Operation Choke Point may be the most infamous example of the U.S. government using its weight to pressure the financial system in recent history. The operation was thought to have ended with the Obama administration, but now many fear that cryptocurrencies have been caught in the crosshairs of a similar effort.
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Monetary Policy
Representative Emmer Says No to U.S. CBDC
Representative Tom Emmer (R‑MN) has introduced a new bill to prohibit the Federal Reserve from issuing a retail central bank digital currency (CBDC).
For those that may not remember, Representative Emmer was the first member of Congress to push back at CBDCs through legislation when he introduced a similar bill in January of 2022. That bill prohibited the Federal Reserve from issuing a retail CBDC by barring it from issuing “a central bank digital currency directly to an individual.” It also explicitly forbids the Fed from offering “products or services directly to an individual,” and from maintaining “an account on behalf of an individual.”
The updated version provides additional protections designed to prevent the Federal Reserve from issuing a retail CBDC. Specifically, the newer version prohibits both the Board of Governors and the Federal Open Market Committee from using “any central bank digital currency to implement monetary policy.’’ Finally, the bill prohibits the Federal Reserve from conducting CBDC pilot programs without informing Congress.
Let’s break down what each of these provisions means.
Retail CBDCs
Over the past 12 months, the Federal Reserve has taken a curious stance regarding whether it will issue a CBDC. The line often touted by Federal Reserve officials has been: “The Federal Reserve does not intend to proceed with the issuance of a CBDC without clear support from the executive branch and from Congress, ideally in the form of a specific authorizing law.” (Emphasis added.) For an institution that has become infamous for its careful word selection, it’s concerning that the official stance is that Congressional approval would be “ideal” and that the intention is to not proceed without it.
Given that the Federal Reserve’s reach (like other federal agencies) has consistently expanded throughout its history, this statement is less than comforting. Legislation such as Representative Emmer’s bill is necessary to officially take a retail CBDC off the table.
Monetary Policy
Proponents of CBDCs often list “improved monetary policy” or “enhanced monetary policy efficiency” as a benefit of adopting a CBDC. In practice, however, this language means the Federal Reserve would surveil individual transactions in a bid to “fine-tune” the economy. One way this fine-tuning could take place would be to charge negative interest rates to essentially penalize people for not spending money during a recession.
In other words, the Fed would charge people to induce them to spend. Representative Emmer’s bill would specifically prohibit this type of behavior by banning the use of CBDCs for monetary policy.
Pilot Programs
The final section of the bill requires that quarterly reports be made to Congress for both CBDC research and CBDC pilot programs. Although it has not been granted the authority to launch a CBDC, the Federal Reserve’s regional banks have been very busy developing and piloting potential CBDCs. In fact, concerns emerged in late 2022 regarding how these pilot programs are being operated. In a press release at the time, Representative Emmer himself said, “The more we learn about the Boston Fed’s work on [CBDCs], the more we have become concerned with the lack of transparency, especially as it relates to their partnership with the private sector.”
Wisely, Representative Emmer’s bill would require the Federal Reserve Board to work with the regional banks to collect information on their research and pilot programs and to report that information to Congress. While there are still risks to allowing the Federal Reserve to explore developing CBDCs, Representative Emmer’s requirement would introduce a much-needed level of transparency.
Conclusion
CBDCs have continued to gain more attention, but with that attention, more people are speaking out against them. Given the risks that CBDCs will usurp the private sector and endanger Americans’ core freedoms, Representative Emmer’s bill marks an important step forward in protecting Americans.
Are you interested in learning more about the risks posed by CBDCs? Check out our new webpage dedicated to explaining what CBDCs are, why they shouldn’t be adopted, and who is speaking out against them.
DOJ and Treasury Silent on Financial Surveillance Statistics Despite Congressional Mandate
Time and time again, the biggest proponents of the Bank Secrecy Act have been quick to defend its intrusion on the liberties of Americans with the argument that it stops crime. Yet, despite tens of millions of reports being filed each year, proponents can rarely name more than a few anecdotes of crimes actually being stopped. In fact, even the agency in charge of monitoring Bank Secrecy Act surveillance can’t say how many reports have actually been used to apprehend criminals.
Luckily, not everyone in Congress is content with the status quo on the Bank Secrecy Act regime. Rep. Blaine Luetkemeyer (R‑MO) sent a letter to Attorney General Merrick Garland at the Department of Justice (DOJ) stating just how unacceptable this disregard for the law is:
The DOJ’s disregard for section 6201 has cemented a lack of transparency into the usefulness of the reported data. If the DOJ is unable to state the usefulness of BSA reporting [data], it begs the question if the burdensome reporting is worthwhile.
The section that Rep. Luetkemeyer noted is section 6201 of the William M. (Mac) Thornberry National Defense Authorization Act for Fiscal Year 2021, or NDAA. In short, this section of the law required a report detailing how data reported under the Bank Secrecy Act is actually used by law enforcement.
Yet, as Rep. Luetkemeyer pointed out, the DOJ has failed to provide any meaningful information as required by the law. In fact, the DOJ is not alone. The Department of the Treasury likewise appears to have failed to provide similar reports as required by sections 6204 and 6205 of the NDAA.
In April of 2022, Reps. Patrick McHenry (R‑NC), Jim Himes (D‑CT), John Rose (R‑TN), Brad Sherman (D‑CA), David Kustoff (R‑TN), and Bryan Steil (R‑WI) all questioned FinCEN Acting Director Himamauli Das on the status of those reports because they were four months late at the time. Acting Director Das failed to supply any meaningful information, but he said that he recognized that “in terms of this hearing, it’s clear that we need to do a better job in terms of communicating how effective FinCEN’s work is.” In saying so, he noted that detailed reports would be ready by the end of 2022.
Now two months into 2023, there has been no indication that those reports exist.
Members of Congress should not have to go chasing down government agencies to ensure they fulfill their statutory duties. However, it’s good to see that Rep. Luetkemeyer is holding these agencies to the letter of the law. Considering the available data suggests the Bank Secrecy Act regime is a failure, it is all the more important that these agencies be held accountable.
Buy Now, Pay Later, and the Rise of Debt
Household debt is currently at record highs. The usual suspects—credit card balances and mortgages—have been covered heavily in the media, but some people have been wondering how the philosophy of “buy now, pay later” might fit into the story.
Last fall, Senator Mark Warner (D‑VA) likened the rise of buy now, pay later (and other fintech) services to the lead-up to the financial crisis. However, when considered alongside the data that is available, it appears clear that there is no such risk.
The Current Consumer Debt Landscape
First, let’s consider the current landscape. The Federal Reserve reported that housing debt and non-housing debt in the fourth quarter of 2022 reached $12.26 trillion and $4.64 trillion, respectively. When broken down further (see Figure 1), it becomes clear this debt is primarily concentrated within mortgages (71 percent of all consumer debt), student loans (9 percent), and auto loans (9 percent).
While credit card debt made up just 6% of the total share of consumer debt, it is notable that credit card debt alone increased 20% since this time last year (Figure 2). However, even though delinquencies are starting to pick up, they still pale in comparison to historic levels (Figure 3).
Buy Now, Pay Later Data
So where does the buy now, pay later industry fit into this story? Well, one complaint about the industry has been due to the lack of standard disclosures and supervision. And to be fair, it’s partly for that reason the industry is not included in the Federal Reserve’s data. However, being a line item in the Federal Reserve’s database should not be a condition of doing business. Moreso, despite not being in the Federal Reserve’s database, there is data available that allows us to piece together the size of this industry.
The Consumer Financial Protection Bureau (CFPB) reported the five largest buy now, pay later companies had facilitated $24.2 billion in spending in 2021. While it’s possible some of this spending was linked to credit cards, let’s assume for simplicity that this represents an isolated layer of debt. Under that assumption, if we compare these numbers with the Federal Reserve’s reports, it becomes abundantly clear how small the industry still is: buy now, pay later would have accounted for just 0.04% of consumer debt in 2021 (Figure 4).
For additional context, the Federal Reserve reports there are 500 million open credit accounts, and 191 million Americans have at least one credit card. In fact, that same Federal Reserve report found that 43 million Americans have five or more cards. In contrast, it’s estimated that only 93 million Americans used buy now, pay later in 2022.
There may be room to make arguments that the novel industry is too concentrated or there are problems with individual consumers taking on unsustainable debt. Still, policymakers should be mindful that to the extent these problems exist, it’s hard to imagine a wide-scale effect akin to the 2008 crisis taking place because of the buy now, pay later industry leading to unsustainable debt.
Conclusion
The buy now, pay later industry is new and will likely continue to evolve. Companies working in this space can certainly help their industry to be better understood during this evolution by being transparent and providing accessible data. However, that is not to say the government should step in to force this transparency. Considering the data available already shows there is little to be concerned about in terms of rising debt, using legislative or regulatory force to mandate disclosures from buy now, pay later companies does not seem justified.
Warren Misses Details on Bank Secrecy Act
Senator Elizabeth Warren (D‑MA) made a curious argument celebrating the Bank Secrecy Act at yesterday’s Senate Banking hearing on cryptocurrency entitled, “Crypto Crash: Why Financial System Safeguards are Needed for Digital Assets.” While her argument may have sounded reasonable, the facts are not on the Senator’s side.
Senator Warren argued that Congress decided in 1970 that it was “time for financial institutions to do their part to prevent money laundering, so it passed the Bank Secrecy Act.” Senator Warren then noted that the banking industry pushed back because the requirements of the Bank Secrecy Act would “have been a tremendous expense as well as a pain in the neck.” Yet, the Senator continues, the industry made it work and cryptocurrencies should be forced to do the same.
Should the cryptocurrency industry be forced to report customer information under the Bank Secrecy Act regime? @SenWarren said yes at yesterday's @SenateBanking/@BankingGOP hearing, but the facts were not on her side. 🧵#CatoEcon
— Nick Anthony (@EconWithNick) February 15, 2023
https://t.co/lUku62Fo1M pic.twitter.com/1ho5k0dvic
Granted, Senator Warren only had a few minutes to speak, but even then, her comments missed the true nature of the history of the Bank Secrecy Act. And more concerningly, they demonstrated a questionable understanding of both cryptocurrencies and the remaining constitutional protections that Americans still have.
The Origin of the Bank Secrecy Act
First, as my Cato Institute colleagues, Norbert Michel and Jennifer Schulp, have documented in great detail, the Bank Secrecy Act passed in 1970 was only a fraction of what exists today. Originally, the 1970 law set the requirement that U.S. financial institutions maintain certain records and report certain transactions to the government. Yet even this initial state proved to be problematic.
Senator Warren is right that the banking industry was quick to push back, but they were not alone. In fact, in a hearing prior to the Bank Secrecy Act’s passage, several members of Congress complained that the bill’s domestic transaction reporting requirements did not address the legislation’s stated purpose, which was to address problems caused by foreign bank secrecy laws. Others objected that the reporting requirements would violate bank customers’ privacy.
In the years following the passage of the Bank Secrecy Act, civil liberties groups, members of Congress, a congressional commission, and others echoed the same concerns. For instance, the American Civil Liberties Union (ACLU) joined the California Bankers Association and Security National Bank in applying for a restraining order to stop the enforcement of the Bank Secrecy Act in 1972. However, their argument wasn’t centered on the costs of enforcement. Rather, they argued that the Bank Secrecy Act violated the Fourth Amendment’s protection from unreasonable search and seizure as well as the protections provided by the First and Fifth Amendments. Although the law was ultimately allowed to carry on, Supreme Court Justices Lewis Powell and Harry Blackmun explicitly cautioned against the risks that expanding the law would present. In fact, Justice Thurgood Marshall even noted,
By compelling an otherwise unwilling bank to photocopy the checks of its customers the Government has as much of a hand in seizing those checks as if it had forced a private person to break into the customer’s home or office and photocopy the checks there.
A Tremendous Expense Indeed
So if the objections to the Bank Secrecy Act were about more than just bankers being stubborn, then what about those tremendous costs that the Senator mentioned and dismissed?
Unfortunately, despite warnings from the Supreme Court, both Congress and administrative agencies have extensively expanded the Bank Secrecy Act regime. According to the latest estimates, the current Bank Secrecy Act regime cost financial institutions $45.9 billion in 2022. Yet the cost of compliance is likely higher than that number suggests. For instance, there’s also the cost of banks leaving the southern border in what’s been termed “derisking.” In short, banks have limited or outright ended their relationships with customers in certain locations because of above-normal Bank Secrecy Act compliance burdens (i.e., processing money transfers sent to Mexico brings added regulatory scrutiny).
Were these costs not bad enough on their own, there’s also the issue of the purported effectiveness of this regime. As far as the public can tell, there are approximately 20 million Bank Secrecy Act reports filed in a given year, but very little to show for it. In fact, the Financial Crimes Enforcement Network (FinCEN), the agency charged with overseeing Bank Secrecy Act reporting, could barely answer how many reports lead to arrests during last year’s oversight hearing. (FinCEN promised to provide a report detailing the numbers by the end of 2022, but that report is so far nowhere to be found.) As it stands, the only number Americans really have to work with in judging the effectiveness of the regime is the 752 money laundering offenders that were reportedly sentenced to prison in 2021—a figure that works out to more than $61 million per conviction.
The Constitution Matters
Finally, with it established that the history surrounding the Bank Secrecy Act is more complicated than Senator Warren suggested, and that the costs of compliance have indeed been tremendous, there just remains the question about how the future regulations should take shape. Namely, should the cryptocurrency industry be forced to act like banks and report on customer activity? Although Senator Warren answered yes to this query, that position fails to account for both the technology and the constitutional protections that Americans still have.
Recalling the origins of the Bank Secrecy Act, the issue of financial privacy reached the Supreme Court in 1976. After reviewing the question of whether the Fourth Amendment protects financial records held with a bank, the Court effectively affirmed the constitutionality of the Bank Secrecy Act under what’s come to be known as the third-party doctrine. In short, the court held that so long as a third party is involved (e.g., a bank or credit union), customer records are not protected by the Fourth Amendment. However, to the extent third parties are not present, the Fourth Amendment still applies.
This detail is important for understanding how the law applies to cryptocurrencies. To the extent a cryptocurrency is decentralized (e.g., Bitcoin) and it is exchanged over a self-hosted wallet (e.g., Ledger), then there is no third-party involvement. Senator Warren described this reality as a “giant loophole,” but it’s really just a matter of upholding the Constitution. In fact, given just how much Supreme Court justices expressed concern over their original considerations of both the Bank Secrecy Act’s reporting requirements and what came to be known as the third-party doctrine, it’s next to impossible to square how going after transactions between two individuals without a warrant does not run afoul of the protections guaranteed by the Fourth Amendment.
Third, and finally, decentralization is not a "giant loophole."
— Nick Anthony (@EconWithNick) February 15, 2023
While protections should be stronger, it’s next to impossible to square how going after transactions between two individuals without a warrant doesn't run afoul of the protections guaranteed by the Fourth Amendment. pic.twitter.com/Pv7sgCUcyV
Conclusion
Stopping criminal activity is certainly a valid pursuit, but the Bank Secrecy Act regime has done, at best, little more than flood law enforcement with millions of unnecessary reports. It is an ineffective and inefficient way to focus resources. Senator Warren closed her argument by reintroducing her bill to expand these reporting requirements and further diminish financial privacy, but it’s just as flawed now as it was last year.
All members of Congress should take careful note of a letter organized by Fight for the Future earlier this year. In that letter, the group warned: “Should cybercriminals successfully tempt the United States to abandon the human right to privacy and the U.S. Constitution, everyone will lose.” Unfortunately, the specter of crime has often overshadowed the true crimes taking place and led to over expansions of government. And unfortunately, the Bank Secrecy Act has been a near perfect example of a mere threat expanding the government’s reach. It’s time to carve a better future, not double down on old mistakes.
For more on the history of the Bank Secrecy Act, see “Revising the Bank Secrecy Act to Protect Privacy and Deter Criminals.”
A Breakdown of the Different CBDC Models
Members of central banks, international agencies, and private consulting firms have suggested a number of different central bank digital currency (CBDC) designs that subtly change how one might operate in practice. Generally, these CBDC models fall into two categories: retail and wholesale. But as this post will show, these categories have their own variations as well.
***Editor’s note: This post is a complementary resource for our recent briefing paper and forthcoming policy analysis addressing the risks of CBDCs.***
Read the rest of this post →The New Deal and Recovery, Part 23: The Great Rapprochement
What finally brought the Great Depression to an end? We’ve seen that, whatever it was, it took place not during the 30s but sometime between then and the end of World War II, when a remarkable postwar revival occurred instead of the renewed depression many feared. We’ve also seen that, while postwar fiscal and monetary policies weren’t austere to the point of preventing that revival, they alone can’t explain it, because they can’t explain the reawakening of private business investment from its decade-and-a-half-long slumber.
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