By: Andrea O’Sullivan

December 8, 2020

Financial access can make or break anyone in America. Being cut off from our payment systems is a bit like being unpersoned: Large swathes of the economy are suddenly out of reach while financial futures darken. Controlling financial access is a great way to control people, and the government knows this. It has manipulated access to financial channels as a way to manage society beyond the constraints of formal legislation.

The best example is Operation Chokepoint, a Department of Justice (DOJ) effort that put pressure on our banking system to cut off financial access for politically disfavored industries under the guise of cutting down fraud or money laundering. A recent proposed change in banking rules would give these industries better protection from such tactics.

Under the Obama administration, regulators such as the Federal Deposit Insurance Corporation (FDIC) and Office of the Comptroller of the Currency (OCC) issued threatening letters to financial institutions that processed payments for industries such as payday lenders, gun and ammunition firms, and cryptocurrency companies. The message was clear: cut back on business with these industries, or else. Banks got the hint, and affected firms found it harder and harder to find banking partners.

To be clear: the industries themselves were perfectly legal. It is no crime to sell fireworks or gold coins or bullets (with the proper federal and state licensing, of course). After all, if these firms were operating a de facto criminal enterprise, the government would have plenty of legal tools to take them down.

What the DOJ was arguing was that these industries were associated with a higher risk for fraud or money laundering. Rather than trying to go after each firm one by one—and surely some of the individual businesses within those industries were indeed engaged in such hijinks—the DOJ sought to put pressure on all of them at once by “choking” them of finance.

Bullying banks into doing the government’s dirty work was a quick and easy way to get the job done. Even better: it was an extralegal method to get rid of businesses the feds didn’t like too much anyway.

Operation Chokepoint was controversial when it was first revealed by the Wall Street Journal in 2013. Obviously, the affected industries cried foul, but Republicans also bristled at what they viewed as a covert politicization of the financial system. (No wonder, since targeted industries tended to include right-leaning trades such as arms sales and energy production.) The FDIC walked the program back a bit in 2015, but it continued in some form until the Trump administration wound it down in 2017.

This is not to say that banks are no longer a key channel for social control, just that the federal government no longer has a known operation to exploit it. Some states and their private sector counterparts have been all too happy to pick up where Operation Chokepoint left off.

For example, NY Gov. Andrew Cuomo directed his Department of Financial Services to issue Operation Chokepoint-style warning letters to financial institutions which provided services to the National Rifle Association. Climate change activists have turned similar tactics towards banks who process payments for oil and gas companiesCommentators and platforms routinely find trouble securing payment processing services. And it will keep going. Wherever there is a group who wants to shut something down, financial pressure will be a tempting tool of suppression.

Censorship-resistant and privacy-preserving cryptocurrencies such as bitcoin and Monero provide some relief to the problem of financial suppression. However, as Operation Chokepoint demonstrates, even cryptocurrency can succumb to financial controls through the on- and off-ramps that transfer digital currencies from fiat currencies and vice versa. This is no problem for people who can remain crypto-native, and have no need to touch US dollars, but that is a pretty small portion of the population at the moment.

Help may be coming from some unexpected quarters: the OCC, which less than a decade ago had led the charge with Operation Chokepoint. Under the leadership of acting director (and Bitcoin-friendly) Brian Brooks, the OCC has proposed a rule change that would make government-supported financial suppression much harder legally. It’s legally clever, and makes use of an Obama-era law to stave off future Obama-style injustices.

The Dodd-Frank Act was a sweeping financial reform that, among many other things, authorized the OCC to ensure that nationally chartered banks provide “fair access to financial services, and fair treatment of customers.” The intention was that minority customers be evaluated for creditworthiness on her or her own individual merits rather than the attributes of their broader group. In other words, a creditworthy individual shouldn’t be punished because they belong to some group that is considered “high risk” in the aggregate.

The OCC would like to apply this thinking to industries through the proposed “Fair Access to Financial Services” rule. The largest banks in the country—those with more than $100 billion in assets—would be prohibited from red-lining politically disfavored industries just as they are prohibited from red-lining politically oppressed populations. Rather, a gun manufacturer or pornography company or payday lender must be evaluated on the terms of their individual creditworthiness.

The rule does not require that all large banks must do business with all, say, fossil fuel companies, just like banks are not required to extend credit to every single member of a protected class who applies for a loan. Rather, it is a nondiscrimination requirement. Large banks will not be allowed to cut off financial access for disfavored industries just because the government or some other powerful group leans on them to do so.

It’s an interesting rule because it merely extends the logic of Dodd-Frank regulations that Democrats strongly supported. To oppose this rule while supporting Dodd-Frank, lawmakers would have to argue that it is okay to discriminate against some groups and not others. It would cement the situation as explicitly political.

Unsurprisingly, cryptocurrency law commentators have championed the rule as a strong check against the Operation Chokepoint-style suppression that choked the crypto industry in its infancy. The large banks that would be affected are balking a bit, arguing that there’s not really a problem here at all. Public comments on the rule are due by January 4, which gives the Trump-appointed acting OCC director (and current nominee for a five-year term) Brooks plenty of time to finalize the rule before whatever goes down on January 20.

Some libertarians balk at the prospect of the government effectively telling private banks that they are not allowed to cut off financial access to a group for whatever reason. It’s a decent point—after all, conservatives argue that religious groups should not be forced by the government to subsidize activities or provide services that violate their beliefs.

These critics say that ideological financial discrimination may result in innovative alternative financing, perhaps involving cryptocurrency. This is true, although unfortunate. For instance, the Lightning network payment app Strike was developed after founder Jack Mallers saw his family’s marijuana business struggle to secure payment processing.

Yet as it stands, the government already tells private banks that they are not allowed to cut off access to certain groups but leaves others open to financial ruin. The OCC is not about to rescind protections for currently protected classes; this rule change would bring consistency. As attorney Marco Santori pointed out, these large banks are already granted certain government privileges by virtue of their charter status—this change would put guardrails on the negative effects of that government-granted barrier to entry.

Furthermore, as mentioned, cryptocurrency activities themselves have already been cut off from financial access due to government pressure campaigns—could the financial vendors for alternatives like Strike one day be targeted? And large banks would be free to deny financing to truly insolvent or undeserving businesses. Finally, this rule change is ultimately a way of tying the government’s hands as well. Operation Chokepoint-style schemes would be clearly illegal under the proposed rule.

It’s great to see policymakers take the problem of power-driven financial suppression seriously. Policy can be a useful tool, but at the end of the day, there is a cultural problem that must also be addressed. More people need to be aware of the harms endemic to financial surveillance and control. We need to recognize what this kind of roundabout dispossession looks like and criticize it harshly when we see private actors engaging in it. Our financial freedoms will depend on it.