The Breakdown - Is the Bank Secrecy Act Unconsitutional?

Episode Date: November 19, 2023

A reading of a new essay and legal exploration from CoinCenter https://www.coincenter.org/its-time-to-have-the-conversation-is-the-bank-secrecy-act-unconstitutional/ Today's Sponsor: Kraken Kraken: See what crypto can be - https://kraken.com/TheBreakdown Enjoying this content? SUBSCRIBE to the Podcast: https://pod.link/1438693620 Watch on YouTube: https://www.youtube.com/nathanielwhittemorecrypto Subscribe to the newsletter: https://breakdown.beehiiv.com/ Join the discussion: https://discord.gg/VrKRrfKCz8 Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW

Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. What's going on, guys? It is Sunday, November 19th, and that means it's time for Long Read Sunday. Before we get into that, however, if you are enjoying the breakdown, please go subscribe to it, give it a rating, give it a review, or if you want to dive deeper into the conversation, come join us on the Breakers Discord. You can find a link in the show notes or go to bit.ly slash breakdown pod. friends, well, today we have one that is short, but highly impactful for this Long Read Sunday. So maybe it's not so much Long Read Sunday as much as Badass Read Sunday. Or maybe another way to put it

is really important topics that are totally taboo in Washington, read Sunday. Or maybe it's reject your shibboleths and slaughter your sacred cows day on Long Read Sunday. I mean, not for those of us in the crypto industry. I think you will find a lot of common cause with this piece. But it goes to the very heart of something that is totally inviolable and beyond question in Washington. Washington, D.C., which is, of course, the Bank Secrecy Act. What we are reading is the introductory blog post to a new report from CoinCenter called Broad, Ambiguous or Delegated, constitutional infirmities of the Bank Secrecy Act. That is a mouthy title, but CoinCender's position is better summed up by the title of

this blog post. It's time to have the conversation. Is the Bank Secrecy Act unconstitutional? Subheader? Beyond the speech and privacy issues, the BSA is a sweeping delegation of law-making power. So let's read the piece by Peter Van Valkenberg, from Coin Center, and then we will discuss it. Peter writes, today we're publishing another report on the Bank Secrecy Act entitled Broad, Ambiguous or Delegated, Constitutional Infirmities of the Bank Secrecy Act. In our 2019

report, electronic cash, decentralized exchange, and the Constitution, we argued that any application of the BSA's surveillance obligations to software developers would violate the First and Fourth Amendment rights of Americans. We reiterated those arguments in our recent comment on the proposed broker rule. This new report, however, looks at the BSA from another constitutional angle, the Supreme Court's current approach towards overbroad laws and the delegation of sweeping powers to the administrative state. As per the title, the report argues that the Bank Secrecy Act is either A, so broad as to criminalize everyday life, B, so ambiguous as to make uncertain its application to millions of Americans, or C, spared from being so broad or so ambiguous

by the exercise of legislative authority delegated by Congress to the Treasury Department. Each of these alternative interpretations of the BSA raises substantial constitutional concerns. In the end, we find that it's C unconstitutionally delegated, but how do we get there and what does that mean? Section. Broad The BSA allows the Secretary of the Treasury to demand transaction surveillance and reports of personal information from a category of entities defined as financial institutions. Originally, that category primarily consisted of insured banks, but over the years it has significantly expanded. The statute, however, doesn't set much of a limit to what should and should not fit in the

category, and offers sweeping powers for the Secretary to expand the range of obligated persons, as well as to arbitrarily exempt persons from obligations altogether. What that means in practice is that the executive branch, rather than elected members of Congress, has unbounded authority to decide who will and will not be obligated to engage in a mass financial surveillance program. One of the most flexible aspects of the statute that comes up often in the context of crypto is the definition of money transmitter, a subtype of financial institution. That definition includes anyone engaged as a business in the transmission of funds. Based purely on a plain reading of that text, the category can include anyone who moves money, even if it is their own money in the course of their

own business. If you pay your employees, you could conceivably be covered. If you get paid for your work, you could be covered as well. While that interpretation might seem wildly broad, it has indeed been the stated interpretation of regulators in the space. In past rulemakings, the Treasury Department has freely admitted that the definition of financial institution in sections 531A2 and C1 is extremely broad. And the absurd consequences of such a broad law have been mitigated at-hawk in a long list of administrative rulings and guidance documents that selectively exempt some and not others according to a non-statutory facts and circumstances test.

As FinCEN has said in response to regulatory comments, quote, FinCEN agrees that the breadth of the definition of money transmitter proposed in this rulemaking requires limitation to avoid both unnecessary burden and the extension of the Bank Secrecy Act to businesses whose money transmission activities either do not involve significant intermediation or are ancillary to the completion of other transactions. Breth on its own raises profound questions of constitutionality, but as our report outlines the fixes for that breadth by either A, finding the statute ambiguous

and narrowly interpreting it, or B, narrowing the statute using delegated authority from Congress, are equally problematic. Section. Ambiguous? As our report argues, the breadth of the BSA results in highly arbitrary enforcement, and the consequence of this is a kind of ambiguity over who will and who will not end up on the wrong side of an unlicensed money transmission prosecution,

a federal felony with swift and severe penalties. That ambiguity raises real questions of fairness and the rule of law. But that unfortunate outcome does not mean that the statute itself is ambiguous, it's just broad and selectively implemented at the discretion of the regulator. This freedom to interpret and reinterpret the law

as best suits the current administration is exactly the kind of administrative discretion that the Supreme Court has recently started limiting using the so-called major questions doctrine and associated limitations on Chevron defense to agency interpretation. In a series of recent cases, the court has seen fit to strike down rules when agencies have, quote, asserted highly consequential power beyond what Congress could reasonably be understood to have granted. A report looks at the BSA in light of Chevron, the major questions doctrine, and also in light of the preferred modes of statutory interpretation favored by the current justices. While there are reasons to hope for a finding that the agency has vastly outstripped its authority,

we don't believe that to be clearly the case. Our analysis of the BSA leads to a somewhat different conclusion. The law is broad and Congress likely intended it to be so. The text itself is not ambiguous and the only thing that saves it from effectively criminalizing everyday life is the fact that Congress also delegated all the power to define, expand, and limit its scope to the secretary. Section. Delegated. That brings us to delegation. While major questions doctrine and the narrowing of Chevron defense have been in the spotlight lately,

the current court has also expressed strong interest in another route towards cabining the authority of the administrative state, the non-delegation doctrine. In a nutshell, the doctrine says that Congress can't simply hand its lawmaking power to the executive branch and hope for the best. It can only assign to the executive gap filling and fact-finding authority, and it must pass legislation specific enough so that we can be sure the administration is exercising that limited authority appropriately. The BSA, however, is a massive and unbounded delegation of authority. We find that the entirety of the BSA can be applied and implemented based on the sole discretion of the Secretary of Treasury. That unbounded discretion is not a delegation of mere gap-filling authority. It's Congress passing the buck on a

massive surveillance law. As we write, quote, if all that saves the BSA's definition of financial institution from unconstitutional breadth is the executive's branch delegated power to rewrite the statute, then that delegation itself is likely unconstitutional. Over the years, we've applauded the Treasury Department for its wise and reasonable usage of that delegated authority. FinCEN's 2019 virtual currency guidance in particular placed reasonable limits on who in the crypto space was obligated to do surveillance. Increasingly, however, we worry that this unbridled authority may be abused to wage a war against crypto. For that reason, as well as a principal belief in the rule of law and our constitutional separation of powers, it's time to question the validity of that

delegation and the constitutional propriety of the Bank Secrecy Act itself. Congress and Congress alone. Not the president nor the unelected officials at Treasury should have the final word on who is and is not a regulated financial institution and who must thereby surveil and report on the activities of their fellow Americans. Now, even though it was short, that was pretty dense, and so I only want to add this piece of things. Coincenter here is very clearly focused on a sort of narrow legal interpretation of the Bank Secrecy Act and the potential holes that it creates and the legal challenge that it opens up. What I'm interested in is getting away from the idea that we can't question the underlying premise of things like the Bank Secrecy Act,

just because we live in a scary world. Ever since September 11th, and the beginning of this century, the issue of safety on the one hand versus personal liberty on the other has become more and more acute, and more real, with tradeoffs in the real world. I believe that we are at another inflection point moment when it comes to that challenge. If you watch the rhetoric, for example, in the AI safety space, much of the implications of it is a massive increase in state power. That's not to say a priori that that's wrong or that some of you won't agree with that, but it's a conversation that we need to have. And I believe it's the type of conversation that even once resolved should not ever be treated as fully resolved. When we have rules like the Bank Secrecy Act

that are so assumed that we're not allowed to question them anymore, we've lost something fundamental in what it means to be American. I am glad that CoinCenter is making this challenge, and I hope that it starts an even bigger conversation than they intended. For now, though, we will wrap this quick little LRS there. I appreciate you guys listening as always. Until next time, be safe and take care of each other. Peace.