# Sound Financial Policy 

##### Principled Recommendations for the 118th Congress 

October 2022 

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#### Sections 

7-part series 

1. ##### [Financial Privacy](/publications/section-1-financial-privacy)
2. ##### [Stablecoins, Central Bank Digital Currencies, and a More Competitive Financial Sector](/publications/section-2-stablecoins-central-bank-digital-currencies-more-competitive-financial)
3. ##### [Opening the Door to Cryptocurrency Innovation by Eliminating Unnecessary Regulatory Barriers](/publications/section-3-opening-door-cryptocurrency-innovation-eliminating-unnecessary-regulatory)
4. ##### [Policymakers’ ESG Concerns Should Not Override the Market’s Allocation of Resources](/publications/section-4-policymakers-esg-concerns-should-not-override-markets-allocation-resources)
5. ##### [Monetary Policy That Holds the Fed Accountable](/publications/section-5-monetary-policy-holds-fed-accountable)
6. ##### [Removing Barriers to Small Business Capital Formation and Expanding Investor Opportunities](/publications/section-6-removing-barriers-small-business-capital-formation-expanding-investor)
7. ##### [Broad Reforms to Boost Competition and Innovation in the Financial Sector](/publications/section-7-broad-reforms-boost-competition-innovation-financial-sector)

Many events in the past few years have illuminated how badly Congress needs to reform the monetary and financial system in the United States.

Inflation spiked to a 40‐​year high, and Congress failed to enact any meaningful reforms—through the Federal Reserve or otherwise—to combat it.

Separately, Congress and the regulatory agencies struggled to provide much‐​needed clarity for all sorts of cryptocurrencies, leaving the industry without the well‐​defined framework it needs.

Congress also enacted legislation requiring individuals to report to the federal government sensitive private information regarding fellow citizens’ financial transactions, and the Fed moved even closer to adopting a central bank digital currency, a form of payment currently employed by the Chinese government due partly to its utility as a surveillance tool.

And, as environmental, social, and governance policy further politicized financial market regulation, Congress and the Fed implemented unprecedented spending programs, including those designed to prop up short‐​term credit markets.

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[Download Sound Financial Policy](/sites/cato.org/files/2022-10/sound-financial-policy-118th-congress.pdf) 

Not only have Americans been dissatisfied with these recent policy changes and proposals, but they have long demonstrated that they distrust the federal government regarding financial privacy. Millions of Americans have chosen to remain unbanked rather than provide personal information to financial firms that are required to report to the government. It was no surprise, therefore, that Congress stoked a public backlash in 2021 when lawmakers tried to lower bank reporting thresholds to $600, a plan that 66 percent of voters opposed.[1](#_ednref1) The Cato Institute’s national survey of Americans’ beliefs about the financial sector suggests that Americans broadly oppose the long‐​term regulatory trends in U.S. financial markets.[2](#_ednref2)

The Cato Institute’s national survey of Americans’ beliefs about the financial sector suggests that Americans broadly oppose the long‐​term regulatory trends in U.S. financial markets.

Based on the survey results, most Americans appear to oppose expanding government regulation even though government officials have consistently expanded financial regulation. In fact, even though Congress tends to expand government regulation after a period of financial turmoil, Cato’s survey results indicate that Americans oppose such an approach even in the wake of a crisis. The survey suggests that most Americans are open to the idea that more market‐​based regulation can be a better way to promote the public interest.[3](#_ednref3)

Most people want the goods and services they use—including their *financial* products and services—to meet some set of quality and safety standards, but policymakers rarely contemplate *market* regulation as a potentially better alternative to more *government* regulation. While many assume that no standards would exist in the absence of government regulation, most companies set standards for their products and services independently of what government requires because doing so attracts customers and enables them to earn profits. Competition also provides incentives for other companies to adopt similar—or better—standards.

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While governments set standards through centralizing legal rules and requirements, markets set standards and enforce rules through competition.

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Yet, both markets and governments make mistakes. A crucial distinction is that where markets have the flexibility to analyze and adapt, government rules are often sweeping and difficult to change. While many Americans believe there should be stricter oversight of the financial industry, they do not necessarily want the kinds of oversight found in sweeping bills like the 2010 Dodd–Frank Act.

Instead, many want regulators to enforce the rules that are already on the books, and they do not necessarily support expanding the number of rules, especially those that dictate which financial decisions people can make.

![Copy: Voter Data Condensed](https://infogram-thumbs-1024.s3-eu-west-1.amazonaws.com/9c4ab186-f955-4062-adfe-ef2ca430964d.jpg) 

##### According to the Cato survey, Americans believe that regulation should serve two primary functions:

1. To protect consumers from fraud (64 percent)
2. To ensure financial institutions fulfill obligations to their account holders (53 percent).

Other functions, such as restricting access to risky financial products (16 percent), are a priority among far fewer people (16 percent). And while public opinion surveys have long reported that many Americans have little confidence in Wall Street banks and financial firms, Cato’s survey results show that Americans distrust government financial regulators as much as they distrust Wall Street. Nearly half (49 percent) have “hardly any confidence” in either, and only 7 percent say they have a great deal of confidence in either Wall Street or government financial regulators.[4](#_ednref4)

Even in the current environment, marked by above‐​average inflation and rising interest rates, these survey results can help Congress develop a better monetary and financial framework for the American people. For decades, Congress has empowered regulators to manage private risks and mitigate private losses to prevent financial‐​sector turmoil from spreading to the rest of the economy, but Cato’s survey results suggest that most Americans are open to a different approach. For instance, 78 percent of Americans think regulations too often fail to have their intended effect, and more people negatively rate government regulators for protecting consumers (73 percent) than they do the free‐​enterprise system (50 percent).[5](#_ednref5) Finally, most Americans do not think that regulators help banks make better business decisions (77 percent) or better decisions about how much risk to take (69 percent).[6](#_ednref6)

A smoothly running financial system makes it easier and less costly to buy consumer goods, raise the capital necessary for launching or operating a business, borrow money for buying or building a home, and invest in ideas that improve productivity and increase economic opportunity. Just as in other areas of the economy, excessive government regulation and involvement in financial markets prevent firms from best serving the needs of their customers and, therefore, society. Cato’s survey results suggest that most Americans are very sympathetic to this view.

For policymakers who want to improve financial markets, this policy guide provides many practical solutions to reduce excessive government regulation and involvement in financial markets.

Here’s a preview of the sections included in this policy guide:

##### Section 1 

### [Financial Privacy](/publications/section-1-financial-privacy)

Americans’ financial privacy has been eroding for over 50 years, often hidden in the details of complex policies. Congress can establish stronger financial privacy protections by eliminating many Bank Secrecy Act reporting requirements. If financial records are needed, law enforcement should be required to show probable cause to obtain a warrant, a reform that Cato’s national survey suggests 83 percent of Americans favor.[7](#_ednref7) Congress should also enact inflation‐​adjusted reporting thresholds for remaining Bank Secrecy Act requirements as well as the Internal Revenue Code, eliminate the exceptions in the Right to Financial Privacy Act, and establish better public oversight for the Financial Crimes Enforcement Network.

##### Section 2 

### [Stablecoins, Central Bank Digital Currencies, and a More Competitive Financial Sector](/publications/section-2-stablecoins-central-bank-digital-currencies-more-competitive-financial)

Congress can implement many policies to improve competition and innovation in financial markets, including those that level the field on which the dollar competes with other potential means of payment. Two potential means of payment that have surfaced during the digital age are stablecoins and central bank digital currencies (CBDCs). Congress should provide disclosure‐​based regulations for stablecoins while preventing the Federal Reserve from issuing a CBDC for retail customers.

##### Section 3 

### [Opening the Door to Cryptocurrency Innovation by Eliminating Unnecessary Regulatory Barriers](/publications/section-3-opening-door-cryptocurrency-innovation-eliminating-unnecessary-regulatory)

Cryptocurrencies remain subject to regulatory uncertainties that may hamper their development along with innovation more broadly. This potentially pushes entrepreneurs abroad and limits Americans’ ability to take advantage of these advances. Policymakers ought to provide a clear, practical test for determining whether a crypto project is decentralized and amend securities statutes to clarify that securities laws do not apply to decentralized cryptocurrency projects. Congress should also clarify the meaning of legal tender in U.S.C. § 5103, clarify the prohibition on counter­feiting U.S. coins in 18 U.S.C. §§ 485–497, remove the prohibition on minting coins of original design (in 18 U.S.C. § 486), and remove capital gains taxes applied to alternative currency use.

##### Section 4 

### [Policymakers’ ESG Concerns Should Not Override the Market’s Allocation of Resources](/publications/section-4-policymakers-esg-concerns-should-not-override-markets-allocation-resources)

Congress should ensure that financial regulators do not function as central planners deciding which enterprises are worthy of capital, especially in the name of environmental, social, and governance (ESG) policy. Congress should clarify the scope of mandatory securities disclosures and shrink bank regulators’ responsibilities, thus limiting the extent to which ESG policy can politicize financial market regulation. Congress should clearly state that disclosures are limited to the type of information relevant to a company’s prospects for financial success (as originally contemplated by the 1933 and 1934 securities acts) and repeal the sections of the Dodd–Frank Act that direct the Securities and Exchange Commission to promulgate the conflict minerals and pay‐​ratio disclosure rules. Congress should also require banking regulators to consider solely economic and financial factors when promulgating regulations, rather than factors that might affect the public’s view of a bank, such as the bank’s so‐​called reputational risks.

##### Section 5 

### [Monetary Policy That Holds the Fed Accountable](/publications/section-5-monetary-policy-holds-fed-accountable)

So long as Congress is inclined to delegate responsibility for conducting monetary policy and limiting financial instability to the Fed, lawmakers should do more to improve the Fed’s performance. For instance, Congress can narrow and clarify the Fed’s legislative mandate and require that the Fed implement rules‐​based monetary policy. It can also level the field on which the dollar competes with other potential means of payment so that the Fed faces competitive pressure to preserve, and perhaps enhance, the U.S. dollar’s attractiveness. A more vibrant financial sector would complement a sounder monetary policy framework, thus providing more economic opportunity for millions of Americans.

##### Section 6 

### [Removing Barriers to Small Business Capital Formation and Expanding Investor Opportunities](/publications/section-6-removing-barriers-small-business-capital-formation-expanding-investor)

Congress should enact an exemption to securities registration for equity offerings that raise funds below a certain threshold, such as $500,000 per year. It should also focus on decreasing the barriers to eligibility for accredited investor status. Congress, could, for example, consider investors advised by financial advisers who meet the current accredited investor definition as accredited themselves.

##### Section 7 

### [Broad Reforms to Boost Competition and Innovation in the Financial Sector](/publications/section-7-broad-reforms-boost-competition-innovation-financial-sector)

Even if the 2010 Dodd–Frank Act is repealed in its entirety, a dysfunctional regulatory framework would remain. Nonetheless, the legislation solidified the harmful view that federal regulators can and should prevent people from losing money in financial markets. The Dodd–Frank Act provides a false sense of security by conferring an aura of safety on firms that play by the rules. It should be repealed in its entirety. Congress should also shrink the regulatory state by eliminating duplicative federal agencies, narrow Fannie Mae and Freddie Mac’s focus to the financing of primary homes, revoke Fannie and Freddie’s exemption from the requirement to register their securities offerings under the Securities Act of 1933, limit the Federal Housing Administration’s single‐​family insurance portfolio to first‐​time homebuyers, and shrink the Securities and Exchange Commission’s scope to regulate money market mutual funds.

#### Endnotes 

[1.](https://www.develop.cato.org/sound-financial-policy#_edn1) Isabelle Morales, “[Poll: Voters Oppose Bank Snooping Plan, Believe It Will Increase Audits on Taxpayers Making Less than $400k](https://www.atr.org/poll-voters-oppose-bank-snooping-plan-believe-it-will-increase-audits-on-taxpayers-making-less-than-400k/),” Americans for Tax Reform, October 28, 2021.

[2.](https://www.develop.cato.org/sound-financial-policy#_edn2) Emily Ekins, Cato 2022 Financial Regulation National Survey, forthcoming. A previous version of this survey reports similar results, thus providing additional support for such statements. See Emily Ekins, “[Wall Street vs. the Regulators: Public Attitudes on Banks, Financial Regulation, Consumer Finance, and the Federal Reserve](https://www.cato.org/survey-reports/wall-street-vs-regulators-public-attitudes-banks-financial-regulation-consumer),” Survey Reports, Cato Institute, September 19, 2017.

[3.](https://www.develop.cato.org/sound-financial-policy#_edn3) Ekins, Cato 2022 Financial Regulation National Survey; and Ekins, “[Wall Street vs. the Regulators](https://www.cato.org/survey-reports/wall-street-vs-regulators-public-attitudes-banks-financial-regulation-consumer).”

[4.](https://www.develop.cato.org/sound-financial-policy#_edn4) Ekins, Cato 2022 Financial Regulation National Survey.

[5.](https://www.develop.cato.org/sound-financial-policy#_edn5) Ekins, Cato 2022 Financial Regulation National Survey.

[6.](https://www.develop.cato.org/sound-financial-policy#_edn6) Ekins, Cato 2022 Financial Regulation National Survey.

[7.](https://www.develop.cato.org/sound-financial-policy#_edn7) Ekins, Cato 2022 Financial Regulation National Survey.

##### About the Authors 

[![Norbert Michel Cropped](/sites/cato.org/files/styles/author_picture/public/2025-01/norbert-m-cropped.jpg?itok=8WIx97Dk)](/people/norbert-michel) 

##### [Norbert J. Michel](/people/norbert-michel)

Vice President and Director, Center for Monetary and Financial Alternatives, Cato Institute

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##### [Jennifer J. Schulp](/people/jennifer-j-schulp)

Former Director of Financial Regulation Studies, Center for Monetary and Financial Alternatives, Cato Institute

[![George Selgin](/sites/cato.org/files/styles/author_picture/public/2021-01/George%20Selgin.jpg?itok=daUqyD5g)](/people/george-selgin) 

##### [George Selgin](/people/george-selgin)

Former Senior Fellow and Director Emeritus, Center for Monetary and Financial Alternatives, Cato Institute

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[![Nicholas Anthony Cropped](/sites/cato.org/files/styles/author_picture/public/2025-02/NicholasAnthony-cropped.jpg?itok=f4HYrot7)](/people/nicholas-anthony) 

##### [Nicholas Anthony](/people/nicholas-anthony)

Research Fellow, Center for Monetary and Financial Alternatives

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##### [Jack Solowey](/people/jack-solowey)

Former Policy Analyst, Center for Monetary and Financial Alternatives, Cato Institute

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