SEC Chair Gensler Warns: Crypto Could Become a "Financial Panopticon"

The U.S. Securities and Exchange Commission (SEC) Chair Paul Atkins warns that the efficiency of blockchain technology in linking transactions to senders could make cryptocurrencies “the most powerful financial surveillance framework in history.” Atkins states that if the government treats each wallet as a broker, every software as an exchange, and every transaction as a reportable event, it would turn the ecosystem into a “Financial Panopticon.”

Blockchain Transparency: The Double-Edged Sword of Surveillance Potential

Atkins’ warning reveals the fundamental contradiction of cryptocurrency technology. Blockchain was originally designed to be decentralized and resistant to censorship, but its open, transparent ledger feature provides unprecedented convenience for surveillance. Every transaction is permanently recorded on the chain, including amounts, timestamps, and wallet addresses. Once these data are linked to real identities, a more comprehensive monitoring network is formed than traditional financial systems.

This technological characteristic indeed has value in law enforcement. Tracking money laundering, terrorist financing, and other illegal activities becomes more efficient. However, the risk Atkins points out is that if this capability is abused, it will erode citizens’ fundamental privacy rights. Traditional banking systems have layers of legal and institutional checks and balances, whereas comprehensive blockchain monitoring could bypass these protections.

How to maintain privacy and how regulation should apply to blockchain technology have become core concerns for regulators. According to previous reports by The Block, as traditional finance enters the cryptocurrency space, discussions around privacy issues are heating up rapidly. Major financial institutions are exploring stablecoins and tokenized assets, but how their familiar KYC (Know Your Customer) and AML (Anti-Money Laundering) frameworks can be coordinated with blockchain’s transparency remains an unresolved issue.

Atkins’ “Financial Panopticon” metaphor is derived from French philosopher Michel Foucault’s concept of the “Panopticon,” where prisoners could be watched at any time but never know when they are being observed, leading to self-discipline. If this model is applied to the financial system, every citizen would live under potential total surveillance, possibly stigmatizing legitimate privacy needs.

The Fourth Amendment and the War over Cryptocurrency Privacy Rights

SEC Commissioner Hester Peirce has repeatedly cited the U.S. Constitution’s Fourth Amendment in her speeches this August, which protects citizens from unreasonable searches and seizures, thereby safeguarding personal privacy. Peirce urges the government to “vigorously defend people’s privacy rights,” and emphasized at a Monday meeting that protecting personal privacy should be a “default,” not a sign of criminal intent.

This stance represents an important ideological shift within the SEC. During former Chair Gary Gensler’s tenure, the SEC’s attitude toward cryptocurrencies was more inclined toward strict enforcement, viewing many privacy tools and decentralized protocols as means to evade regulation. Atkins and Peirce’s remarks indicate that the current SEC leadership is trying to find a new balance between regulation and freedom.

Peirce warns: “The government should resist the temptation to force people into intermediaries to establish regulatory footholds or facilitate financial surveillance.” This directly challenges the core assumption of traditional financial regulation—that all financial activity must go through regulated intermediaries. In the crypto world, the existence of peer-to-peer transactions and self-custodied wallets makes this assumption no longer applicable.

Key Turning Point in the Tornado Cash Case

Background: In August, Tornado Cash founder Roman Storm was convicted of illegal fund transfers. Tornado Cash is a decentralized cryptocurrency mixing service aimed at providing privacy for users.

Controversy over the verdict: Cryptocurrency advocates argue that punishing developers of tools is equivalent to punishing those who create the tools, rather than the criminals using them. It’s akin to suing the blacksmith because someone used a knife for a crime.

Shifting government stance: During the Trump administration, Deputy Assistant Attorney General Matthew J. Galletly stated that “writing code” is not a crime. This contrasts sharply with the tough stance during the Biden administration, offering new hope for Storm’s appeal.

Seeking a Balance Between Regulation and Privacy

Atkins states: “I believe that if we work together, we can establish a framework that ensures technological and financial progress does not come at the expense of individual freedoms.” This optimistic outlook suggests the SEC might adopt more nuanced regulation, distinguishing different types of crypto activities and technologies.

Possible pathways for balance include: maintaining strict KYC/AML requirements for large centralized exchanges while allowing small-scale P2P transactions to remain relatively anonymous; setting legal use cases for privacy-enhancing technologies rather than outright banning them; and establishing legal standards for “reasonable privacy expectations,” similar to cash transaction limits in traditional finance.

However, achieving this balance faces technical and political challenges. Technically, how to preserve blockchain transparency while enabling selective privacy remains an open question. Politically, there is a fundamental tension between national security agencies’ need for comprehensive surveillance and the protection of civil liberties.

Atkins’ warning marks a critical moment: the SEC is openly acknowledging the privacy risks in cryptocurrency regulation, rather than simply equating privacy needs with illegal intent. This shift in attitude could pave the way for a more balanced regulatory framework, but the final outcome ultimately depends on the choices made by legislative, judicial, and enforcement authorities.