Privacy-first finance is an approach to financial transactions that prioritises the protection of customers’ personal data. This article covers how privacy in finance is regulated and the technologies used to enhance it.
Key takeaways:
- Three core laws regulate financial privacy in the US.
- Despite regulations, financial privacy is a concern for many people.
- A range of technologies has emerged in response to people’s inclination towards privacy.
Financial privacy regulations
Financial privacy in the United States is regulated both at the federal and state levels, with federal laws representing the core of regulations, while states mostly add further precision in definitions. The three legislations at the federal level that are concerned with financial privacy and data protection are listed below.
- The Right to Financial Privacy Act prevents the government from accessing people’s financial records without their knowledge.
- The Gramm–Leach–Bliley Act requires financial institutions to limit data sharing and explain their data sharing practices to customers.
- The Fair Credit Reporting Act promotes privacy, fairness, and accuracy of information kept by consumer reporting agencies.
Why financial privacy matters
Despite the regulations in place that serve to protect consumers’ data, privacy is becoming a major concern due to the severity of consequences should data be stolen or misused, and the growing threat to financial information resulting from the increased digitalisation of transactions.
Data breaches are a major security concern. There have been 3,158 data compromises in the US in 2024, affecting over 1 billion individuals. Should such an event lead to identity theft, the consequences for the victim can be alarming, including damage to their credit rating, debt, and arrest.
Data breaches in financial institutions are not the only issue. Navigating the net leaves a digital footprint at every step, resulting in various entities gaining detailed information about people’s activities, including financial habits, which can be abused.
Technologies that enhance financial privacy
As a result of these growing concerns, a variety of technologies have emerged with the purpose of improving the security of consumers’ data. Some of these are available to the consumers themselves, while others are implemented by financial institutions.
VPNs
Every device connected to the internet is assigned an IP address, which functions much like a street address on the internet, and is used by devices to direct data. An IP address can be traced to a physical location.
A VPN (virtual private network) works by directing all traffic from a device to the VPN server, before sending it to the desired location, and in the same manner, incoming traffic passes through the VPN server. Consequently, using a VPN hides one’s location from the site they are visiting, and conceals their activities from both their internet service provider and potential malicious entities who might intercept traffic.
Furthermore, it encrypts all data being sent and received, such as credit card numbers, preventing anyone from reading it should they intercept it.
Many companies are aware of users’ affinity for privacy and allow their services to be used with a VPN. These services include streaming, iGaming, and social media platforms, among others. Online casinos that are designed to be used with a VPN are especially popular among players. By accessing a VPN, they can play at a wider range of sites, some of which might be blocked in their country.
Virtual credit cards
Many banks offer their customers virtual credit cards, which are tied to customers’ bank accounts but hide true credit card details from merchants. They are granted either for a single transaction or a set time period.
Virtual credit cards generate a new, single-use credit card number for every individual transaction. This number is only valid for one transaction, meaning that if anybody manages to steal it, such as in a data breach, they cannot use it to access the owner’s funds.
The prevalence of virtual credit cards is rising, with a recent survey of 2,516 individuals showing that more than 4 in 10 buyers use them.
Cryptocurrencies
Cryptocurrencies by themselves offer a certain level of privacy, as the only identifying feature on the blockchain of any given person is their public key. Buying cryptocurrencies at no-KYC exchanges makes the coins practically untraceable; however, these establishments are becoming increasingly rare due to regulations.
To facilitate a higher level of anonymity, a new type of cryptocurrency was invented called privacy coins, notable examples being Monero and Zcash. They use a variety of techniques to make their users completely anonymous, although the growing stringency of regulations caused them to be delisted from many exchanges.
Lastly, the privacy of cryptocurrencies can be improved by using a privacy-focused crypto wallet, such as the Wassabi Wallet. Below is a list of features these wallets possess that serve to enhance privacy:
- CoinJoin: combines multiple users’ transactions into a single transaction.
- PayJoin: includes both the sender’s and receiver’s input in the transaction, complicating chain analysis.
- Subaddresses: a new address is created for every transaction.
- Coin control: allows a user to select specific UTXOs to send in a transaction.
Homomorphic encryption
This is a technique that allows encrypted data to be analysed without being decrypted.
Banks put a lot of effort into combating money laundering, and criminals who partake in this activity often divide their ill-gotten assets into multiple smaller parts, depositing them in different bank accounts, in order to reduce their chance of detection. This makes the analysis of data, with the purpose of identifying money laundering, a complex process that can benefit from banks sharing information with each other, and homomorphic encryption allows banks to share data in encrypted form, without violating their customers’ privacy.
Private browsers
Private browsers are designed to block trackers, which are pieces of software embedded in websites that are used for monitoring people’s activities. Trackers use cookies and fingerprinting to recognise a specific individual and connect their activities across various websites. They monitor what links people click on, what they search for, and what they buy. This information is sent to the company that owns the tracker, which can link the activities to an IP address and, therefore, to a range of personal information, creating a detailed profile of every person, including their location, interests, and spending habits.
While this data is primarily used for targeted advertising, which is by itself not a threat, the excessive collecting and selling of personal data by companies increases the likelihood of it ultimately falling into the wrong hands.
Conclusion
It is evident in the number of relevant technologies that people care about protecting their data while interacting with financial systems. Financial institutions employ some of the technologies themselves, namely virtual credit cards and homomorphic encryption, but customers also have access to third-party tools that enhance their financial privacy.
It was technology that created an issue in the first place, with the digital storage of information and online transactions, and technology will likely keep advancing to compensate and protect people’s data.
Peyman Khosravani is a global blockchain and digital transformation expert with a passion for marketing, futuristic ideas, analytics insights, startup businesses, and effective communications. He has extensive experience in blockchain and DeFi projects and is committed to using technology to bring justice and fairness to society and promote freedom. Peyman has worked with international organizations to improve digital transformation strategies and data-gathering strategies that help identify customer touchpoints and sources of data that tell the story of what is happening. With his expertise in blockchain, digital transformation, marketing, analytics insights, startup businesses, and effective communications, Peyman is dedicated to helping businesses succeed in the digital age. He believes that technology can be used as a tool for positive change in the world.
