On The Brink with Castle Island - Iain Murray (Competitive Enterprise Institute) on the history of Operation Choke Point (EP.169)

Episode Date: January 18, 2021

Iain Murray, VP of Strategy at the Competitive Enterprise Institute, joins the show to discuss the history of Operation Choke Point, a 2011-2015 program used to exclude legal businesses from banking led by the DoJ and FDIC. In this episode:  How Iain Murray came to be one of the main historians of Operation Choke Point The roots of Choke Point in the crackdown on poker sites in 2011 How Choke Point was started on a whim by two midlevel DoJ lawyers in 2011 How OCP targeted completely legal but politically disfavored industries How mechanically the DoJ was able to get banks to comply with their informal guidance Why the closed nature of banking means that alternatives financial service providers for these industries couldn't be created How bank consolidation meant that OCP was easier to instrumentalize How successful was Choke Point in marginalizing targeted industries? Did OCP have buy-in from the highest levels of the Obama administration? How regulations should have implemented the rules they sought to create with Choke Point – and why they chose not to How OCP was an end-around the administrative procedure act, and why it was done covertly Was there any accountability for the individuals behind OCP? Was anyone fired? Why individuals on any side of the political spectrum should be concerned about OCP Did Choke Point ever really end? The long term enduring effects of OCP How the Wyoming SPDI is a reaction to Choke Point Whether Iain agrees with the OCC's 'Fair Access' rule Content mentioned in this episode:  Iain Murray at CEI, Operation Choke Point: What it is and why it matters OCC, 'Fair Access' rule 

Hello everyone and welcome back to On the Brink with Castle Island. This is Nick Carter. This is our second episode in the choke point series. We will have more to come. So this week you may have seen that the Office of the Comptrol of the Currency finalized a rule requiring that large banks provide fair access to bank services. Now you might wonder, well, why would they have a rule like that? While this rule has its roots in something called Operation Chokepoint, which was a Department of Justice and FDIC program, which ran from about 2012 to 2015, and it effectively involved de-platforming entire industries from the financial services providers, effectively duming them solely because a few folks in the administration didn't like them. And this was done in an extrajudicial way. It wasn't done

through the normal processes. It wasn't done through an act of Congress. It was done pretty much arbitrarily. Now, to cover the history of Operation Choke Point, which in my opinion, is one of the greatest scandals that most people have never heard of. I brought on the subject matter expert, Ian Murray. He is a vice president at the Competitive Enterprise Institute. In my opinion, he wrote the canonical history of the operation, and he's been very generous with his time coming on and explaining the origins, the prehistory, and the lingering and chilling effects of chokepoint that still affect us to this day.

This is one of the most important topics that we have been covering on this podcast. I think it's absolutely vital in understanding how banks can be weaponized for political objectives to de-platform entire industries, including potentially our own. So let's jump right into it. Brought down by bad mortgage investments, Lehman, which has 25,000 employees, will be liquidated. The federal government loans American International Group, AIG, $85 billion. This is a different kind of market, and the Fed is asleep. The federal government is stepping it to stabilize Fannie Mae and Freddie Mac.

The two mortgage giants that have been threatened by the housing crisis. The Bank of England has pumped 75 billion pounds more into Britain's ailing economy with a new round of quantitative easing. You print a couple trillion dollars and all of a sudden people start to worry. So out of this worry, we have something called the Bitcoin. Bitcoin. Ian Murray is the vice president at the Competitive Enterprise Institute. We're talking about a very important topic.

It's something that we have actually launched a mini-series on. to explore this in the context of the crypto industry. This episode is meant to be a bit of a look back at the full historical episode of Operation Chokepoint. Ian is really one of the foremost experts on the topic and has written extensively on it. Ian, thanks so much for joining us today. It's a delight to be with you today, Nick. So maybe before we start, you can tell us a little bit about the Competitive Enterprise Institute

and what you guys do. Yes, Competitive Enterprise Institute is a libertarian think tank in Washington, D.C. We were set up to examine and make recommendations on the issue of regulation. Other people do things like taxation and legislation. We do regulation. In other words, those secondary pieces of legislation that actually form most of the way that business and economic transactions are regulated in the United States. We think there's too much regulation and we're trying to reduce it.

That's music to my ears, Ian. So how did you come to be one of the main chroniclers of Choke Point? How did that come about? Well, around 2011, 2012, in 2010, in 2010, after the financial crisis, the Congress passed a law called popularly Dodd-Frank. And that was an attempt to regulate the financial industry so that the financial crisis wouldn't happen again. but it went much further than that. It included a lot of other things that had nothing to do with the financial crisis. And especially in the area, consumer finance, regulations of the way that we as consumers use and spend our money.

So this meant that there was an awful lot more regulation of the consumer finance industry than previously. And a lot of that was directed against new upcoming competitors to the banking industry. So I started paying attention to what the regulators were doing with these new competitors, things like payday loan operators, financial services,

centers, a lot of things that were, a lot of industries that were aimed at the underbanked. One of the things about Dodd-Frank is that the increased regulation was pushing people on the margins out of the banking system. Free checking accounts started to disappear, for instance. So that meant that people who had been pushed out of the banking system needed to have alternatives. And I was looking at how regulators were handling these alternatives. And in many cases, it seemed that they were trying to kill them off. And that's how I first became aware of Operation choke point, because it seemed that there was a process going on beyond the normal process of regulation that was aimed at trying to kill off some of these industries, these new industries.

So you have a great paper called Operation Choke Point, what it is and why it matters, and we'll get into it. But one thing you mention is that the crackdown on the poker industry, which I was affected by, was in some ways presaging the crackdown, the full-fledged chokepoint operations. in terms of some of the tactics employed. So for those that aren't familiar with that, tell us a little bit about how that was actually implemented. Yeah, this is an odd one. The federal government justified its crackdown on online poker under the 1961 Wire Act, which was meant to ban interstate gambling on sporting events.

around that time much of the interstate gambling on sporting events was was controlled by the mob so the Wire Act was passed to try to stop this but it didn't really have much effect on the mob however the Wire Act was one of those pieces of legislation which hung around after its intended intended purpose had failed and began to be used in other ways So the Department of Justice in the 70s decided that it was going to implement the Wire Act to stop all forms of gambling that use any sort of telecommunication lines. So it basically made remote gambling impossible. Then, of course, we had the Internet that appeared, and a federal court found in 2002, I think, that the Wire Act doesn't actually forbid Internet gambling on games of chance, but only on sporting events. Once again, the original point of this was sporting events. But the Department of Justice just ignored this and continued to apply it as if it, as if to apply to all online gambling in games of chance. And then around 2006, there was a very, very late passage in Congress of another bill.

I think Uyghur, the Unlawful Internet Gambling Enforcement Act. and that basically really cracked down on not just games of chance but games of skill like poker. So the authorities, especially the U.S. Attorney's Office of the Southern District of New York, which is generally the most activist U.S. Attorney's Office when it comes to anything that's either financially related or users telecommunications. They basically just ordered a bunch of banks to freeze payments to thousands of poker players who were using two particular payment processes.

and basically said that this was money laundering and illegal gambling. And again, they cited the Wire Act. So what this did was it set this precedent for going after payment processes in order to stop an otherwise legal activity. Yeah, it sounds to be quite convenient to do that. I suppose it's a very high leverage way to interfere with whole industries. Would you say that this act as employed for the, this Wire Act as employed for the poker takedown, was it being used in a valid way or was it

a really creative interpretation of the law? I think that not only was it an invalid way because the courts had said that it didn't apply, it only applied to sporting events. it should not apply to games of chance or games of skill. So the use of the Wire Act was just completely inappropriate in this case. However, the law remains on the books and some courts have allowed this sort of activity to continue. Then there's Whigia, the Internet Gambling Act, again that is based around games of chance and not at games of skill and poker is clearly a game of skill so so again it's really it's really it's not even a gray area it's it's very much a disputed area

that this should apply but unfortunately the way the way the law works is that harms are created and then it becomes a very, very difficult process to try and get restitution of those harms through the courts. And very often, I'm afraid, regulators just rely on the fact that people can't afford to challenge them in court. And that's basically what happened with the poker industry. So many thousands of people lost their livelihoods. as a result of this and it's just appalling that it was allowed to happen.

Yeah, it's always interesting because I know that a lot of my friends played internet poker as did I. And a lot of us discovered Bitcoin is a direct result of effective view being de-platformed and having our funds frozen at the poker sites. And so it's interesting to see how the internet routes around these disruptions, albeit, you know, with great difficulty in this case because Bitcoin was really immature back then. I think this was started to sow the seeds of a lot of people's interest in Bitcoin. We'll see if that is successful in terms of remediation issues like these, you know, these nodes that get exploited by the government. But that always struck me is kind of ironic or kind of symmetrical in a way.

So then moving on to chokepoint itself, maybe in kind of very simple terms for people that just aren't familiar with it at all. What would just Operation Chokepoint actually refer to? Operation Chokepoint was a collaboration between various, the Department of Justice and various financial regulators. There's a whole alphabet. soup of regulators that help to regulate the financial industry. For instance, the Department of Justice has a role.

The Federal Deposit Insurance Corporation of FDIC has a role. The Office of the Control of the Currency, OCC, has a role. The Treasury has a role. The Federal Reserve has a role. Each state has its own banking regulators and banking So there's a huge array of regulators that supposedly oversee this industry. Operation Choke Point essentially came about as a collaboration between a lot of these agencies that was essentially begun on a whim by two middle.

level lawyers at the Department of Justice around 2020-2011. They'd gone after a couple of obviously fraudulent payday lenders and decided that the entire industry was corrupt and so wanted to try and shut it down. seems. So they, they realized that the best way to do this would be to go after, just as in the online poker industry's case, go after the payment processes that handle the payments that the payday lenders used. And so they, they persuaded the FDIC to issue a circulate in the summer of 2011 that basically said that banks who had relationships with third-party payment processes who served a number of industries faced, were exposing themselves to greater

reputational risk. And as a result, they would be eligible for. increased supervisory activity. The list of activities that these payment processes supported is extensive. It doesn't just include payday loans, but it includes a bunch of other things, all of which are perfectly legal, things like ammunition sales, cable box de-scramblers, coin dealers, dating services, drug paraphernalia, firearm sales is a particularly interesting one, fireworks sales, home-based charities, lottery sales, mailing lists and personal info, money transfer networks, online gambling, of course, payday loans, pharmaceutical sales, pornography, surveillance equipment,

and even things like tobacco sales and travel clubs. So it's a really extensive list. And any bank that handled the account of a payment processor that dealt with any of these industries was going to be immediately suspected of facilitating fraud. activity and that is something that no bank wants to be exposed to. So I guess my immediate first question is why should the DOJ care about reputational risk of banks or the FDIC? What what does the government care about reputations and imposing these reputational standards on banks?

Well, theoretically, the idea is that that the that the, that, that, that, that, that, that, that, The reputational risk implies a strategic risk that by engaging in relationships with these processes, banks are actually exposing themselves at a strategic level to much more involvement in fraudulent activity. So there's going to be credit, compliance, and transactional risk as a result of that. Of course, that's basically begging the question of are these industries actually involved in illegal activity to begin with? Almost certainly some of them are. And that's very much an issue for banking. regulators to be interested in. However, the assumption that the entire industries themselves are

hopelessly fraudulent, it goes not just a step, but several miles too far. Most of these activities are, in fact, most of these activities are legal. There are some that are explicitly illegal. I think, for instance, Ponzi schemes are on the list. Yes, that's it. explicitly illegal and any bank that's dealing with a payment process that handles a Ponzi scheme is almost certainly involved in illegal activity. But other industries are not just legal, but they have actually had their right to exist affirmed multiple times by the Supreme Court. Pornography is a great example of that. So just assuming that the industry is fraudulent is essentially saying that the industry should be illegal despite what the courts have said.

Right. So how exactly was power meted out here? I mean, how precisely and mechanically did the DOJ get its way in this situation? Well, they got together is what they called the consumer protection working group. And that working group decided. that banks that had, that were involved in this, in providing banking services to the payment processes that dealt with these industries, would be subject to investigative subpoenas under something called FIrera, the financial institutions reform recovery, and Enforcement Act. Receiving a ferrier subpoena is one of the worst things that can happen to a bank.

It basically means that they have to turn over their entire operating procedures to the banking supervisors, and it's just a complete pain in the backside for any bank to do this. So therefore, banks immediately started reacting to that circular that have been passed around in 2011 and started cutting off banking services unilaterally to any of the payment processes that were involved with these industries. So essentially it was the threat of subpoenas that led banks to decide on their own account that they didn't want anything to do with these people because it was too much of a pain in the backside. As a result, people started seeing their banking services cut off. their payment processes were the first, and then their own personal banking relationships

that started to be cut off. I think it was in May 2013 that an online porn star realized that she'd been cut off from a bank, from banks, and wasn't able to get a new bank account anywhere. And she realized that something, was up then firearms sales salesmen started realizing that they were getting cut off in a

similar way and of course payday vendors who were the initial target of all of this started started discovering that they had no banking services either and that's when people realized that there was something something going on and so I guess from the perspective of someone who has suddenly been de-platformed and goes around trying to get a bank account. It looks like this is a highly coordinated activity to exclude this person or entity from the financial industry. But I guess what was really happening was this was an emergent phenomenon whereby all these banks collectively decided it was in their interest to stop servicing these sectors. But, you know,

I guess it looked coordinated, but really it was because they wanted to avoid subpoenas. Yes, I think that's a fair characterization of it. However, it was clear from the start that it was the intention of the regulators to literally, it was in response. to a Wall Street Journal inquiry about what was going on here. One of the Department of Justice officials talked about choking off the merchants from the very air they need to survive. And that's how the language about Operation Choke Point started to appear. So it was clear from the very start that this was the intention of the regulators. they essentially did, you know, what the mob does, you know, nice bank you got here, it would be shame if somebody came in and started poking around and supervising it.

And so what do the banks do in those circumstances? They're almost certainly going to respond the way the regulators assumed they would. And I guess one reason why this is so troubling is that banking is not, free market activity. You know, you can't really just create a new bank if you disagree with how the existing banks are operating. I mean, it's a highly permissioned activity. You need a charter to operate, and charters are pretty scarce. So, you know, if it had been the case that it was easy to spend up an alternative bank and provide services to these industries that have been de-platformed, maybe the market could have solved this. But in this case,

it's like a taxi medallion. It's hard to create new banks, and so the government has a really tight grip on the industry. That's exactly right. And especially at this particular time, this sort of 2013, 2014 time period, that was when the full burden of the extra compliance costs that were landed on banks as a result of the Dodd-Frank Act that I mentioned earlier really started a bite. So at that time, what we saw was a very swift consolidation in the banking industry. Small banks just couldn't survive this anymore.

We had a client of us who we helped to sue the Consumer Financial Protection Bureau, was a very small bank in Texas. that originated mortgages for $30,000 shacks down the end of dirt roads. The compliance cost that Don Frank put on the banks basically made that activity impossible. There was no way they could make money of it. And the president of the bank told me that in order to comply with all these costs, he'd actually had to hire more staff than he had originally just to do the compliance. So what we were seeing was these small banks were either closing or, in the vast majority of cases,

merging with other banks in order to survive. So there's this massive consolidation taking place in the banking industry. And the very last thing that these newer, bigger banks, wanted was to have increased supervisory activity just at the point that they were merging. And I guess the cliché is that big banks lent to big businesses and community banks lend to small businesses and this consolidation raises the average size of banks. And so credit provision just became more scarce, right? Yeah, yeah.

In fact, a Harvard study found that lending to small and medium-sized enterprises decreased by about 20% in the years after the financial crisis. And that was part of the process that you just described so well. So returning to chokepoint, I mean, how successful would you say this was? I mean, you listed like almost two dozen industries here in the paper that were targeted. How successful was this operation in kind of marginalizing them? Well, it was tremendously successful. I mean, we saw how, you know, firearm sales, firearms dealers were many cases driven out of business. the payday lenders that I spoke to were in some cases literally reduced to old-fashioned shoebox cash accounting

because they couldn't find anywhere to take their money. And that obviously makes, if say you've got five or six stores spread over three or four, counties, as a lot of these small-scale payday lenders did, that makes the business incredibly difficult. So a lot of people were forced to the wall. Quite a lot of these new financial service centers and payday lenders went out of business. But some of them realized that there was something bad going on here and they decided to put up a fight and worked with their trade associations as a bunch of different trade associations in this area to find out what was going on here. You know, use of Freedom Information Act requests, worked with the House Financial

Services industry which was able to, sorry, the House Financial Services Committee, which was able to subpoena a lot of records from the regulators. And that way, we actually discovered what was really going on here and how this was all being coordinated by these working groups that was the setup between the regulators. So I guess choke point was kind of a secret for a while until the subpoena's kind of cast light on the issue, right? I mean, was it, did the DOJ and the FDIC try and sort of deliberately conceal what they were doing? I think they complied with the, with the subpoenas, and it was through the subpoenas that we discovered that this was actually called Operation Showpoint from the beginning.

But it was also clear that that absent those subpoenas, they all, they all. almost certainly weren't going to make the knowledge of this sort of thing public. So this all happened during the Obama administration. You mentioned that it was kind of mid-level staffers initially that kicked it off. Do you know if the kind of more senior administration officials had knowledge of this operation and even if they supported it or was it kind of agencies gone rogue kind of thing? It seems that there was at least tacit approval. Interestingly, the Consumer Financial Protection Bureau,

the very agency that had been set up to regulate things like payday loans, they seem to actually withdraw from Operation Showpoint very early. I suspect there may have been a sort of not invented here issue with them, that they felt that if anybody was going to do this, it should have been them, so they weren't going to help out. But otherwise, it does seem that there was enough knowledge in the senior levels that it must have passed approval. One interesting thing is that very early on, they went after Native American tribal payday lenders. And the tribes complained bitterly about that. And they got a very high-level meeting with the FDIC. And they were able to take.

to get the FDIC to back off. But otherwise, it does seem to have been going ahead with at least the tacit approval of the heads of the agencies. So to get right to the meat of it, I mean, would you consider Operation and Choke Point to have been unconstitutional or illegal under the laws that existed at that time? I think it's a very clear abuse

of the way that that we're supposed to operate. Regulators are supposed to operate under something called the Administrative Procedure Act. So if there is an industry that they want to regulate, they're supposed to follow the terms of this Act, which is do substantial research and have a rational basis for acting, then issue a proposed rule, allow that rule to go through a period of notice and comment

where anybody who's affected by it has the chance to say, to say this will affect me very badly and here's why. And then they're supposed to review those rules, revise the rule, in light of the comments and then issue a final rule. That's what the procedure that regulators are supposed to undertake. Things like Operation Chokepoint are end runs around the Administrative Procedure Act. They attempt to use existing legal authority in novel ways in order to bring about ends which they probably couldn't get under the administrative

the Administrative Procedure Act because too much of a fuss would be taken up. Sorry, one thing I should add is that a final rule can actually be disapproved by the Congress. So the people's elected representatives actually have the opportunity to say to regulators, no, even if you thought this was a good idea, we disagree, we disapprove the rule. Again, things like Operation Chokepoint don't allow. that procedure to take place. As such, it's basically freelancing by regulators abusing powers that have been granted them by Congress in a way that Congress never anticipated. Right. So the reason it had to be done covertly and extrajudicially was because it would not have gone through if Congress had had the

ability to look at it and there'd been a period of public comment right yeah and in fact in some cases it almost certainly wouldn't even if congress had allowed it to go through then there would have been appeals to to the court under on first amendment grounds and things like that so so you know as i say pornography it was one of the targets of this an industry which has had its right to exist reaffirmed time after time by the Supreme Court under First Amendment grounds, trying to destroy an industry that you don't like, for whatever moral reason, using other means, was likely to be looked on somewhat askance by the court.

And I'm not a constitutional scholar by any means, but I would imagine that the Fourth Amendment would apply here too. I mean, in terms of protecting banks from unreasonable searches when there's no evidence of a crime that's been committed. Well, indeed, that is actually one of the objections to things like various subpoenas. I think that would be interesting to see tested in court. But one of the interesting roles that was played here was by the House Oversight Committee, which was able through its, through its, subpoena powers to get all the papers relating to to Operation Chope Point and was issued a very very detailed report that that laid bare exactly what was going on here.

And most, very interestingly, one of the accusations against the financial industries, against the financial regulators was that they had attempted to frustrate congressional oversight by dismissing concerns from lawmakers. So the constitutional role of the Congress was being dismissed by the regulators. And that is another area that I think should make people concerned about activities like this. So you've hinted at it, but in terms of the history, how did this operation come to be kind of blown up and eventually, in theory, come to an end? Well, one of the members of the House Oversight Committee, and I think the House Financial Services Committee at the time,

is a congressman called from Missouri called Blaine Ludkimer. Congressman Lukumeier has a background as a banking investigator, as a banking supervisor. So he actually understood what was going on here. And as a result, he was able to put pressure on the head of the FDIC because he spoke the same language as the head of the FDIC to point out exactly how inappropriate this activity was. And he got the head of the FDIC to issue a letter saying that they wouldn't be issuing any furrier subpoenas on the basis of reputational risk. And they also withdrew the circular that had this list of industries that contained,

that supposedly created reputational risk. So he was able through simply talking to the FDIC in the language that they understood, he was able to persuade them that this was a really inappropriate use of their resources. And he in many ways is the real hero of Chirkpoint. So I know a lot of people claim that the Obama administration was scandal-free. This certainly looks like a scandal. to me. Did anybody, was anybody fired or did anyone resign over this? Or was it just kind of ignored after it ended?

As far as I'm aware, nobody was fired. The lawyers who started this off moved on to other things. As far as I'm aware, there was no actual disciplinary action taken here. which is a bit of a problem in my view. Even though it caused tremendous damage, huge collateral damage to whole industries and to firms that we're not doing anything illegal, but we're still affected by this. Well, indeed. And this is why accountability of regulators is such an important issue. I'm a former civil servant myself.

civil servant in Britain before I came moved over to the United States about 25 years ago. And as a civil servant, you do what your hires up tell you to do. But one thing that you do not do is go around trying to destroy legal industries simply because you disapprove of them. And that's where there needs to be a degree of accountability. If needs be, then perhaps the heads of those agencies need to go on a buck stops here basis, but somebody needs to be held accountable. I know we covered this earlier, but in terms of the selection of the industries,

it does seem kind of arbitrary. I mean, there's a puritanical thread that can be drawn, but do you have any, could you speculate as to why those specific industries were chosen, or was it more of a proof of concept to demonstrate this kind of competency? I think you've got it right with the proof of concept. However, it's interesting that certain industries were not on the list. For instance, I think if this had originated in a conservative Republican administration, then we might have seen a slightly different.

list. I think some of the industries would still have been on there, but I think, you know, we might have seen things like abortion providers or marijuana, the sales and so on. I mean, drug paraphernalia was on the list, but marijuana sales were not. So, you know, I think we would have seen a slightly different list. And I think that if choke point had been allowed to continue, then that list would probably have expanded in the recent under the current administration. Right. So regardless of your kind of partisan affiliation, everybody should have caused to be concerned about wholesale financial redlighting because it's really just it's contingent on who has power, who gets deplatformed. And as I say, the, uh, uh, what, this two game at,

at industries that have been controversial, but nevertheless have had their right to exist affirmed by the Supreme Court. So the question I always like to pose to people who might actually rather approve of cracking down on payday lenders is if this was aimed at abortion service providers, what would be your reaction then? And I think that if people think about the implications there, then they might come to a different conclusion.

Yeah, everyone is supportive of censorship when it's leveled against their opponents, and they're always shocked when it subsequently happens to them. Exactly. In terms of the lingering effects of the operation, so part of the inspiration for this series is the realization that there is an enforcement. formal set. There is a, for whatever reason, crypto firms have had a very hard time getting banking in the history of the industry. And that has begun to change, I would say, just in the last 18 months. But virtually everyone I know that started a company has had a hard time getting banking. Almost everyone that I know that is a crypto enthusiast that has interacted with exchanges,

including myself, has had bank accounts frozen or has been derrised or otherwise de-platformed. So clearly this notion of financial redlining still exists. Would you say it ever, so would you say it persisted even though the program came to a formal end? I mean, to what extent would you say choke point like tactics kind of exist today? Yeah, I think what happened was that Chow Point let the genie out of the bottle. I think people in the banking industry decided that even if Chow Point had gone away, that something like it could return. And therefore, why bother to take the risk of being involved with some of these industries?

and the big payment processor firms, especially Visa and MasterCard, they were also very, very wary of this. They were one of the first targets of the action against the poker industry that we discussed right at the start of this. So I think that there has been a lasting chilling effect on the industry as a result, a result of choke point. The banking industry was scarred by it and they don't want to be hurt again, so they're taking voluntary action, which of course is much harder to deal with. That voluntary action, I think, is an example of how in the regulatory studies area, we talk about a lot about regulatory capture. Generally, that means that the regulators have been captured by

the industry and just do whatever the industry wants. Sometimes it's a reverse. Sometimes the industry is captured by the regulators. And basically, even when it's left to its own devices, it still does what it thinks the regulators are going to want. The financial industry is so heavily regulated these days that I think we're seeing an example of that reverse regulatory capture here. And the financial industry is just doing this on its own account, simply out of fear that they might get regulated again. Yeah. And when you look at the coordinated deplatforming that happens to, you know, for instance, people with politically disfavored opinions and they'll be de-platformed within minutes by all the major payment processors and so on.

I mean, it's interesting, it's coordinated, but it's still emergent. And what you're saying is this is a kind of a preemptive bid to avoid future chokepoint like sort of oversight, I guess. Yeah, that's my very strong suspicion. A lot of it also comes from the fact that, businesses, especially highly regulated businesses, don't like controversy. And so if there's any sort of pressure group, external pressure group, that suggests that, oh, you shouldn't really be involved with this other industry, if that gets to the head of the business,

they tend to send down a memo saying let's not be involved. It's an unfortunate fact of the way business operates these days that the freedom of association is no longer thought of as a virtue in business. And I think that's a very, very big problem going forward. So there's some key regulatory developments here, which I want to touch on. The first would be Wyoming's attempt to create special purpose depository institutions. I've seen this justified by some Wyoming policymakers as a reaction to choke point. So these would be full reserve banks that are outside the purview of the FDIC because they aren't fractional reserve like other banks are.

and they don't necessarily need deposit insurance. And, you know, as you know, Wyoming businesses were affected by choke point. There's, you know, firearms manufacturing there. Do you feel that new banking structures, new charters might add some vibrancy to the bank sector and make it easier to ward off this sort of capture in the future? Yeah, I think one of the overlooked contributing factors, to the FDIC's interest was during the financial crisis as part of the Dog Prank Act. This was supposed to be a temporary measure, but deposit insurance was raised from $100,000 per account to $250,000 per account.

So that significantly increased the FDIC's exposure to risk. so the FDIC quite naturally reacted reacted according to that significant increase in exposure so I would tend to agree that allowing new forms of banking structure that are not subject to the same sort of oversight

would is actually if not a whole solution, at least a part of the solution. We need to allow the market to operate in this area. As you said at the very beginning, we need to allow for new forms of banks, for new forms of payment processing, that are not subject to the reasons why regulators are involved in the first place in order to let that market process develop.

Creation of new markets is an evolutionary activity, and regulators who want to stick their nose in to new forms of business are almost certainly going to stop that evolutionary process from happening. So Wyoming's action is exactly the sort of thing that I think could provide a solution. I'm not saying it necessarily will, but it could. And let's see what happens. Yeah, there's still open questions as to whether those entities will be granted reciprocity in other states. And I'm sure there'll be a legal battle over that.

And ultimately it is a question of where the power to control. create new banking institutions is vested, whether it's in the states or the federal government. So I'm sure there'll be lots of fights. The other body to talk about would be the OCC, the office of the comptroller of the currency. They've been led by Brian Brooks, who's, he's an export from the crypto industry. He used to be the chief legal officer of Coinbase. And Brian Brooks has taken a pretty interesting view on all this. He's promoted the fintech charter, which potentially would have that same effect of reinvigorating the kind of bank industry and adding new modes of sort of deposit taking institutions. The other thing he did was the OCC wrote a memo saying that they,

I don't remember the exact phrasing, but effectively trying to inhibit future choke point-like tactics by sort of mandating the banks not discriminate in their clients. So I was wondering if you had a reaction to that letter that they wrote. Yeah, I think generally speaking, Comptroller Brooks has been a very good thing for the industry. I think the fintech charter regulatory sandboxes are great ideas and I really approve of that sort of thing. I'm less happy about the non-discrimination rule. It gets back to the point of freedom of association that I mentioned earlier. Choke Point was an attempt to interfere with freedom of association by saying you must not associate. with these industries.

I think the OCC rule actually interferes with freedom of association as well by saying that you must associate with these industries. You cannot discriminate against them. There may be quite good reasons for an individual bank to discriminate against somebody. For instance, with the incoming administration, it might use this rule to force a Christian bank to associate with an abortion service provider. That's going to be a very big problem for that Christian bank. So I think what we should see is that the government should actually be neutral to freedom of association issues.

They shouldn't demand no association. They shouldn't demand association at the same time. If we could just get back to that principle of neutrality and allowing freedom of association, I think we'd be a lot better off. So I guess before we go to kind of zoom out a little bit, I mean, why generally is it a bad idea, why is it a bad idea to pursue crime or set policy

solely through financial rails. Generally speaking, these questions as to whether an industry should exist, they have broader implications than just the financial spectrum. Should firearms sales be allowed to exist? That's a constitutional question. constitutional question relating to the second amendment. If we allow end runs around that constitutional debate and we just allow the financial regulators to say,

well, this does actually provide a risk to banks that we regulate, so we have a genuine interest here in stopping this from happening, you cut off that constitutional debate. And I don't think that's healthy in a constitutional democracy. So we need to allow those constitutional debates to happen. And regulators should not be sticking their o'er in to try and steer the debate in a different way, simply based around their own particular interests. And that's assuming that those interests are genuine and not pretexts.

So I'd like to see these things discussed much more in the open as a political and or constitutional issue rather than just as a regulatory issue. Right. Well, Ian, you've been very generous with your time. Before we go, maybe just give me your retrospective on choke point. It's now about five years in the rearview mirror. There's some lingering effects. the historiography you did at the time, do you think that holds up? What are your kind of reflections on the scandal, you know, five years later? Well, I think it was a good example of how people who've been affected by, but badly by regulators' actions can actually get some relief through just doing what we always say you should do, go to your congressman, tell them your story. This was a good example of proper oversight, congressional oversight of agencies and of how congressman with a genuine

interest in the matter can actually affect some change, which I think is refreshing, given given all the things that we've seen go on recently in Congress. My big worry, as I mentioned before, is that once regulators try something like this, even if they get slapped down, there is a tendency for them to try it again. So I would like to have seen some sort of legislation pass both. houses and get signed by the president to stop this sort of thing happening again. Something did pass the House, but stalled in the Senate. And so unfortunately, the potential for something like Chow Point happening again is still

there. And that's why groups like mine have got to be on the, got to be ever vigilant. And we have early warning systems. when those are set off, we'll do our best to spring into action, and hopefully we'll have the same sort of result. Well, on that sober note, I want to thank you for coming on. Ian, this has been absolutely fascinating and a very important conversation. So thanks again for all that you do on this. Nick, it's been an absolute pleasure, and thanks for everything that you do for this incredibly vibrant sector. Thank you.