How Partisan Bureaucrats Weaponized Financial Regulation

The main goal of financial regulation in the United States is supposed to be the protection of consumers, investors, and their businesses from deception and fraud. Government agencies such as the Securities and Exchange Commission and the Federal Deposit Insurance Corporation should protect our interests and property rights from bad actors and criminals. Yet, in far too many cases, the financial regulatory agencies that are supposed to be our useful servants have become arrogant masters.

I recently moderated a panel discussion on Capitol Hill titled “De-Weaponization of Financial Regulation,” which examined this problem. Panelists explained the past, present, and possible future of finance regulators, usually at the federal level, who abuse their discretion and power to achieve ends outside of the due process of law enforcement. This abuse, whose track record long precedes the January 2023 creation of chairman Jim Jordan’s Select Subcommittee on the Weaponization of the Federal Government, is thoroughly un-American and has no place in our constitutional order.

One of the Obama administration’s biggest scandals was “Operation Choke Point,” a coordinated effort of multiple federal agencies to drive companies active in politically disfavored sectors out of business by pressuring banks to cancel their accounts and service contracts. Businesses as diverse as payday lenders, pawn shops, gun stores, and coin shops were targeted. The government implicitly threatened regulated banks if they didn’t manage their “reputational risk” in a way that aligned with the preferences of officials at Treasury and the FDIC.

Eventually, this project was exposed by whistleblowers and investigated by Republicans in Congress, with Representatives Blaine Luetkemeyer (R., Mo.) and Sean Duffy (R., Wis.) leading the charge. My Competitive Enterprise Institute colleague Iain Murray wrote a study on the issue back in 2014, emphasizing, among other things, that the FDIC’s supposed concern over bank risk had little to do with financial solvency and could easily be used against any politically attractive target in the future:

The FDIC’s list of high-risk industries seems guided more by moral censure than by any real prospect of criminality. If “reputational risk” is a significant factor in designating an industry “high risk,” then it is not too difficult to imagine a future FDIC in more “conservative” times designating a whole different list of industries.

A disturbingly similar playbook is currently being run against cryptocurrency developers and investors, an effort that observers have started calling “Choke Point 2.0.” A 2023 memo from D.C. law firm Cooper & Kirk described what is going on:

Bank regulators have published informal guidance documents that single out cryptocurrency and cryptocurrency customers as a risk to the banking system. Businesses in the cryptocurrency marketplace are losing their bank accounts, or their access to the ACH network, suddenly, and with no explanation from their bankers. The owners and employees of cryptocurrency firms are even having their personal accounts closed without explanation.

Thomas Hogan, a former chief economist at the Senate Banking Committee, has noted that the SEC specifically, under the leadership of Biden-appointed chairman Gary Gensler, has worked to disfavor cryptocurrency investments rather than simply extend over the industry the same level of oversight as that exercised over any other asset class. Hogan wrote for the American Institute for Economic Research in July 2023:

SEC officials have relied on opaque and discretionary enforcement actions. They have charged companies for not complying with the law without clearly stating what the law is. This approach is likely to push legal crypto exchanges to offshore jurisdictions with less regulatory scrutiny. The SEC must stop this illegal war on crypto. They should provide a clear, legal path for crypto exchanges to operate in order to protect American investors and the U.S. economy.

And the efforts continue today. In June of this year, the cryptocurrency exchange Coinbase sued the FDIC and the SEC over efforts to “debank” crypto companies. The complaints allege that regulators have been targeting the industry for nearly two years with various administrative actions and penalties while refusing to disclose information about their actions, even when documents have been formally requested pursuant to the Freedom of Information Act. According to Coinbase chief legal officer Paul Grewal, “financial regulators have used multiple tools at their disposal to try to cripple the digital-asset industry.”

Kyle Torpey reported on the case for Investopedia in June, writing that “Coinbase’s complaint against the FDIC also addresses ‘pause letters’ sent to financial institutions the FDIC supervises, which allegedly aimed to halt crypto-related activities, framing the letters as part of a broader scheme to isolate digital-asset firms from banking services.”

Obviously, no one has to take at face value the word of an interested party such as Coinbase. Though the company isn’t FDIC-insured, regulated entities have been complaining about their regulators for as long as such agencies have been in existence. But the preponderance of the available evidence points to executive-branch officials’ abusing their enforcement discretion to target a politically vulnerable sector of the market in ways that are consistent with previous abuses of power.

With Operation Choke Point as our past and anti-crypto Choke Point 2.0 as our present, we would be remiss to not consider the potentially more dangerous future that a central-bank digital currency (CBDC) would present. The Federal Reserve, while it is supposedly not yet developing such a tool, insists that “a CBDC would be the safest digital asset available to the general public, with no associated credit or liquidity risk.” It doesn’t take great effort to imagine the abuses of financial privacy and security that would become possible if the federal government controls every dollar in your bank account via a central database.

Nicholas Anthony of the Cato Institute’s Center for Monetary and Financial Alternatives, for example, wrote in his new book Digital Currency or Digital Control? that “whether it’s preemptive controls to take choices off the table, behavioral controls to nudge people’s spending, or punitive controls to punish citizens, a CBDC would provide countless opportunities for government to control citizens’ financial transactions.”

Despite an already highly regulated banking system, with an array of “know your customer” and other disclosure mandates, the U.S. financial system is still sufficiently decentralized that implementing an authoritarian regime on par with the Chinese Communist Party’s social-credit system would be very difficult. Unless, of course, policy-makers move to eliminate cash transactions and force Americans to use a government-issued digital currency instead.

At our best, we live in a country of laws and not of men, as John Adams famously said. When a citizen has committed no crime or injury against his fellow man, he should have nothing to fear from an honest and just government. It shouldn’t matter if some bank regulator happens to like gun shops or payday lenders or precious-metals dealers or Dogecoin or junk food or oil drilling or explicit websites. The only thing that should matter is if those firms are minding their own business and following the law — which the vast majority of them are doing.

Of course, the government has plenty of levers of influence that could be weaponized against the American public, but the actions of financial regulators are especially important for two reasons. One, we have already seen the abuses of these agencies and have every reason to think they could occur again. And two, interfering with an individual’s or business’s ability to make and move and invest money is a way of socially crippling them and stopping them from freely expressing their political and moral beliefs.

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