Fincen Spying Plan Invites Privacy Workarounds

The dangers to financial privacy are monumental. Consider an Obama administration plan to give spy agencies unfettered access to data on American citizens and others who bank in the U.S. 

Suspicious Activity Reports, filed by financial institutions that operate in the U.S., are the primary documents that the Financial Crimes Enforcement Network intends to share. The reports cover all personal cash transactions exceeding $10,000, suspected incidents of money laundering, loan fraud, computer hacking and counterfeiting. 

The Treasury Department proposal, revealed by Reuters last week, aims to consolidate financial data banks, criminal records and military intelligence. This initiative will put intelligence agencies, such as the Central Intelligence Agency and the National Security Agency, on the same footing as the Federal Bureau of Investigation, which currently does not have to make case-by-case informational requests to Fincen.

Also under the new proposal, Fincen's database would be linked to the Joint Worldwide Intelligence Communications System, which U.S. defense and law enforcement agencies use to share classified information.

Money was never meant to be a method of supranational identity tracking. Its use in that way could signal some level of law enforcement desperation. When all other enforcement tactics fail, surveil the finances.

More than 25,000 financial firms, including banks, securities dealers, casinos, and money transfer agencies, routinely file "suspicious activity reports" to Fincen, according to the Reuters article. Banks and other firms tend to over-report some financial details of ordinary citizens since the requirements for filing are so strict they don't want to be accused of failing to disclose activity that later proves questionable. 

Increasing encroachment against financial privacy like this Fincen move "raises concerns as to whether people could find their information in a file as a potential terrorist suspect without having the appropriate predicate for that and find themselves potentially falsely accused," Sharon Bradford Franklin, senior counsel for the Rule of Law Program at the Constitution Project, told Reuters.

One protection from becoming scooped up in a fishing expedition and being falsely accused is the use of virtual or alternative currencies. But this week, Fincen issued guidance on virtual currencies and regulatory responsibilities.

Clarifying circumstances where the "money transmitter" definition applies under the law, Fincen classified de-centralized virtual currency as a convertible virtual currency that has no central repository and no single administrator, and that persons may obtain by their own computing or manufacturing effort. Although bitcoin was not singled out by name, the guidance appears directed at cryptocurrencies that operate in a peer-to-peer, distributed fashion such as Bitcoin.

The primary impact of the likely tighter compliance will be felt by the bitcoin-to-fiat exchanges operating in the U.S. and this will lead to jurisdictional competition, as seen in online casino gambling where the more entrepreneurial jurisdictions rose to dominance by embracing the technology early and not overregulating.

Almost serendipitously, discussions about adding privacy extensions to the Bitcoin cryptographic money protocol have been increasing lately.

Bitcoin is nonpolitical money and it falls outside the scope of reporting financial institutions. Since bitcoin does not provide user and transactional privacy by default, multiple bitcoin wallets and Tor, a client software and volunteer server network that enables online anonymity, can enhance privacy without modification to the core Bitcoin code. Nonetheless, code-modifying proposals for augmenting Bitcoin privacy have been introduced. One idea calls for automatic mixing techniques, which would periodically give all users the opportunity to shuffle coins among one another, making the money harder to trace without implicating individuals. Another concept is "coin control," a method for users to select which of their wallet’s multiple addresses to use as the "from address" (currently picked somewhat randomly by the client software).