Written by: Aiying
Two seemingly unrelated stories, one about cryptocurrencies and the other about banks, are actually related to anti-money laundering restrictions.
In the first story, the New York Times talked about how more and more ordinary people have had their bank accounts closed because the banks thought they were doing something risky. In the second story, the U.S. government proposed a new rule that would require financial institutions to report to the government a list of customers who use cryptocurrency mixers.
1. Anti-money laundering restrictions are like a compromise between the government and citizens. Although this compromise is a bit tasteless, I will tell you why.
The U.S. government and its various law enforcement agencies have the power to access all bank records for the purpose of fighting crime. They can access them directly, meaning they don't have to go through the standard process of getting approval from a judge. This is a very powerful power. To balance this power, a compromise was reached between the government and citizens that limited the government's access to bank records. They set certain key financial limits, and only transactions above these limits will be monitored by the government.
The most common way the government sees your personal financial information is to require banks to file a currency transaction report, or CTR, every time someone deposits or withdraws cash. However, not all cash transactions are reported by banks. Banks are only required to file reports for transactions over $10,000. So, if you withdraw $9,999, your name and address will not be reported to the government. However, if you withdraw $10,001, you lose this protection and your information will be reported to the government.
The U.S. government’s direct access to bank records dates back to 1945, when then-Treasury Secretary Henry Morgenthau issued an executive order during wartime that required banks to begin reporting the public’s currency deposits and withdrawals. These reports, known as TCR-1s, were sent to the government each month and included information about the amounts of cash and the identities of the people making the transactions.
Morgenthau's reason for making this report was that he wanted to eliminate the black market that had developed as a way for people to circumvent the wartime rationing program. But while the war soon ended and rationing stopped, the practice of cash reporting continued into the 1950s and 1960s, even though it could be legally questionable in peacetime.
In 1970, the U.S. Congress passed a law called the Bank Secrecy Act, which requires banks to record detailed information about cash transactions and submit it to the government. Over the years, the content of this law has been continuously expanded. For example, in 1994, banks were also required to screen suspicious transactions and submit reports.
While such laws can help the government fight crime, they also create some problems for society. First, banks need to spend a lot of time and money to make these reports, which leads to some customers, especially those whose transactions may be risky but legal, having their accounts closed by banks. In addition, this also infringes on the public's privacy rights because the government can directly obtain bank records without probable cause or a search warrant.
The act was first challenged in the mid-1970s, but the Supreme Court ruled that the Bank Secrecy Act was not unconstitutional because there was no right to privacy in bank records.
The last line of defense against excessive government intervention at this time is to set an anti-money laundering threshold. This threshold was originally set by Morgenthau in 1945 at $10,000. This amount was reaffirmed in 1972, but has not changed since then.
However, due to inflation, this amount has actually been greatly reduced. When the Bank Secrecy Act was first passed, $10,000 had the purchasing power of $75,000 today. Therefore, over time, more and more daily cash transactions have been included in the scope of reporting, which not only means that the scope of government surveillance has expanded, but also leads to more bank accounts being closed.
In 1994, the government began requiring banks to report suspicious activity over $5,000, an amount that has now been raised to $10,000. Due to inflation, $5,000 is actually worth half of what it is today, causing more common transactions to be flagged as suspicious. Time magazine noted that customers who are flagged as suspicious may be driven away by banks because banks do not want to process transactions that may cause trouble.
To solve this problem, we can increase the reporting threshold once, for example to $15,000, and then adjust it annually for inflation. In this way, only transactions above this amount will be marked as suspicious, which reduces the chance of ordinary transactions being mislabeled.
2. Reporting on the use of cryptocurrency mixing may expose many innocent cryptocurrency users
Now, let's look at cryptocurrencies. In addition to requiring reporting of large transactions and suspicious activity, the government now requires reporting of cryptocurrency "mixing." Mixing is mixing your cryptocurrency with someone else's so that it's hard to trace the original transaction. The government considers this a way to launder money, so banks are required to report any transactions that may involve mixing.
Interestingly, the government has not set a minimum threshold for such reporting, meaning that no matter how small the transaction is, as long as it involves coin mixing, it needs to be reported. However, coin mixing is not necessarily money laundering. Because all cryptocurrency transactions are public and can be tracked by anyone, coin mixing may also be just for personal privacy protection.
If the government does not set a minimum threshold for reporting, then there is a possibility that many cryptocurrency users will be flagged as suspicious for insignificant mixing activities, which will result in many users being turned away from banks. This is just like the situation in which bank customers were driven away before, but now it happens to cryptocurrency users.
The government has changed the reporting thresholds many times in the past, for example in the 70s and 95, the government raised the reporting thresholds based on public feedback. So, if the government can also set an appropriate reporting threshold for cryptocurrency mixing, it can prevent innocent users from being marked as suspicious because of some small mixing transactions.
