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Host: Nick Anthony (Cato Institute) Guest: Rep. Warren Davidson (R‑OH)

Nick Anthony: Hello, one. Hello, all. Financial surveillance is expanding before our eyes. Decades-old reporting thresholds that have never been adjusted for inflation continue to sweep more Americans into government databases. Regulators are pushing the boundaries of their authority, and looming over the debate is the prospect of a central bank digital currency, or CBDC, a technology that could fundamentally reshape the relationship between citizens, their money, and the state. For many people, it’s easy to get disillusioned and think nothing stops this train, yet once in a while you get shown the light in the strangest of places if you look at it right. Today, that light is coming to us from the House of Representatives. I’m joined by a policymaker who is fighting back against financial surveillance, Congressman Warren Davidson. In his own words, he works on the Financial Services Committee to help limit runaway government expansion that threatens to bankrupt America. Music to my ears. He was there when the Berlin Wall fell, he built his own manufacturing company, and he has been in Congress since 2016. But perhaps best of all, Warren has called out the Bank Secrecy Act as a bloated surveillance machine demanding endless reports without delivering proportional results. And he’s recognized that central bank digital currencies are a dystopian tool for surveillance, coercion, and control. Warren, thank you for joining us on the Cato Podcast.

Rep. Warren Davidson: Yeah, thanks, Nick. Thanks for noticing and highlighting my work here. You make it very easy because much of the time I’m complaining about what’s going wrong — that there’s financial surveillance expanding new reporting requirements, or even just the problems that have been on the books for decades now.

Nick Anthony: And one of the things that made me very happy was when you wrote to the agency leading all of this, the Financial Crimes Enforcement Network, and you were calling for updates. But unlike many officials who call for expanding financial surveillance, you called on the agency to scale back and tailor the system to prioritize actual crime over surveilling innocent Americans. I’d love to hear from you directly — what made you say enough is enough to call out FinCEN and say change is needed?

Rep. Warren Davidson: Well, when I ran for Congress, I was pretty unhappy with Congress. I feel like we’re getting far more government than we’re supposed to. One of the themes I’ve had is that we need to restore a government small enough to fit back within the Constitution. In a lot of ways, I think we’re suffering from a fatal overdose of government. It’s just not killing us yet. But it is killing the country our Founding Fathers created. It’s not just that they’re bankrupting the country financially — they’re doing so morally. And I think the moral offenses are things like the Bank Secrecy Act, where it turns the Constitution on its head and creates a surveillance state.

So when you look at the Bank Secrecy Act, the premise is that in order to operate a bank, you spy on your customers on behalf of the government, and they’ll let you run a bank. And look, that’s like that all over the world. But the United States is supposed to be a little bit different than the rest of the world. We have a Bill of Rights, and a lot of other countries don’t. We have a right to privacy that doesn’t say if you have nothing to hide, you have nothing to fear. It says you have a reasonable expectation of privacy. I think people feel like their bank account should be private. And if you want evidence of that, look how upset people became when they saw the Biden administration talking about spying on your bank account if it had $600 of activity in a year or more. I mean, the reality is that they already spy on it. They just wanted to be able to introduce that evidence without any risk of discovery in all kinds of cases.

And so I think you just look at, well, how’s the system working? On the other side, they collect millions and millions of suspicious activity reports on the premise that a crime might occur, and by collecting this, we could prevent it or solve it. And companies and individuals are spending a fortune on this. In a way, I think of it as violating the Third Amendment — the government’s embedded in some place, and you’re essentially paying for it. It’s just not a direct bill to your household. That, I think, you have to try to curb back.

And on the other side, FinCEN — when you’ve got, say, a senior citizen who’s scammed out of $10,000, well, that’s not a big crime. So the federal government doesn’t get involved, and state and local law enforcement don’t have the sophistication to solve these crimes. But when you look at it, it’s like, oh, well, you got 100 little old ladies scammed in a day. And around the country, you add that up with the same nexus going back to some transnational criminal organization, and they’re scamming people out of tens of millions of dollars every year. And if that one crime were committed for tens of millions of dollars, well, then all the federal resources would come in and solve it. So here we have actual crimes happening, and you can’t get FinCEN and a lot of the other agencies to help solve real crime, because they’re busy measuring false metrics — like, oh, we spied on a sufficient number of cash transaction reports on our customers, and therefore we’re heroes doing a great job. It’s been such a pain for me seeing the exact same thing — that we just get no answers about actual metrics, actual measures of effectiveness in terms of this helping the country uphold the rule of law. And instead, it seems like this massive dragnet.

Nick Anthony: And personally, in a rare turn of events, I was excited about part of the Anti-Money Laundering Act of 2020 that was supposed to require a review of sweeping financial surveillance, and also have reports not on customers, but on FinCEN itself, saying how this information is used. Is it catching criminals, leading to arrests, leading to convictions? And here we are about half a decade later, and we really haven’t gotten answers on that. We haven’t seen the effectiveness of this. I’m very confused from a citizen’s point of view, because if there’s a law saying I have to do something, I assume that’s the way it works. And yet FinCEN doesn’t seem to want to comply. I’m wondering what it will take to actually hold them accountable and get some change happening in this space.

Rep. Warren Davidson: I always say it’s not that nothing’s happening. I talked with Director Gacki about this, and Chairman French Hill and I sent a joint letter recently, kind of looking for some considerations. They put out a notice of proposed rulemaking to do some reforms. I feel like they’re not ambitious enough on the reforms they’re trying to do. And look, this isn’t going to fundamentally change the Bank Secrecy Act and the third-party doctrine. The premise is that once you’ve shared your information with someone else, you no longer have an expectation of privacy with the government. It’s like, well, I have to share my account information with a bank in order to have a bank account, but that doesn’t mean I intended to share it with the federal government, right? You’re supposed to get a warrant. Well, they don’t. And on the back end, you’re not getting at that premise with these reforms.

So I don’t want to create some sort of false optimism here. But at the edges, there are proposals in the works to change things like reporting thresholds, and to refine and more narrowly define what they’re looking for with suspicious activity reports, and to give feedback to the people collecting this data on whether we’re putting it to good use, so that there’s this back-and-forth iteration. Because for a lot of banks, they’re looking at it like — where does this even go? What am I doing? If I am doing it, could I be effective? And the reality is that bank regulators, a lot of times, don’t even coordinate with FinCEN. They just go, well, for a bank your size, normally you file X,000 suspicious activity reports, and you guys only filed several hundred. So clearly, you must be facilitating money laundering and you’re not being a good bank. And you’re like, I don’t know, maybe we just don’t bank criminals. We didn’t find it suspicious that a guy sold a used car. We didn’t send that in to you guys, things like that.

I think that’s one of the big problems here — measuring effectiveness so far has really been, exactly what you’re saying, getting the numbers in, stacking up those reports. And yet, when Congress first created the Bank Secrecy Act, it was supposed to be reports that are highly useful in deterring crime. And so that’s the framing I think this needs to be around. And when you have things going on like inflation increasing the amount of surveillance — since the $10,000 number was set in 1972 and never adjusted since — you just get that pile of reports higher and higher and higher.

Nick Anthony: And it’s amazing to me that this is admittedly a niche issue. You have to really care deeply about privacy, and also about financial services, to get at this nexus. But at the same time, the general public has really woken up to the fact that something’s fundamentally wrong if a number was set in the 1970s and hasn’t changed since. And also that something’s fundamentally wrong with the third-party doctrine — this idea, as you mentioned, that the second you hand information to a banker, it’s all of a sudden almost like public record. And I was glad you called out at a recent hearing when somebody tried to argue that this information is a public good and should be available everywhere. It gives me hope that change is coming, that people are starting to rally around this. But do you see that change in Congress — that people are starting to recognize that a lot of this is outdated and there needs to be some fundamental reforms? Or is this still very niche in the policy realm?

Rep. Warren Davidson: Look, the future of money, the future of payments, is coming to a head because there’s been a lot of private sector innovation in payments. Not just cryptocurrency, Bitcoin in particular, but a whole range of innovations in the payment space. I mean, even if you look at Square and Stripe and others, these were sort of innovations in the regular payment space. And how money moves is a big deal. So you mentioned the threshold set at $10,000 — adjusted for inflation, that would be $80,000. And I think today we would say, yeah, if somebody handed a stack of $80,000 over to someone else, you’d go, well, that’s a little odd, right? But selling a used car for more than $10,000 — it’s hard to find a car that’s operational and functional for more than $10,000, and somebody paying cash for it shouldn’t be inherently wrong. I mean, the other related thing is if you happen to have more cash and you want to travel anywhere, they’ve turned that into a crime. And if someone pays you in cash, you’re supposed to treat them with the suspicion that they’re criminals, even as a private citizen. So I just think there’s a lot of flaws here.

And they’re trying to apply those kinds of laws to digital transactions, and the technology isn’t even structured that way. So people running nodes on proof-of-work, proof-of-stake — they’re supposed to collect something called 6050I. That’s odd. The architecture isn’t even built that way. The alarming thing is it’s coming to a head in other ways too, because Democrats — Elizabeth Warren in particular — is pushing a central bank digital currency. And this would corrupt our whole monetary system into what they call programmable money. I call it corruption into a system, as you highlighted, for surveillance, coercion, and control. I mean, it is — to use a Lord of the Rings reference — the one ring to rule them all. You could actually do what Trudeau tried to do, not just through banks, by freezing truckers’ bank accounts during COVID in Canada. Even monetary policy people are like, oh, you could do a stimulus, and the money could only be used for these things instead of those things, or it would expire. So you can’t save it or invest it — you have to spend it on these things this fast. And your bank account would be with the central government. So this is really communist money for the digital age, but it is a level of surveillance that the Stasi never dreamed of being able to achieve.

Nick Anthony: It gets to the core of who we are — our money, whether that’s how we go about our day, whether it’s spending on gas or donating to a church or a political cause or how we’re paid. It reveals everything about us. And you’re absolutely right that there are policymakers out there who see that as the ultimate source of control. It is the one ring for them. And some of them argue they’ll use it for good, but that type of power corrupts so quickly. I’ve seen plenty of academics who say, oh, we need this to do monetary policy — like you said, either a stimulus or some targeted relief, and we’ll be able to see what people are spending. That’s one thing if you’re talking about a theoretical model, where you’re in the model. But when we bring that to real life, we’re talking about real people with rights, and this system fundamentally violates that from the start.

And it’s been heartbreaking for me to see countries around the world just pushing forward with CBDCs and saying, we need this no matter what. Most recently, the European Central Bank has said that they want to use it to evade U.S. sanctions and to compete with Visa and MasterCard. If that’s not a sign that something is concerning, I don’t know what is. And yet we have authoritarian regimes like China, Russia, and Nigeria going even further with it. That’s one thing that’s also given me hope — you’ve really led the charge on stopping this, alongside fellow member Tom Emmer, making sure that a CBDC does not happen in the United States. I’m wondering what you think about how the progress is going on the legislation. We’re kind of in a weird space right now — it seems like we’re getting near having a prohibition, yet at the same time a lot of policymakers seem to hedge it in all sorts of different ways. We have the Federal Reserve kind of blurring the lines on an executive order. Where do you see this going right now? Are we in a good space, or is there still troubled waters?

Rep. Warren Davidson: It took a lot of work and momentum to get President Trump’s views on this whole space changed. Part of it was Steve Mnuchin — while he was effective as Secretary of the Treasury in the first Trump administration, he wasn’t great on these issues. Frankly, he was actively pretty bad on these issues. And even in between, in the Biden years, he’s the guy who drove a lot of the crypto tax in the Senate’s infrastructure bill — Steve Mnuchin, working with Rob Portman from Ohio, to really embed those things in the bill. This was a real problem. So how did Trump change his views on this? You know, the privacy, fintech, crypto community really got time with him, caught his ear, caught Eric and Donald Trump Jr.‘s attention. And I think the views have massively changed on the surveillance state, particularly with respect to money.

And so when Donald Trump started his second term as the 47th president, he issued an executive order — the one you referred to — that did three things, one of which bans central bank digital currency. But the one that gets too little attention is that it also protects self-custody. To me, this is fundamental. The right to transact does not come from government — it predates any government. And frankly, this is where the Bank Secrecy Act sort of corrupts the state of the real Bill of Rights. I think that’s why we need to enshrine in a constitutional amendment a protection and limitation on government infringing the right to transact. The executive order does that with self-custody. It also talked about stablecoins and market clarity.

But the real question is, is the Federal Reserve subject to this executive order? I continually ask that of the Federal Reserve members — most recently at a field hearing in Oklahoma — and they always evade answering. They want to talk about their independence, and I’m like, well, you are somewhat independent in terms of setting rates. I’d like them to be independent of feeling like they should monetize the debt, so that they would at least be honest that when Congress runs big fiscal deficits, that fiscal policy inherently creates inflation. But they won’t be that candid most of the time.

What I have done, though, is I’ve met with Chairman Kevin Warsh already. He’s assured me that — wholesale, retail, any of that — there will not be a central bank digital currency during his chairmanship, and he sees total alignment with the administration there. They will say, on the back-end architecture, we’re using old tech, and there are certainly some vulnerabilities. He looked at Bitcoin as an example of a very secure network. So if you look at the computing architecture behind blockchain, it’s got a lot of security. There are ways to design that have some good privacy features, and there are ways to design it where it’s a master tool for surveillance. So when you tell me you’re going to do blockchain architecture, I think that’s great, but I won’t celebrate it as great until you tell me how you’re going to design that architecture. Otherwise, it’s effectively just a hydra — it’ll cosmetically look different, but on the back end it’s all the same evil beast that Elizabeth Warren wants to craft. And Christine Lagarde of the European Central Bank, or the ultimate bond villain, Agustín Carstens, at the Bank for International Settlements in Basel, Switzerland — they all want to basically build Chinese communist money. It undermines the dollar, but it completely turns Western civilization on its head, because it puts the government between you and your own money.

That was something that really broke my heart early on in the CBDC conversation — there were a lot of cryptocurrency developers, ones that I admire, who started to work with governments to create CBDCs, because they thought, oh, we can implement this new tech, we can create a new, greener pasture that’s private and more secure. And they quickly learned that governments were not interested in that. When they were working with central banks abroad, the banks said, oh yeah, we want to use the blockchain, but we don’t want to have these privacy features, or we want to make sure everyone is KYC’d at the gate, or we want to make sure we can control and program it. And at that point, there was an interesting divergence, where the libertarians and cypherpunks said, okay, enough is enough, we can’t do this, and some of the more institutional players still stuck around — maybe with hope, maybe chasing the contract, it’s anyone’s guess.

But it makes me so glad that you recognize what’s going on here, and that we have to ask those questions — we have to go deeper and say, okay, the headline is nice, but how are you actually building and designing this? And you’ve done that a number of times, even just at an administrative level, where I’ve seen at hearings you’ve mentioned how different regional Federal Reserve Banks are hiring people to work on CBDC development or working on projects with the Bank for International Settlements.

Nick Anthony: And I still have so many questions about that. But mainly — do you think something needs to fundamentally change, where the regional banks are required to listen to executive orders, or have some sort of stricter line? Or does that get in the way of the independence of the Fed? How do we draw this line? Because I do recognize it’s a tough thing to crack, but there needs to be some sort of —

Rep. Warren Davidson: Well, if you look at the Federal Reserve Charter, there is a central bank in DC, but there are 12 regional banks, and the regional banks are not federalized, so they create this different system. That’s where they kind of get too cute by half. They’ll say, oh, we aren’t working on that here in DC. Well, A, that’s not entirely true either. But B, when you have the New York Fed doing all the actual liaison with the Bank for International Settlements, the European Central Bank, and even China — just for interoperability, of course — then they share it with everyone else in the regional system. When you have regional banks literally posting job postings — we’ve shared these in hearings and submitted them for the record — here’s a job posting where you say you’re not working on it, but here’s the listing that says you’re hiring somebody to write code to develop a programmable central bank digital currency. It seems like you’re working on it.

And that’s why, to use another movie analogy, I compare it to Star Wars: they’re working to build the Death Star. They’ve got it designed, it’s under construction, but they promise they won’t turn it on. Well, you can’t let that happen. That’s where even the language in Tom Emmer’s bill doesn’t really go far enough to stop them. I don’t want them to design it or study it — all you want, learn how communist money is evil, even in the digital age. But no design, no development, no progress. Don’t pass go. Unfortunately, in the recently passed housing bill — that 32 of us opposed — Elizabeth Warren got in there what I consider effectively a go-live date for CBDC. Right now it’s clear that it’s not really legal, and they say we’re clarifying it’s not legal — there’s a complete ban on central bank digital currency until 2030. I’m like, well, that makes 2030 seem like the go-live date. And it’s also in a midterm. So I just think that’s problematic language. If you’re going to ban it, then be clear and overtly ban it. Two years from now, twenty years from now, whatever — communist money isn’t going to be a good idea ever. So why would we say, well, we might want to just sunset this and be able to come back and look at it again? No, we don’t.

Nick Anthony: Yeah, that has concerned me so much. It’s very helpful to hear your perspective on that, and I’m on the same page. When I look at that, it not only looks like a go date, but it also looks almost useless in ways, because we have a president who is against central bank digital currency, we have a Fed chairman who’s against central bank digital currency, we have much of Congress against it right now. And at 2030, we’re looking at a very different set of policymakers — that could change in a big way. And that’s also the year after the digital euro is planned to be introduced. So there’s going to be a whole wave of fear of missing out, or FOMO, like we saw with Facebook’s Libra, and also the digital yuan back in 2019 to 2021.

And I’ll say, also on the note of designing, it’s really baffled me. In addition to my work here at Cato, I maintain the Human Rights Foundation’s CBDC tracker, and there are several jurisdictions that have what they call, quote-unquote, “pilot projects.” But there are tens of thousands or hundreds of thousands of people who are exposed to it. It’s almost like a legal gray area they’ve been able to get away with — they’re just designing it, they’re just testing it, it’s not really launched — yet it’s affecting real people making real transactions in their real lives. That’s what concerns me when we have discussions about the Federal Reserve trying to build this out, because once it leaves the computer, the genie’s out of the bottle. It’s very hard to put it back in.

Rep. Warren Davidson: Yeah, and I mean, I think that’s why your work, Nick — and Cato and others highlighting this — is so important, because you have to stay vigilant. In 2030, they’re going to use this as a chance to go live with their system, just to stay up with China and Europe. Let’s be clear — it’s also an effort by China and Europe to undermine the strength of the dollar. That’s not in America’s interest. My own view is, if America is the last country in the world without a central bank digital currency, the dollar will be the most powerful currency in the world. Chinese people don’t want the Chinese yuan, right? They already don’t want it. They’re literally funding money laundering for the cartels through criminal enterprises in China — that’s part of the link to fentanyl and drugs, the flows are there. The cartels used to take about a 20% haircut to get their money laundered; now they get the full value of it, because the Chinese are eating the cost to launder the money — they don’t want their own money. The Chinese government wants to put an end to that black market to some extent, and they want control over it, so they’re putting a central bank digital currency on the system. Why would we want to accommodate the Chinese money?

The more we resist that kind of system of surveillance, coercion, and control, the more valuable the dollar gets around the world and in our own country. I think the temptation has been the other way — to keep doing more surveillance, coercion, and control even within the dollar framework. And you’ve got the same sort of authoritarians who — maybe even in their own mind, just to keep us safe — think, well, there are voids, we don’t have full visibility, we don’t have the full ability to filter transactions, i.e. block them, or limit them, or even reverse them after you’ve made the decision to send your money somewhere. I think that’s a creepy system. We don’t want that. As somebody who’s read all these works of fiction — 1984, Brave New World, Fahrenheit 451 — they all depict money the same way the Book of Revelation does: it becomes this dystopian tool. And I view Revelation as scripture — I think, okay, eventually it will happen. But universally, whether it’s fiction or scripture, it’s depicted as evil. So we should resist it, not embrace it. We should say no to this. I think the future of money is going to determine the future. If we lose this fight, the basic premise of Western civilization is lost. You don’t have a right to transact, you don’t even have the right to access your own money unless you’re approved by the government. We should resist it, not embrace it.

Nick Anthony: That’s a powerful statement to end on. Listeners, you heard it from Congressman Davidson himself. And this is a good reminder that despite the trouble that some governments can cause, there are still officials fighting for our rights, and together, we may just win. If you want to learn more, you can find my work on financial privacy and CBDCs either on cato​.org or at my Substack, Banking Bureaucracy and Beyond. And you can learn more about Congressman Davidson at david​son​.house​.gov. If you enjoyed today’s discussion, please subscribe and leave a review wherever you get your podcasts. To learn more about the ideas and research discussed in this episode, visit cato​.org. The Cato Podcast is a production of the Cato Institute, dedicated to advancing individual liberty, limited government, free markets, and peace. Join us next time for more insights and conversations on the issues shaping our world.