Nicholas Anthony
The Cato Institute’s mission is to originate, disseminate, and advance solutions based on the principles of individual liberty, limited government, free markets, and peace. Within the Center for Monetary and Financial Alternatives, we narrow that scope to the realm of monetary and financial policy. And while our work often involves digging into the weeds to assess the merits of specific pieces of legislation, it’s always important to step back and ask what the subject of our work means for liberty. Today, that subject is financial privacy.
So, what does financial privacy mean for liberty?
An Insight into Your Life
Privacy is foundational for protecting freedom. Abuses to human rights and efforts to control people often depend on governments knowing the intimate details of a person’s life. It’s for this reason that financial privacy is so important. Financial activity can reveal details about a person’s relationships, profession, religion, political leanings, locations, and more. In fact, although the data conversation has often centered largely around social media concerns, financial information can be far more revealing.
Consider the average post on Facebook or Twitter. People will often try to present their “best life” on social media and that might mean filtering photos, embellishing stories, or outright making up an entirely new persona. In economics, we can refer to these actions as “stated preferences.” In contrast, financial activity can offer insight into someone’s “revealed preferences” because, by their nature, financial transactions involve explicit costs. Put bluntly, financial transactions require people to put their money where their mouth is. Someone could post online that they are abroad “on a luxurious vacation,” but their purchases would reveal they are actually at home. Likewise, someone could post about their “humble life in a small town,” but their pay stubs would reveal they are actually a millionaire.
The list of examples goes on, but financial activity reveals many areas of a person’s life so it’s more likely to reveal who someone truly is—even if the person doesn’t want those details known by others.
Over the last 50 years, the volume of personal financial data has increased significantly as payments have increasingly become electronic. Consider the use of credit cards. Less than 20 percent of families had a credit card issued by a bank in 1970, but now the average person has around 3 credit cards. With this rise in access has also come a rise in use: credit cards alone were used for 28 percent of payments in 2021. Looking at the broader landscape, over 70 percent of payments in 2021 were electronic. Whether it’s when using a credit card on a shopping trip or a mobile app to pay friends, people now leave a digital trail with the payments they make nearly everywhere they go.
The Potential for Abuse
Unfortunately, you do not need to look far to see how governments around the world use financial data and the financial system to control people. And it is clear that where privacy acts as a limit on government power, a lack of privacy can lead to an abuse of that power. Let’s consider just a couple of examples from recent years.
In China, many people used cash to purchase train tickets during the 2019 freedom protests. Although the Chinese economy has largely adopted digital payments more than other countries, protestors turned to cash in this instance out of fear of what a train ticket on their bank statement might mean for them in the future. For all the convenience tapping a card might offer, people feared repercussions from being permanently linked directly to the protests. These fears were not unfounded. The Hong Kong police said that a card is “like a GPS system because it can locate where and when the holder uses it.” Many of those that supported the protests were later targeted and had their finances frozen.
In Canada, protests erupted over the COVID-19 lockdowns in 2022. However, those protests were brought to a halt when Prime Minister Justin Trudeau invoked the Emergencies Act to freeze the bank accounts of those involved in the protests without acquiring a court order. In just one week, more than 200 bank accounts were frozen in an effort to crack down on the protests. At the time, Ottawa’s police chief, Steve Bell, said, “If you are involved in this protest, we will actively look to identify you and follow up with financial sanctions and criminal charges. This investigation will go on for months to come.”
So in both autocratic and relatively free countries, it’s not difficult to see how financial surveillance can quickly translate to financial control. With that said, the United States is supposed to be different. What was written in the Fourth Amendment to the U.S. Constitution should protect financial privacy and limit government power. However, financial privacy has been slowly disappearing for over 50 years under the Bank Secrecy Act and third‐party doctrine. Although Americans have been caught off guard when cases of financial surveillance occur, it should not be a surprise given the erosion of financial privacy that has occurred over time. And to make matters worse, it seems some policymakers are eager to continue this trend with the introduction of a central bank digital currency, or CBDC.
Conclusion
So, what does financial privacy mean for liberty? From where you travel to what you donate to, financial activity can paint a detailed picture of a person’s life. Having financial privacy means being able to have control over who gets to see that picture and what purposes it may be used for. Privacy is not about having something to hide but rather privacy is about having control over your life. It is for that reason that financial privacy is foundational for protecting freedom.
To read more about financial privacy in the United States and the need for reform, read my latest policy analysis: The Right to Financial Privacy.