US SEC Chairman's Roundtable Speech: Balancing Crypto Privacy and Financial Regulation

Source: SEC official website; Compiled by: Jinse Finance

On December 15 local time, Paul S. Atkins, Chairman of the U.S. Securities and Exchange Commission (SEC), delivered a speech at the SEC Cryptocurrency Working Group's roundtable on financial surveillance and privacy. He stated that blockchain has extremely strong capabilities in related-party transactions and sender identification, and if regulatory direction is misguided, the crypto ecosystem could be pushed toward "the most powerful financial surveillance architecture in history."

Paul S. Atkins warned that if the government "treats every wallet as a broker, every piece of code as an exchange, and requires every transaction to be reported," it will turn the industry into a "financial panopticon." However, he also emphasized that there still exists a feasible path that balances security and innovation without sacrificing personal privacy. The discussion around the boundaries of blockchain privacy and regulation is becoming a core regulatory issue.

The full text of Paul S. Atkins' speech is as follows:

Ladies and gentlemen, good afternoon, and thank you all for coming. First, I would like to thank Commissioner Hester Peirce and the entire Cryptocurrency Working Group for organizing today's roundtable. I would also like to thank the distinguished panel of experts who have traveled to Washington to share their insights on 21st-century financial privacy. Before I present my own views, I must reiterate that the opinions I express here today are my own and do not necessarily represent the position of the SEC or any other commissioner.

The participants in today's roundtable will explore a question that is fundamentally American in nature: Can people participate in modern financial activities without sacrificing privacy? This contradiction raises many important issues. On one hand, the federal government has an obligation to protect U.S. citizens from threats to national security interests, including curbing illegal financial activities through measures such as the Bank Secrecy Act, as implemented by the Treasury Department and other agencies. On the other hand, the ability of citizens to freely conduct personal affairs (including financial matters) without surveillance from the government or other institutions is one of America's core values.

The emergence of cryptocurrencies has served as a catalyst, providing us with a unique opportunity to consider this issue in the context of 21st-century technology. Since January of this year, the current administration has emphasized returning power to the American people, enabling them to manage their own affairs, including in the realm of cryptocurrency.

For our part, the SEC must face up to its own achievements in balancing investor protection and privacy. The Commission has established tools such as the Consolidated Audit Trail (CAT), swap data repositories, and Form PF, claiming these tools are essential for protecting investors, combating fraud, and maintaining market security. However, the federal government's insatiable appetite for data has led to the continuous expansion of these tools, increasingly threatening the freedom of American investors and imposing costs that often yield little benefit, as the government does not even use all the information submitted. For example, although the Commission created CAT with the intention of gaining a clearer understanding of trading across markets, it ultimately evolved into a powerful system that brings the SEC closer to mass surveillance. For this reason, we have taken steps to reduce some of the most sensitive data elements in CAT and to re-examine its scope and cost.

In his book "The Fatal Conceit," Friedrich von Hayek criticized the belief held by many government officials that the solution to problems is to gather enough smart people in a room and collect enough information so that these all-knowing individuals can, based on all this information, find a perfect solution. However, we have seen how poorly this approach works in practice—perhaps it doesn't work at all. So, how right Dr. Hayek was!

With the advent of cryptocurrencies, it is not hard to imagine a future where the government and a range of intermediaries can peer into every aspect of an individual's financial life. Regulators may have a strong appetite for data, but this tendency is clearly at odds with the essence of the free society that made America great.

Therefore, regulators must remain humble and principled as they embrace the opportunities brought by cryptocurrency. In the analog era, financial regulation was naturally limited by paper records, physical distance, and manual processes. These delays, while inconvenient for the government, also naturally limited the amount of information the Commission could obtain about any American investor. However, in the digital age, these limitations have been significantly reduced, making today's discussion about cryptocurrencies and privacy-enhancing technologies especially important.

Public blockchains are more transparent than any traditional financial system. Every value transfer is recorded on a ledger that anyone can access. On-chain analytics companies have already excelled in helping law enforcement link on-chain activity to off-chain identities. In other words, if regulatory direction is misguided, cryptocurrency could become the most powerful financial surveillance architecture in history.

In fact, if the government treats every wallet as a broker, every piece of software as an exchange, every transaction as a reportable event, and every protocol as a node for surveillance, then the government will turn this ecosystem into a financial panopticon.

At the same time, this technology also brings privacy protection tools that the analog world cannot provide, such as zero-knowledge proofs, selective disclosure, and wallet designs that allow users to prove compliance without providing intermediaries or the government with complete financial records or personal details. We can envision a system in which regulated platforms can prove their users have been screened without permanently retaining detailed records of every payment, transaction, or donation.

These tools will also help our markets continue to operate smoothly as they migrate on-chain. The inherent full financial transparency of public blockchains may suppress important financial market activities.

For example, many institutions rely on the ability to build positions, test strategies, and provide liquidity without immediately exposing these activities to competitors and predatory traders. If every order, hedge, and portfolio adjustment is visible in real time, we may see front-running, copycat behavior, and "herd selling," which would make it harder for companies to manage risk. If every inventory imbalance or client fund flow is immediately exposed to the market, the appeal of market making and underwriting will be greatly diminished.

This technology makes it possible to balance the government's interest in curbing national security threats with the American public's interest in privacy. But to better achieve this balance, we must ensure that Americans are not immediately suspected simply for using these tools. Protecting citizens' lawful activities from mass surveillance, while ensuring the government can fulfill these important functions, is the best way to safeguard national security and fundamental civil liberties, while also providing room for innovation to flourish.

Therefore, this is a matter of great importance—the issues before us are far-reaching and have lasting impact. At the start of this roundtable, I look forward to hearing more insights from the experts on how the Commission can protect Americans' privacy and how cryptocurrency privacy tools can reduce, rather than increase, the necessity for mass financial surveillance.

I firmly believe that as long as we work together, we can build a framework that ensures technological progress and financial development do not come at the expense of individual freedom.

Unfortunately, due to other commitments, I am unable to attend the entire meeting, but I am pleased to be here today to meet with you all. Thank you for taking the time to attend. I look forward to an exciting discussion ahead.