The Most Recent Privacy Conflict in the World of Cryptocurrency

By the end of May, the U.S. Security and Exchange Commission’s (SEC) newest mass surveillance tool, the Consolidated Audit Trail (CAT), became “fully operational.” SEC registered broker-dealers, exchanges, and alternative trading systems are now required to gather and report trade information related to every U.S. trade, as well as the personal information of every U.S. retail brokerage customer.

While this clearly affects customers of traditional financial institutions, it may also seriously compromise the personal privacy of participants in the digital asset economy as well.

Marisa Coppel serves as head of legal for the Blockchain Association, while Amanda Tuminelli is the chief legal officer of the DeFi Education Fund. They lead the organization’s impact litigation and policy efforts.

It is important to note that the views expressed in this column are those of the author and do not necessarily reflect those of CoinDesk, Inc. or its owners and affiliates.

Created to accumulate and retain detailed customer data across U.S. financial markets, the CAT will be the largest database of securities transactions ever constructed. Despite being portrayed as a tool to “allow regulators to efficiently and accurately track all activity throughout the U.S. markets,” the CAT has the potential to enable extensive government surveillance.

Under the SEC’s CAT-related requirements, regulated entities will be compelled to collect various data points about trades, traders, and retail customers, including customer names, addresses, and account details. For digital asset market participants, this information could extend to transaction identifiers and wallet addresses, offering insight into users’ transaction information for all time.

The implications for the digital asset industry are alarming, especially with the recent finalization of the Dealer rule-making, which is being challenged in federal court. If the SEC moves forward with the proposed rule that expands the definition of what constitutes an “exchange,” the worries will only increase.

If these new rules withstand legal challenges, the designated “dealers” and “exchanges” will need to report digital asset users’ information to the CAT.

This means that vast amounts of crypto trading data and personal customer information will be subject to the SEC’s surveillance. What’s more, the CAT data is available not only to the SEC but also to various government agencies and private self-regulated organizations without the need for a warrant or reasonable suspicion of wrongdoing. This expands the scope of who could potentially access Americans’ financial and trading activities in the name of simplifying the SEC’s monitoring efforts.

Former Attorney General William Barr has voiced concerns over the potential violations of constitutional rights that may arise from the CAT program, highlighting the need for the SEC to respect individual constitutional rights in handling data.

SEC Commissioner Hester Peirce has also warned about the surveillance state implications of CAT, emphasizing the need to balance privacy and security concerns. Despite recognizing the security risks associated with the database, the SEC has yet to fully implement amendments to enhance cybersecurity.

The SEC has already faced legal challenges over the implementation of CAT. The American Securities Association and Citadel, as well as the New Civil Liberties Alliance, have filed lawsuits to challenge CAT’s release. These lawsuits underscore the importance of checks and balances in curbing governmental overreach.

Privacy is a fundamental right that should not be sacrificed in the name of regulatory efficiency. The crypto community must make its opposition to CAT known and work to protect Americans’ constitutional rights. Excessive financial surveillance like CAT poses a significant threat and should not be allowed to become law without proper oversight.

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