SEC Chair Atkins Criticizes Financial Surveillance, Supports Crypto Privacy
Commentary by Steven Lofchie
SEC Chair Paul Atkins asserted that the SEC's data collection tools, including the Consolidated Audit Trail, swap data repositories, and Form PF, have expanded in ways that "increasingly put the liberty of American investors at risk."
Speaking at a crypto roundtable on financial surveillance and privacy, Mr. Atkins argued that the Commission had moved closer toward mass surveillance as a result of its good intentions to protect investors and detect fraud. Mr. Atkins said the SEC is now taking steps to scale back some of CAT's most sensitive data elements and to re-examine its scope and cost. He acknowledged that the use of crypto presents both risks and opportunities for financial privacy. He claimed that "[p]ublic blockchains are more transparent than any legacy financial system," and that "[c]hain analytics firms are already exceptional" at "linking on-chain activity to off-chain identities."
Mr. Atkins argued that "[c]omplete financial transparency on public blockchains can disincentivize important market [] activity." He said "institutions depend on the ability to build positions" and "provide liquidity without...telegraphing that activity to competitors and predatory traders." Mr. Atkins asserted that "[i]f every order and portfolio adjustment [were] visible in real time, [markets] could invite front-running and copycat behavior [that] make[s] it harder...for firms to manage risk." Mr. Atkins said "privacy-preserving tools...such as zero-knowledge proofs [and] selective disclosure...allow users to prove compliance without handing over their entire financial history...to intermediaries or the government."
Mr. Atkins said Americans should be able to use privacy tools without "falling under suspicion." He claimed the Commission must "balance the government's interest in deterring" national security threats with the "public's interest in privacy" while "giving room for innovation to flourish."
Commentary
Chair Atkins raises important concerns about the risks that come with regulators collecting massive amounts of personal and financial information. The Consolidated Audit Trail, for example, may be of value to U.S. regulators, but perhaps it is of more value to bad actors, who could be unconstrained as to its use. Further, why does it make sense to put FINRA in the position of defending this information against every hacker in the world; it is not a task for which FINRA should be made responsible. (See; e.g.; SIFMA Argues CAT Should Be Liable for Data Breaches; SIFMA Urges SEC to Slow Down Rulemaking, Prioritize Cybersecurity of the CAT System; SEC Commissioner Hester Peirce Questions Current Data Collection Practices.)