Thread by @andrewmgrossman

Grateful to @pmarca for throwing light on debanking.

So what to do? 3 policy responses, 2 for this January: 1) limit regulators' "jawboning"; 2) require public disclosure, backed by penalties; 3) dial back anti-money laundering law, the "world's worst policy experiment." (1/4)

1. Limit "jawboning" with an EO and personnel changes. The most widespread abuses aren't from regs, published guidance, or enforcement actions. They're informal: regulators expressing "concerns," raising eyebrows, etc. This "jawboning" comes cloaked in many guises, like "reputational risk" and "red flags." For closely regulated businesses like banks, a wink is as a good as a rule, because regulators wield so much power and have extremely broad discretion.

Drawing a perfect line to separate valid concerns about compliance from abusive requests is hard or even impossible. But two narrower fixes are easy. First, issue an executive order[*] requiring financial regulators to ban their personnel from requesting or encouraging the denial of services based solely on an account-holder's First Amendment-protected speech or associations, use of crypto, or status as a business in any lawful industry, including crypto, firearms, etc. Second, appoint financial regulators willing to investigate ongoing and past abuses, clean house, and put new personnel on the job who won't abuse their stations. These may be temporary fixes, but they'll work and, over the longer term, begin to change the culture.

[*] For the legal nerds, yes, there's a potential issue with financial regulators being "independent" agencies. But (1) unclear how much that matters following Seila Law and Collins and (2) the President can and should choose appointees willing--really, eager--to coordinate and do the right thing here.

(2/4)

2. Require government officials and employees to disclose jawboning activities, with penalties for non-compliance. For a variety of reasons, it's not feasible to extend the EO more broadly to include, for example, DHS, DOJ, White House personnel, etc. But that doesn't mean there's nothing to be done: all executive branch personnel should be required to publicly disclose jawboning that targets First Amendment-protected speech and association. That can also be done by EO, backed by penalties. And this wouldn't just address debanking; it would also go a long way toward addressing the government role in social-media censorship.

Looking for details? @CatoInstitute published the proposal that @mrsshap and I drew up: cato.org/briefing-paper… . And @WSJopinion ran our piece on it the other week: wsj.com/opinion/how-tr…

(3/4)

3. Turn the dial way back on anti-money laundering law (AML). AML is the legal basis for most anti-crypto pressure and actions. Banks face enormous penalties for non-compliance, and regulators wield enormous discretion over how to enforce it. As @matt_levine has often described it, banks effectively have a dial that they can use to turn up or down their AML (and KYC) programs, based on the pressure they get from regulators. Turn up the dial, and there will be a lot more false positives--innocent people ejected from the banking system. The pain imposed on them is enormous; the pain on regulators and the banks is essentially nil.

The problem is that the dial is turned up to 11. Sure, money laundering is bad, but the real question is whether it's worse than AML? The best evidence says the answer is no. Economist Ronald Pol calls AML "the world's least effective policy experiment."

The numbers (from Pol 2020)*: AML "helps authorities intercept about $3 billion of an estimated $3 trillion in criminal funds generated annually (0.1 percent success rate), and costs banks and other businesses more than $300 billion in compliance costs, more than a hundred times the amounts recovered from criminals."

*tandfonline.com/doi/full/10.10…

And keep in mind that this only accounts for compliance costs, not the costs and burdens imposed on individuals and businesses from being unfairly caught up in the AML dragnet.

Before AML took hold, money laundering itself was a crime, but banks were largely treated as neutral intermediaries. AML enlists them into law enforcement without subjecting them to protections like due process that apply to government actors. It doesn't make sense to treat banks as government actors--that's a recipe for financial disaster and would kill innovation--but that's what would be necessary to legitimize the role they're currently being forced to play. The better course may be to return to the older arrangement or, at the least, reform AML to narrow and clarify its scope so that there's less discretion to be abused.

Dialing back AML will take time. But it is essential to any durable solution to debanking, as well as to unlocking innovation in the financial sector. (4/4)