Rethinking cryptocurrency financial surveillance and privacy

Law and ledger It is a news segment focused on legal news in crypto, and brought to you Kelmann Method – A law firm focused on digital asset commerce.

The following opinion editorial was written by Alex Forehand and Michael Handelsman of Kelman.law.

Hester Perth’s Peanut Butter & Watermelon Speech

Interesting “Peanut Butter & Watermelon” by SEC Commissioner Hester Perth speech– Excluded by the Science of the Berkeley, California Blockchain Conference on August 4, 2025. Her reflections draw attention to the fundamental tensions at the heart of digital finance. That is, a thwarted technology promise with traditional machinery of financial surveillance, which mandates intermediaries for police transactions.

Intermediation’s Digital Promise

Perth begins with his grandfather’s unconventional snack, watermelon with peanut butter and the operator who knows his habits. This will flush out larger points. Automation processes (i.e., deleting intermediaries) can maintain confidentiality and restore agents to users, but human intermediaries introduce potential points of surveillance.

In today’s context, blockchain, zero knowledge proof, smart contracts, and other encryption tools democratize access to finance.

Surveillance and third party doctrine

However, the established legal doctrine stands in contrast to this promise. Under the doctrine of third parties, if a user passes data to a third party (a financial institution or telephone provider), it will lose the fourth revised privacy protection.

This has been shown historically by automating phone dialing. The court confirmed its view in Smith v. Maryland. This was meaningful in the human phone operator context, but the petitioner argued that it appears to have little applied in the automated self-monitoring context. Nevertheless, the Supreme Court “was not included to determine that another constitutional outcome was necessary because the telephone company decided to automate it.”

Today, third-party doctrines underpin the Bank’s Secret Law (BSA). This forces widespread data collection through the Suspicious Activity Report (SARS), Currency Transaction Report (CTR), and Prominence Customer (KYC) rules.

result? Financial institutions are converted into semi-law enforcement agencies and submit millions of SARs and CTRs each year.

Recent Government Accountability Bureau study Many currency trading reports have been unused and found to suggest that volume can be reduced without compromising law enforcement. Put another way, the marginal value of large-scale financial surveillance may not justify the incredible costs they place on banks, customers and the public sector.

Friction: Libertyv. Security

The SEC has its own monitoring tool known as the Consolidated Audit Trail (“CAT”), in which brokers record stock and options customer and order data in all markets, from the moment an order is launched through routing, modification, cancellation, or execution.

The broker should send this data to the cat. “Thousands of employees of the SEC and private self-regulatory organizations (“SROs”) can be used to review all persons’ trading activities without any doubt of fraud.” As Pierce warned, a sledgehammer of this nature is similar to a “dystopian surveillance state.”

Perth challenges us to ask: Are these drastic surveillance systems proportional to the threat we face? And are they eroding freedom essential to American identity? Quote Judge Brandeis, she calls for vigilance.

Critics such as Katie Haun have observed that even mediocre transactions from payments up to hospital bills create trackable “data points” and form a system of choice that even innocent users monitor.

Perth points to the path forward. It is ripe for the time to rethink third party doctrines and modernize regulations similar to BSA. Reflecting the Ministry of Finance’s own efforts to postpone and review AML rules for investment advisors, she highlights the need for empirical assessments – are all these reports really practical? And is the government using financial institutional representatives?

What does that mean to you?

For clients operating at the intersection of innovation and regulation, these issues lead to important and nuanced considerations.

• Privacy Design by Default: New Architecture – Token privacy, programmable compliance, or discriminatory privacy mechanisms can help you meet AML obligations while minimizing unnecessary data capture.
• Advocate for smarter reporting thresholds: Industry stakeholders need to support reforms aimed at streamlining the SAR/CTR filing framework, focusing on truly suspicious activities and reducing confusion.
• Strengthen Fintech’s Fourth Amendment Protection: Courts say ” Carpenter vs. United States and Smith vs Maryland,Even in the context of third parties, there may be space to extend wire-level protection into the financial domain.
• Help clients navigate compliance with Liberty in mind. Organizations need to conduct thoughtful cost-sale analysis of data collection, not only to maintain regulatory compliance, but also to maintain customer trust and freedom.

Commissioner Perth’s speech gracefully juxtaposes quirky childhood snacks with complex legal doctrines, and in doing so challenges stakeholders (regulators, lawyers, technicians) to rebalance privacy and surveillance in the financial system. As a lawyer from a code, Kelman PLLC is ready to advise clients who strive for compliance and Constitutional integrity in an intermediation-hungry world.

Kelman PLLC can continue to monitor the development of cryptographic regulations across its jurisdiction and advise clients navigate these evolving legal landscapes. For more details or consultation schedule please inquiry.