporting thresholds to inflation, strengthening the Right to Financial Privacy Act, and ending the Bank Secrecy Act are all things within Congress’s power. However, until they act, financial surveillance will continue to get worse every day. 

Speaking at a congressional hearing, Representative Warren Davidson (R‑OH) didn’t pull any punches when describing the Bank Secrecy Act. He said, “Over the decades, [the Bank Secrecy Act] has become a bloated surveillance machine demanding endless reports without delivering proportional results.”

Representative Davidson went on to point out that the Bank Secrecy Act’s “reporting thresholds have never been adjusted for inflation. $10,000, the initial threshold established in the 70s for [currency transaction reports], would be more than $80,000 today.”

Looking to the future, Representative Davidson also warned that central bank digital currencies (CBDCs) are the next step in financial surveillance and financial control. 

He ended his opening remarks with a powerful message about the need for change:

If we truly want to stop money laundering by the criminals, scammers, and terrorists of this century, not the last, it’s time we change course. … Put simply, we can continue to pile up reports on lawful activity, or we can exchange volume for actionable intelligence. It’s time to make this trade.

The congressman is correct on all counts.

The Bank Secrecy Act is a bloated surveillance machine. It forced banks to file 28 million reports on their customers last year. The $10,000 has never been adjusted for inflation—meaning that more transactions get reported each year as the dollar loses value. And a CBDC would take this surveillance to the next level by giving governments access to your money by default. 

As Representative Davidson often says, freedom surrendered is rarely reclaimed. But the tide is turning. More people are recognizing, each day, just how bloated and ineffective the Bank Secrecy Act has become, and more are seeing CBDCs for what they are: surveillance tools. The question now is which of Davidson’s colleagues will step up and join the fight to defend financial freedom.

The Gramm-Leach-Bliley Act (GLBA) established federal ground rules for financial privacy in 1999. The Republicans of the House Financial Services Committee now offer an update, the ‘‘Guidelines for Use, Access, and Responsible Disclosure of Financial Data Act,” or GUARD Financial Data Act. The GUARD Act would preempt state laws that regulate entities and data already covered by GLBA, but it imposes new federal rules likely to do more harm than good. 

Federal Lawmakers Should Not Assume that Pro-Regulation States Are Leaders

The drafters of federal privacy bills tend to assume that states that have passed privacy statutes (about 20) are “leaders” and model the federal bills on state statutes; the perspective of states with no privacy statute is left out. Though the GUARD Act omits punitive state measures like California’s private right of action, the bill reflects the pro-regulatory idea that data collection is inherently harmful and should be minimized. Especially in the age of artificial intelligence, where accurate data has tremendous potential for good, this perspective should not guide federal legislation.

Also, like most privacy laws, the bill fails to address the core problem of financial privacy: the Bank Secrecy Act and warrantless law enforcement access to financial data. The GUARD Act has its priorities backwards. Private-sector financial services often use data to fight fraud or offer new products: the police can use it to put people in jail or seize their life savings. 

Less Data Is Not Better When Fighting Fraud or Assessing Risk

The GUARD Act ostensibly seeks to ensure that financial service firms collect, keep, and process less personal information. If successful, these limits might impede efforts to fight fraud or develop new services. Three problematic provisions are as follows:

• The bill’s data minimization provision requires financial service firms to collect only the data that is “adequate, relevant, and reasonably necessary” for the purpose disclosed in the firms’ private policy. Disputes as to whether specific data is truly necessary could arise—unless firms write privacy policies that describe their purpose for collecting the data very broadly, which they would be likely to do. 

  If this provision did minimize data collection, it could do more harm than good. For example, sophisticated forms of fraud that use artificial intelligence are rampant. Anti-fraud measures also use AI to identify suspicious patterns in real-time data flows. But it will be harder to spot patterns accurately in patchy data.

• The bill gives the former customers of a financial service provider the right to request that their data be deleted, except when the data is used for credit reporting or to comply with other laws. Again, disputes as to whether data qualify for the exemptions are likely. New methods of credit risk assessment are being developed to better serve consumers with scanty credit files. The new methods may not use the same information as traditional credit reports. If the credit reporting exemption is read narrowly, the right of deletion could hinder such innovations. Furthermore, exercise of the right of deletion could also lead to thin data for use in fraud detection and other beneficial purposes.
• The GUARD Act requires that a customer opt in before a financial service shares sensitive information with third parties. Sensitive information includes demographic information such as citizenship status, genetic or biometric data, and precise geolocation data. If a customer’s refusal to opt in meant that law enforcement could not access the information without a warrant, an opt-in rule would make sense. But law enforcement and regulators would be exempt. Thus, the rule is another hoop for financial service firms to jump through and could hamper efforts to fight fraud. Precise location information aids fraud detection: the opt-in rule could put unaffiliated third-party fraud detection services at a disadvantage.

Screen Scraping with Disclosures Still Could Be a Security Risk

“Screen scraping” happens when a third party visits a website to collect any available data, including when a third party uses a customer’s logon credentials to access a financial service provider’s site. In addressing the use of customer credentials for screen scraping, the GUARD Act does a good thing and a bad thing.

• The GUARD Act requires screen scrapers to make key disclosures to the customer describing how their data will be used, to whom it will be disclosed, and so on. This is a reasonable policy.
• The GUARD Act also provides that a financial service may not bar a screen scraper from entering the service’s site, if the scraper has made the required disclosures to customers. This is unwise. Screen scraping creates security risks. The scraper’s disclosures to the customer may not eliminate these risks. Financial service providers such as banks negotiate secure open banking arrangements with third parties to end to screen scraping. If financial service providers cannot block or ban screen scraping, they will have less incentive to participate in open banking. And they may be unable to stop security breaches. 

Going Forward, Policymakers Should Focus on Harmful Uses of Data

The best approach to financial privacy is to recognize that legitimate private-sector firms put information to valuable uses such as fraud detection. Inconsistent state laws are a problem, but overregulation at the federal level would also be a problem. Policymakers should consider laws that target specific, tangible harms by private-sector bad actors, and end law enforcement’s warrantless access to financial data. The power of government to arrest or deport those they surveil presents unique risks. The GUARD Act takes privacy policy in the wrong direction.