How my views on financial privacy have evolved over a decade

I began exploring the topic of financial privacy and payment anonymity in the early days of this blog. Over the past decade, my views have shifted significantly—here's how and why.

Rereading my earliest mentions of financial privacy, they now seem a bit... idealistic? extreme? For instance, in my 2014 post entitled Fedcoin, a central-bank issued digital currency, I suggested that the product should be 100% anonymous, like coins and banknotes.

Criminals would undoubtedly exploit unlimited anonymous digital currency, as I acknowledged in a 2018 article entitled Anonymous digital cash. But I figured that the bad guys would find their own ways to transact anyways, say through their own mafia-created payments system, so central banks may as well go forward with anonymous digital currency, the benefits to civil society of unlimited e-cash ultimately outweighing the cost.

I wouldn't support these same ideas today, or would at least modify them, as I'll show further down.

But idealistic and extreme aren't quite the right words. I think that I was right, at least when looking at things from a certain vantage point, but it was still early in my blogging career and I hadn't yet explored other vantage points

To be clear, financial privacy, or the ability to make transactions anonymously or near-anonymously, isn't just something that criminals require. It's crucial for regular folks, too, and in my earlier blog posts I spent a lot of time detailing why this is so. After a cashier dropped my card behind the counter (and potentially skimmed it?), I wrote that cash provides buyers with a "shield from everyone else involved in a transaction" in my 2016 post In praise of anonymous money. And I still agree with that, and to this day always pay with cash when the store I'm at feels a bit sketchy. I worry that this shield will disappear as cash usage continues to decline.

Civil society's need for private transactions isn't just a weird fringe view. In a 2018 entitled Money is privacy, I described the work being done on privacy and payments by Federal Reserve researchers Charles Kahn, James McAndrews, and William Roberds. Licit transactions can unintentionally evolve into a long-term relationship, they write, including clawbacks, extraterritorial rulings, and new forms of product liability. To boot, personal information linked to digital transactions can be stolen in data breaches.
 
According to the three Fed researchers, the ability to transact anonymously converts a potentially thorny transaction into a one-and-done relationship. Licit payments that might have otherwise been deemed too dangerous can proceed, the extra trade making the world better off. (See also my 2020 article Central banks are privacy providers of last resort.)

As for crypto, I've described blockchains as dystopian hellscapes or panopticons, because every single transaction is mapped out for all to see. That makes blockchains just awful places to carry out conventional business. Firms require a degree of secrecy in order to hide their corporate strategies and tactics from competitors—but the medium doesn't permit secrets. Blockchains need more privacy. (See my 2022 post DeFi needs more secrecy, but not too much secrecy, and the right sort of secrecy). 

So what changed?

Starting in 2018, I focused more on studying fraud, including ransomware, tax evasion, and gift card schemes. I found gift card fraud particularly intriguing: semi-anonymous payment systems linked to Google Play and Apple iTunes have enabled an entire industry of scammers, including IRS and tech support fraudsters, to launder stolen funds. Network operators like Google and Apple, as well as major retailers such as Target and Walmart, quietly profit from all of this fraud. (See Gift Cards: When Good Products Do Bad Things [2021] and In-game virtual items as a form of criminal money [2019].)

Which led me to my next big truth: if privacy is crucial, so is the necessity of criminalizing money laundering.

Money launderers are the financial intermediaries who, knowing full well that a customer's funds are dirty, conduct transactions with them anyways, in a way designed to disguise its source.

The willful laundering of a criminal's money is an extension of the original crime, making a launderer just as morally and ethically culpable as the criminal they are helping. By facilitating the final release of illicit funds, the money launderer enables the crime to fulfill its purpose, completing the damage caused by the initial offense—be it theft, extortion, or human smuggling. This is why the launderer's actions deserve to be criminalized. (See A short and lukewarm defence of anti-money laundering standards from 2021).

The crime of money laundering bears a striking resemblance to the centuries-old crime of fencing—the art of accepting and redistributing stolen property. (See my 2024 post "I didn't launder the cash, your honor. The robot did") In earlier times, thieves were responsible for reselling their stolen goods themselves. However, by the 17th century, this task was often outsourced to specialized intermediaries, or 'fences.' At first, there was no legal term for this crime, but in 1692, England formally criminalized fencing, and deservedly so.

Thinking more about the crime of money laundering led me to become more critical of stablecoins, for instance. From 2014-2018 my articles on stablecoins were mostly neutral or positive, but now my posts focus on the fact that stablecoin issuers, by turning a blind eye to those using their platform, have allowed themselves to become launderers for all types of criminals. (Among others, see my 2019 post From unknown wallet to unknown wallet and my 2023 post Why do sanctioned entities use Tether?)

At this point, you may be able to see my conundrum.    

If, like fencing, money laundering should be criminalized (and indeed it is illegal in most parts of the world), that collides with my prior belief in the importance of financial privacy. After all, the only way for a banker, money transfer agent, or stablecoin issuer to be safe from a money laundering charge is to show that they did a good faith job collecting enough personal information to ensure that they weren't dealing with criminals. And giving up personal information is necessarily privacy-reducing.

One way to resolve my conundrum would have been to pick a side and advocate for it, but I think both sides are important, so I've generally tried to find a compromise. Most of my writing on the topic over the last five or six years has been trying to wrestle with where to draw the line between financial privacy and the crime of money laundering. 

My compromise position has generally advocated a privacy safe harbour for small day-to-day transactions. But anything above a certain monetary ceiling needs to be identified in order to avoid a money laundering charge.

Here are some examples of my often clumsy attempts to balance the two ideals:

• The purchasing power of the $100 note has been eaten away by inflation. Let's improve basic payments anonymity by re-introducing $500 notes, but burden those notes with a tax in order to make up for the benefits accruing to criminals. See my posts A tax, not a ban, on high denomination banknotes and Pricing the anonymity of banknotes from 2018, and Supernotes from 2019.
• If we’re going to issue a central bank digital currency, it shouldn’t be fully anonymous or fully surveilled. Instead, it should provide a limited, rationed degree of anonymity. See The dematerialization of cash (2017) and Anonymity vouchers (2019).
• Below a certain monetary threshold, cash transaction reports (CTRs) and suspicious activity. reports (SARs) needn't be filed, which means small transactions enjoy a degree of privacy. However, these thresholds are not adjusted for inflation. To preserve the small privacy safe harbour, those thresholds should rise over time in-step with the general price level. New financial products should enjoy the same shield. (See my 2020 article Why Aren’t Anti-Money-Laundering Regulations Adjusted for Inflation? and my 2023 posts In praise of anti-money laundering thresholds and Even crypto mixing deserves a threshold).
• While the crypto privacy bot Tornado Cash makes blockchain transactions private, it is also a money laundering machine, a point I made multiple times beginning in 2021 with Tornado Cash and money laundering. The proper way to build a privacy bot is to take a balanced approach that begins with screening out bad actors, and only then provides privacy, thus ensuring that the tool isn't used for laundering money. (I explore this balanced approach in my 2022 post Crypto’s privacy/commingling dilemma , my 2024 post "I didn't launder the cash, your honor. The robot did" and my 2023 article Thoughts on Privacy Pools and the law.)
  

Balancing the two ideals rather than taking an either/or approach has led me to adopt a more comparative approach to thinking about financial privacy. I've begun to analyze cross-country differences in the intensity of financial surveillance as conducted by national financial intelligence units. Canada, for instance, has chosen a balancing point that is far more in favor of financial privacy (and accordingly more accepting of money laundering) than the U.S. has, as illustrated in my 2024 post Your finances are being snooped on. Here's how.

So that's where I've landed after ten years of writing about privacy. Hard-core privacy advocates and civil libertarians would probably describe me as a sell-out or a wishy-washy centrist because I'm willing to compromise on financial privacy. Fair enough. But I do wonder how many privacy advocates would go so far as to call for an all-out decriminalization of money laundering. Doing so would maximize privacy, but surely no privacy advocate thinks that bankers who clean money for the mob should by allowed to walk free. We are probably closer than they think.

I look forward to seeing how my opinions evolve over the next ten years, as I'm sure they will. Thoughts or comments?

Pricing the anonymity of banknotes

Banknotes are useful. Not only do they provide their owner with a standard set of payments services, they also offer financial anonymity. This post introduces the idea of trying to price the anonymity component. 

To help think about why we might want to price anonymous banknote usage, I’m going to make an analogy. Imagine Walmart sells special suits that allow people to become invisible. While most Walmart customers always pay for the goods they find in the aisles, a few try these invisible suits on, grab a bunch of stuff, and sneak out without paying. The product is weaponized and turned against its provider.

This same sort of weaponization characterizes the modern provision of banknotes. The government, like Walmart, provides citizens with a privacy-enhancing product: cash. Because its coins and banknotes don’t leave a paper trail, they act as a financial cloak. In the same way that an invisible suit can be used to evade Walmart’s checkout counter, a government-issued banknote can be turned against its provider by allowing users to avoid paying for the government services they have consumed. 

Walmart may wish to do something about the weaponization of invisible suits, especially if the costs imposed by abusers of suits begin to exceed the amount of income the company gets from buyers of invisible suits. One option Walmart has is to stop selling the product. No one would fault them for putting an end to an unprofitable business line. Invisible-suit aficionados could just shop elsewhere. 

But what if Walmart is society’s only provider of invisibility? This complicates things. While a few bad apples regularly abuse Walmart’s invisible suits by using them to steal, many others use the suits in legitimate ways. So while a decision to stop selling invisible suits might improve Walmart’s finances, it might also make society worse off. 

This same tension crops up in the debate over the future of cash. A ban on cash would help reduce tax evasion and improve government finances. But since banknotes are the only anonymous financial product, and no other entity is permitted to provide banknotes, a ban would put an immediate end to financial privacy. Because privacy is something that regular folks value for licit reasons, their welfare would be reduced.

Say Walmart does the noble thing. It continues to stock invisible suits to meet the public’s demand for privacy. But the company still has costs it must meet, including wages, inventories, and rent, and with a steady loss of payments facilitated by the weaponization of invisible suits, that hurdle becomes much harder to clear. To plug deficits, Walmart may have to ask all its rule-abiding customers to pay a little bit more for their purchases by raising all of prices by a little bit. 

But an across-the-board price increase hardly seems fair. Those abiding by Walmart’s rules are being asked to make up for a shortfall that is entirely the fault of suit-stealing rule breakers. Honest shoppers who don’t generally like to use invisible suits will be particularly furious — and who can blame them? They are being asked to pay more for the goods they hold dear in order to support the use of a single product they never cared for much anyway. 

This same lack of fairness plagues modern tax systems. The government needs to fund (via taxes) the services it provides, but the presence of cash is weaponized against the system by tax cheats. The funding gap that emerges must be made up for by all of the remaining citizens — the non-cheaters. So taxes, or the price of government services, will be higher in the presence of cash than in a world without cash. Non-cheaters, particularly those who don’t use cash, will feel betrayed because they must pay higher taxes to support the ongoing provision of a product they don’t necessarily value. 

Walmart may have a better option. Instead of increasing the price of all goods to make up for the behavior of a few invisible-suit users, it can just raise the price of suits high enough to make up for the shortfall. So customers who like invisibility end up bearing the costs imposed by thieves who weaponize suits. This targeted approach seems like a fairer path for Walmart to take. It releases a large chunk of its customer base from the obligation of offsetting the invisibility-induced shortfall while still giving those who value the privacy provided by invisible suits the option of buying them.

If setting a higher price for invisibility is the best option for Walmart, what about modern banknote-providing governments? In the same way that Walmart increases the price of invisible suits to offset the shortfall created by those who weaponize them, a government can introduce a levy on cash users. Rather than placing this levy on all banknote denominations, it might target high-denomination banknotes instead. The idea is that bulky $1s and €5s may be less useful in large-scale tax evasion than $100s and €200s. 

By setting a levy or negative interest rate of 5 to 10 percent per year on high-denomination notes (there are various ways to do this), the government would be able to earn a large-enough stream of revenue to help offset the shortfall created by cash-using tax evaders. The effect would be a lower tax bill for all non-cheaters, both for those who generally do not use cash and those who use only small-denomination notes ($1 and €5s). In effect, the anonymity provided by $100s and €200s would now be directly paid for by the users of those $100s and €200s. Unlike an all-out ban on banknotes, financial anonymity would still be provided. 

I think it makes sense for the Walmart in our thought experiment to give anonymity pricing a shot. Maybe governments should entertain the idea, too.

[This post was originally published at the Sound Money Project. I've modified it slightly for clarity.]

Setelinleikkaus: When Finns snipped their cash in half to curb inflation

On the last day of 1945, with World War II finally behind it, Finland's government announced a new and very strange policy.

All Finns were required to take out a pair of scissors and snip their banknotes in half. This was known in Finland as setelinleikkaus, or banknote cutting. Anyone who owned any of the three largest denomination Finnish banknotes — the 5000 markka note, the 1000, or the 500 — was required to perform this operation immediately. The left side of the note could still be used to buy things, but at only half its value. So if a Finn had a 1000 markka note in their wallet, henceforth he or she could now only buy 500 markka worth of items at stores. As for the right side, it could no longer be spent and effectively became a bond (more on this later).

Source: Hallitus kansan kukkarolla, by Antti Heinonen

Setelinleikkaus was Finland's particular response to the post-War European problem of "monetary overhang," described in a 1990 paper by economists Rudi Dornbusch and Holger Wolf. After many years of war production, price controls, and rationing, European citizens had built-up a substantial chest of forced savings, or involuntary postponed consumption, as Dornbusch & Wolf refer to it. With WWII now over, Europeans would soon want to begin living as they had before, spending the balances they had accumulated on goods and services. Alas, with most factories having been configured to military purposes or having been bombed into dust, there wasn't nearly enough consumption items to make everyone happy.

It was plain to governments all across Europe what this sudden making-up of postponed consumption in a war-focused economy would lead to: a big one time jump in prices.

This may sound familiar to the modern day reader, since we just went through our own wartime economy of sorts: the 2020-21 battle against COVID and subsequent return to a peacetime economy. The supply chain problem caused by the COVID shutdowns combined with the big jump in spending as lockdowns expired, spurred on by a big overhang of unspent COVID support cheques, led to the steepest inflation in decades. 

According to Dornbusch and Wolf, European authorities fretted that the post-WWII jump in prices could very well spiral into something worse: all-out hyperinflation, as had happened after the first World War. Currencies were no longer linked to gold, after all, having lost that tether when the war started, or earlier, in response to the Great Depression. 

To prevent what they saw as imminent hyperinflation, almost all European countries began to enact monetary reforms. Finland's own unique reform — obliging their citizens to cut their stash of banknotes in two — would reduce the economy's stock of banknotes to just "lefts," thereby halving spending power and muting the wave of post-wartime spending. After February 16, 1946 the halves would be demonetized, but until then the Finns could continue to make purchases with them or bring them to the nearest bank to be converted into a new edition of the currency.

As for the right halves, they were to be transformed into a long-term investment. Finns were obligated to bring each right half in to be registered, upon which it would be converted into a Finnish government bond that paid 2% interest per year, to be repaid four years later, in 1949. It was illegal to try and spend right halves or transfer their ownership to anyone else (although it's not apparent how this was enforced).

In theory, turning right halves into bonds would shift a large part of the Finnish public's post-war consumption intentions forward to 1949, when the bonds could finally be cashed. By then, the economy would have fully transitioned back to a civilian one and would be capable of accepting everyone's desired consumption spending without hyperinflation occurring.

To our modern sensibilities, this is a wildly invasive policy. Had setelinleikkaus been proposed in 2022-23 as a way to dampen the inflationary effects of the reopening of COVID-wracked economies, and we all had to cut our dollar bills or yen or euros in half, there probably would have been a revolt.

With the benefit of hindsight, we know that setelinleikkaus didn't work very well. Finland continued to suffer from high inflation in the years after the war, much more so than most European countries did.

Why the failure? As Finish economist Matti Viren has pointed out, the reform only affected banknotes, not bank deposits. This stock of notes only comprised 8% of the total Finnish money supply, (Finns being  uncommonly comfortable with banks) so a major chunk of the monetary overhang was left in place.

Another glitch appears to have been the public's anticipation of setelinleikkaus. According to
former central banker Antti Heinonen, who wrote an entire book on the subject, banks began to advertise their services as a way to avoid the dangers of the upcoming monetary reform (see images below). So Finns deposited their cash prior to the final date, the monetary overhang to some degree evading the blockade.

Finnish bank advertisements warning of the upcoming note cutting
Left: "Bank accounts are fully secured in the banknote exchange."
Right: "Depositors are protected."
Source: Hallitus kansan kukkarolla, by Antti Heinonen (Translations via Google Translate)

If the Finnish experiment was a dud, other European responses to the post WWII overhang — either  redenominations, temporarily blocking of funds, or all-out write offs of bank accounts — were more successful. Germany's monetary reform of 1948, which introduced the Deutschmark and was later dubbed the "German economic miracle", is the one that captures the most attention, but here I want to focus on a lesser known reform.

Belgium's Operation Gutt, named after Belgium's Minister of Finance, Camille Gutt, was the earliest and perhaps the most dramatic of the post-war monetary operations. Taking place over four days in October 1944, Belgium contracted its entire money supply, both banknotes and deposits, from 165 billion to 57.5 billion francs. That's a two-thirds decline! You can see it illustrated in the chart below, along with the monetary reform enacted by the Dutch the following year, inspired by the Belgians.

A chart showing the incredible contraction of Belgium's money supply in 1944
Source: Federal Reserve Bulletin, October 1946 (red arrow is my emphasis)

It's not just the size of Operation Gutt that is striking to the modern eye. It's also the oddity of the tool being used. Today, we control inflation with changes in interest rates, not changes in the quantity of money. To soften the effect of the global COVID monetary overhang, for instance, central banks in the U.S., Canada, and Europe began to raise rates in 2022 from around 0% to 4-5% in 2024. 

By making it more lucrative for everyone to save and less attractive to borrow, central bankers were trying to reduce our propensity to spend our COVID support payments, and with less spending, prices wouldn't get pushed up as fast. This reliance on interest rates as our main tool of monetary policy is a relatively new phenomenon. In times past, central banks tended to lean heavily on changes in the supply of money, which may explain why in 1945, their main response — in Europe at least —  was to obliterate the public's money balances rather than to jack up interest rates to 25% or 50%.   

It's worth exploring in some more detail how Operation Gutt was designed. On October 9, 1944, Belgian bank depositors had 90% of the money held in their accounts frozen, leaving just 10% in spendable form.

As for holders of banknotes, there was no Finnish-style cutting. Rather, Belgians had four days, beginning October 9, to bring all their banknotes to the nearest bank, only the first 2,000 francs qualifying for conversion to newly printed versions. All notes above that ceiling got blocked in a separate account (along with excess deposits), some of which would be released slowly over the next few years—while the rest would remain frozen forever, subject to whether the owner was deemed to have been a collaborator who got rich during the occupation. (Finland's setelinleikkaus also had this same "cleansing" motivation.)

In 1944, a line forms at the National Bank of Belgium to exchange notes.
Source: National Bank of Belgium on Flickr

In this sense, the post-WWII European monetary reforms were not only designed to reduce inflation, but also had a moral basis. Think of them as progenitors to India's 2016 demonetization, which was designed to catch so-called "black money," although it failed to do so.

Did Operation Gutt work? Incredibly, the decimation of two-thirds of the money supply in just a few days did not cause an immediate fall in Belgian prices. According to Belgian economic historians Monique Verbreyt and Herman Van der Wee, the Belgian retail price index stood at 260 the month of the reform, but had risen to 387 by September 1945. So it would seem that the whole operation failed. This surely draws into question the quantity theory of money, one of the basic tenets of monetary economics. A decline in the money supply, all things staying the same, is supposed to cause a fall in prices. Here is a glaring case in which it didn't.

However, the National Bank of Belgium (NBB), the country's central bank, strikes a more constructive tone. In a recent retrospective on Operation Gutt, the NBB describes the reform as a gamble that paid off over time, eventually inspiring the "Belgian Economic Miracle", a period of low inflation and fast growth lasting from 1946-1949. By contrast, France did not embark on its own monetary reforms, the NBB takes pains to point out, and it thereby "paid the consequences of post-World War II inflation well into the 1960s." Belgium's inflation rate was also much lower than Finland's in the four or five years after the war. 

Which gets us back to Finland. Unlike the Belgian central bank, Finland's central bank — Suomen Pankki — notably avoids almost all mention of its post-war reform on its website. According to Matti Viren, setelinleikkaus led to "distrust towards the authorities and economic policy for decades," so there may be some sheepish reticence on the part of the central bank to draw attention to it.

But setelinleikkaus and Operation Gutt aren't just archaic monetary policy dead-ends. One day I suspect they'll be back. Not just as a special tool for responding to emergencies, but as a day-to-day policy wrench, albeit in a new and refined form. 

Cash, which is awkward to immobilize for policy reasons, will be gone in a decade or two, leaving the public entirely dependent on bank deposits and fintech balances which, thanks to digitization and automation, can be easily controlled by the authorities. To rein in a jump in inflation, central bankers will require commercial banks and companies like PayPal to impose temporary quantitative freezing on their clients'  accounts, but unlike Finland's 1945 blockade, the authorities will be able to rapidly and precisely define the criteria, say by allowing for spending on necessities — food, electricity, and gas— while embargoing purchases of luxury cars and real estate.

The future version of setelinleikkaus won't be clumsy, it'll be a precise and surgical inflation-fighting tool, albeit a controversial one.