"Financial Panorama Prison" is not inevitable: SEC Chair aims to build a third way

Author: Zhang Feng

U.S. Securities and Exchange Commission (SEC) Chairman Paul S. Atkins delivered a speech at the Cryptocurrency Working Group Roundtable on December 15, 2025, offering in-depth insights into the balance between financial privacy and regulation in the blockchain era. He explicitly stated that, if regulatory directions go astray, cryptocurrencies could become “the most powerful financial surveillance architecture in history,” potentially pushing the entire industry into the abyss of a “financial panoramic prison.” In today’s landscape of deep integration between digitalization and blockchain technology, how to implement effective financial regulation without infringing on personal privacy has become a common challenge faced by global regulators.

1. Why is this issue so critical? — Misguided regulation could lead to a “financial panoramic prison”

In his speech, Atkins straightforwardly pointed out that cryptocurrencies and blockchain technology possess unprecedented transaction transparency and traceability. Every on-chain transaction is recorded on a public ledger, and on-chain analysis firms can efficiently assist law enforcement in linking on-chain activities to real identities. This technological feature is like a double-edged sword: on one hand, it helps combat illegal financial activities; on the other, it could be misused as a comprehensive surveillance tool.

If regulatory authorities adopt extreme, all-encompassing approaches—such as treating each wallet as a broker, each code as an exchange, requiring reporting of every transaction—then the entire crypto ecosystem would be forced into a “panoramic monitoring” state. In this scenario, every transfer, position adjustment, and even smart contract interaction would be exposed, personal financial privacy would be completely obliterated, and innovation vitality would be stifled.

As Atkins warned: “Public blockchains are more transparent than any traditional financial system… If regulation goes wrong, cryptocurrencies could become the most powerful financial surveillance architecture ever.” This concerns not only technological ethics but also touches on the core contradiction of modern financial systems: How to delineate boundaries between ensuring security and defending freedom?

2. Fundamental principles for solving this issue: balancing national security and citizens’ privacy

Atkins emphasized that the essence of this issue is “very American,” namely, whether people can participate in modern financial activities without sacrificing privacy. This reflects the long-standing American value trade-off between national security and personal freedom.

On one hand, the government has an obligation to curb illegal financial activities through tools like the Bank Secrecy Act, protecting citizens and the nation from security threats; on the other hand, “citizens should be free to handle personal affairs without government surveillance,” which is one of America’s core values. The emergence of cryptocurrencies provides an opportunity in the 21st century to rethink this balance.

Therefore, the fundamental principle of regulation should be: effectively prevent risks and safeguard national security, while fully respecting and protecting citizens’ financial privacy rights. Any policy that emphasizes only surveillance or allows unchecked freedom will harm the long-term healthy development of the financial system.

3. Existing tools and their boundaries: self-restraint in regulation through the CAT system

Over the past years, the SEC has established a series of data collection and monitoring tools, such as the Comprehensive Audit Trail System (CAT), swap data repositories, and PF forms. These tools have played a role in increasing market transparency and combating fraud but also reveal risks of regulatory overreach.

Using the CAT system as an example, Atkins pointed out that it was initially designed to help the SEC better understand market transactions but has gradually evolved into a “powerful surveillance system,” bringing the SEC “closer to large-scale monitoring.” More notably, the government has not even fully utilized all submitted information, yet investors bear unnecessary costs and privacy risks.

In response, the SEC has proactively taken measures to reduce some of the most sensitive data elements in CAT and re-evaluate its scope and costs. This approach reflects the regulator’s self-restraint and rational use of tools—not blindly pursuing maximum data collection, but carefully assessing the necessity and reasonableness of each data category.

4. Challenges of regulation in the digital age: easier information access demands greater humility

In the “analog era,” financial regulation was limited by paper records, physical distance, and manual processes—these objective constraints inadvertently protected personal privacy. However, in the digital age, especially with the proliferation of blockchain technology, the cost and barriers to obtaining information are greatly reduced, enabling regulators to nearly instantly and comprehensively monitor user transactions.

If this technological convenience is abused, it could easily lead to excessive surveillance. Atkins cited economist Hayek’s view in “The Fatal Conceit,” criticizing the bureaucratic mindset that “believes that collecting enough information and convening enough experts can find perfect solutions.” In fact, more data does not equal wisdom, and data accumulation does not guarantee effective regulation.

Therefore, in the digital era, regulators should maintain “humility and principles,” avoiding overreach driven by technological ease. Discussions around privacy-enhancing technologies (like zero-knowledge proofs) are especially relevant in this context.

5. Avoiding overregulation: not turning every link into a surveillance node

Atkins explicitly opposes the idea of bringing every component of the crypto ecosystem under regulatory coverage. He warned that if the government “treats each wallet as a broker, each software as an exchange, each transaction as a reportable event, and each protocol as a monitoring node,” then the entire system would become a “panoramic financial prison.”

Fortunately, blockchain technology itself offers tools to protect privacy, such as zero-knowledge proofs, selective disclosure, and compliant proof wallets. These technologies allow users to demonstrate compliance without revealing all financial details. For example, regulated platforms can prove their users have passed AML checks without permanently storing every transaction record.

This enables “less disclosure, more compliance,” and opens new paths for regulatory innovation: not by increasing data reporting, but by leveraging technology to verify compliance while protecting privacy.

6. Ensuring normal market operation: allowing partial information to remain private to maintain market health

The normal functioning of financial markets relies on a certain degree of privacy and confidentiality. Atkins pointed out that many institutions depend on building positions, testing strategies, and providing liquidity. If these activities are fully disclosed in real-time, it could lead to front-running, imitation, and herd behavior, distorting the market.

For example, if market makers and underwriters must disclose every inventory adjustment or fund flow instantly, their business appeal diminishes, and market liquidity could suffer. Therefore, moderate opacity of information is necessary for healthy market operation, and regulation should leave room for legitimate business privacy.

This principle also applies to the cryptocurrency market. If every on-chain transaction and smart contract call is fully exposed, it could deter institutional participation and facilitate market manipulation. Hence, regulatory frameworks should strike a balance between transparency and confidentiality.

7. Building a goal-oriented framework: technological progress should not come at the expense of personal freedom

At the end of his speech, Atkins proposed that the ultimate goal is to build a regulatory framework that promotes technological innovation and financial development without sacrificing personal freedom. This framework should feature:

• Principle-based: balancing national security and personal privacy;
• Technology-neutral: leveraging privacy-enhancing tech to achieve “compliance without surveillance”;
• Layered regulation: differentiating among entities and risk levels to avoid one-size-fits-all;
• Dynamic adjustment: continuously optimizing tools in response to technological and market changes.

He emphasized that this is “a matter of profound significance and lasting impact,” requiring joint participation from regulators, industry, and the public. Only through collaboration can we find a feasible path that ensures security and innovation without sacrificing personal privacy.

8. Implications for China’s regulation: rethinking goals, principles, tools, and frameworks

The discussion by the SEC offers important insights for China’s regulation of digital currencies and blockchain:

• Clear regulatory goals: China should establish a balanced approach—prevent financial risks and illegal activities while protecting user rights and encouraging innovation.
• Emphasize restraint: Regulators should exercise tool rationality and restraint when using big data and blockchain analysis, avoiding overreach. Learning from SEC’s CAT system reflection, mechanisms for necessity review of data collection should be implemented.
• Adopt suitable technologies: Actively explore zero-knowledge proofs, homomorphic encryption, multi-party computation to enhance privacy in compliance. For example, in AML monitoring, “prove compliance without revealing transaction details.”
• Encourage innovation in frameworks: Regulations should leave room for technological iteration and business practices, avoiding overly rigid rules that stifle innovation. Approaches like regulatory sandboxes and pilot programs can help explore the balance between regulation and privacy.
• Promote industry self-discipline: Encourage industry organizations to develop privacy and compliance standards, fostering a tripartite governance system of government regulation, industry self-regulation, and enterprise initiative.

Paul S. Atkins’s speech profoundly reveals the core contradictions and potential paths for financial regulation in the crypto era. In today’s era of unprecedented technological power, regulators must remain clear-headed and restrained to avoid falling into the “panoramic surveillance” trap. Making good use of existing tools, ensuring normal business operations, and exercising power restraint may be the key to balancing crypto regulation and privacy protection. This challenge is not only for the United States but also a common test for every country exploring the future of digital finance.