Sound Financial Policy

Americans’ financial privacy has been eroding for over 50 years, often hidden in the details of complex policies. Congress can establish stronger financial privacy protections by eliminating many Bank Secrecy Act reporting requirements. If financial records are needed, law enforcement should be required to show probable cause to obtain a warrant, a reform that Cato’s national survey suggests 83 percent of Americans favor.⁷ Congress should also enact inflation‐​adjusted reporting thresholds for remaining Bank Secrecy Act requirements as well as the Internal Revenue Code, eliminate the exceptions in the Right to Financial Privacy Act, and establish better public oversight for the Financial Crimes Enforcement Network.

Congress can implement many policies to improve competition and innovation in financial markets, including those that level the field on which the dollar competes with other potential means of payment. Two potential means of payment that have surfaced during the digital age are stablecoins and central bank digital currencies (CBDCs). Congress should provide disclosure‐​based regulations for stablecoins while preventing the Federal Reserve from issuing a CBDC for retail customers.

Cryptocurrencies remain subject to regulatory uncertainties that may hamper their development along with innovation more broadly. This potentially pushes entrepreneurs abroad and limits Americans’ ability to take advantage of these advances. Policymakers ought to provide a clear, practical test for determining whether a crypto project is decentralized and amend securities statutes to clarify that securities laws do not apply to decentralized cryptocurrency projects. Congress should also clarify the meaning of legal tender in U.S.C. § 5103, clarify the prohibition on counter­feiting U.S. coins in 18 U.S.C. §§ 485–497, remove the prohibition on minting coins of original design (in 18 U.S.C. § 486), and remove capital gains taxes applied to alternative currency use.

Congress should ensure that financial regulators do not function as central planners deciding which enterprises are worthy of capital, especially in the name of environmental, social, and governance (ESG) policy. Congress should clarify the scope of mandatory securities disclosures and shrink bank regulators’ responsibilities, thus limiting the extent to which ESG policy can politicize financial market regulation. Congress should clearly state that disclosures are limited to the type of information relevant to a company’s prospects for financial success (as originally contemplated by the 1933 and 1934 securities acts) and repeal the sections of the Dodd–Frank Act that direct the Securities and Exchange Commission to promulgate the conflict minerals and pay‐​ratio disclosure rules. Congress should also require banking regulators to consider solely economic and financial factors when promulgating regulations, rather than factors that might affect the public’s view of a bank, such as the bank’s so‐​called reputational risks.

So long as Congress is inclined to delegate responsibility for conducting monetary policy and limiting financial instability to the Fed, lawmakers should do more to improve the Fed’s performance. For instance, Congress can narrow and clarify the Fed’s legislative mandate and require that the Fed implement rules‐​based monetary policy. It can also level the field on which the dollar competes with other potential means of payment so that the Fed faces competitive pressure to preserve, and perhaps enhance, the U.S. dollar’s attractiveness. A more vibrant financial sector would complement a sounder monetary policy framework, thus providing more economic opportunity for millions of Americans.

Congress should enact an exemption to securities registration for equity offerings that raise funds below a certain threshold, such as $500,000 per year. It should also focus on decreasing the barriers to eligibility for accredited investor status. Congress, could, for example, consider investors advised by financial advisers who meet the current accredited investor definition as accredited themselves.

Even if the 2010 Dodd–Frank Act is repealed in its entirety, a dysfunctional regulatory framework would remain. Nonetheless, the legislation solidified the harmful view that federal regulators can and should prevent people from losing money in financial markets. The Dodd–Frank Act provides a false sense of security by conferring an aura of safety on firms that play by the rules. It should be repealed in its entirety. Congress should also shrink the regulatory state by eliminating duplicative federal agencies, narrow Fannie Mae and Freddie Mac’s focus to the financing of primary homes, revoke Fannie and Freddie’s exemption from the requirement to register their securities offerings under the Securities Act of 1933, limit the Federal Housing Administration’s single‐​family insurance portfolio to first‐​time homebuyers, and shrink the Securities and Exchange Commission’s scope to regulate money market mutual funds.