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SBF was considered, for a time, the heir apparent to George Soros. He was the next generation’s wellmonied Democratic standard bearer in Washington. One major reason why crypto has experienced what feels like performative outrage from Democrats since 2022 is that they are trying to demonstrate that crypto did not successfully buy them. Many in Washington, like many in crypto, have… selective memories of what meetings they took, transactions they entered, calls they made, and cookies they noshed on in 2020 and 2021. But to remove the beam in my own eye before casting out the mote in another’s SBF struck me as whipsmart, extremely cynical, but sincere with respect to his motivations. I thought him likely one of the most competent operators in crypto. Don’t assume that I meant that as high praise, please. Also I understood him contemporaneously to be Tether’s bagman and told people, privately, “Don’t get too close 5 chance he goes to prison.” In hindsight, I overrated the competence in several important domains, and totally missed the massive fraud. This was in no small part because of a strong sense of fellowfeeling. We have blind spots the size of Jupiter for people who remind us of ourselves and our closest friends. It’s hardwired into humanity, I think. Anyhow, Tether’s current most important bagman is Howard Lutnik, who may be stepping back from the position, as he’s currently leading Trump’s transition team and has his eyes on bigger prizes. Forget MicroStrategy’s high implied volatility. Lutnik convertible arb would be the trade of the century. Some crypto advocates believe it’s unfair to tar the industry with the SBF brush, for either industry internal reasons “He was CeFi not true DeFi, and tried to force the rest of us along with it Nuts to him” or political reasons “Not my side of the aisle Salami, you said Never heard of him neither” Here we are again at the tension between a democracies should practice careful consideration of individuals on their merits and reject collective punishment but b the political system shouldn’t have the memory span of a squirrel. Operation Choke Point Once upon a time there was an impressively unprincipled set of decisions made. Like many such tales, it didn’t happen as one discrete event in a smoky backroom. It started small and then cascaded, was covered up, and then came to light. Then, it was roundly and justly castigated. There are certain incredibly nonsalubrious businesses that make routine, intense use of banking rails and which simultaneously generate many customer complaints. Debt collectors are one such business. Full disclosure I was an unpaid advocate for consumers with issues with debt collectors and banks, FWIW for many years, and have described debt collectors as “among the most odious hives of scum and villainy as exist in the United States.” I’m also grouping a few clusters of consumer credit bottom feeders under “debt collector” or we’d be here all day payday lenders, socalled “credit repair” companies, and debtadjacent telemarketing. Banking regulators, in response to customer complaints which savvy customers, such as customers who listen to advocates like yours truly, will sometimes route through regulators because that achieves better outcomes than routing through CS, warned banks that debt collectors appeared to be at grossly disproportionate risk of ACH transfers that customers claimed were unauthorized. Customers claiming this are not always being candid. However, debt collectors do routinely abuse one’s common intuitions about how banking rails work as an intentional strategy. See the above piece for elaboration at length. Now, banks who bank debt collectors can math out how many of their ACH payments are complained about. One can make an argument that those banks might not have institutional knowledge that complaints about debt collectors are structurally anomalously high, for Seeing like a Bank reasons. One could further argue that a regulator can licitly tell a bank something they don’t know. That sounds reasonable and an appropriate use of a public servant’s time. Those banks that would open accounts for debt collectors n.b. not all banks are OK with having that business. Debt collection, while not salubrious, is legal and regulated in the United States. Banks are not onestop monitoring shops for all of their customers’ various obligations under the law. But working through legislatures and courts is slow and expensive. Why not simply deputize the banks We already have them run private intelligence agencies How much of a reach is it for them to also run private consumer protection bureaus The Obama administration didn’t like debt collectors, for very similar reasons to why I don’t like debt collectors. And so they broadened the critique the risk in banking bad guys was broader than the known, accepted, controlled, and certainly not existential risk of ACH reversals. Those customer complaints, those complaints could harm the bank’s standing in the community. That could result in e.g. a withdrawal of customer deposits. This would imperil the bank, for the usual reason. And if something could imperil banks, why, that should naturally cause the FDIC to make its opinions known. Get out of peril, by kicking debt collectors to the curb. But the FDIC had to be persuaded into that point of view, by a cadre of very talented people. The Department of Justice had a legal theory, which it was quite proud of. The Financial Institutions Reform, Recovery, and Enforcement Act of 1989 FIRREA gives the DOJ a hunting license for any fraud and many other crimes which affects a federally insured financial institution. FIRREA was passed after the savings and loan crisis, to protect small financial institutions from peril and thereby avoid another crisis. Now your common sense understanding might be “Oh, Congress probably intended on cracking down on fraud targeting banks which, I don’t know, was big enough to imperil a small community institution I could see a really large fraudulent bank loan imperiling a small bank. And checking the history books, there were some wildly fraudulent bank loans mixed up in the SL crisis. OK, so we federalized prosecution of defrauding a bank like that Sounds reasonable.” If you have that intuition, you are apparently not creative enough to have worked as a lawyer in the Obama admin DOJ. No, their thought was that if you provide rails which facilitate fraud, such as giving a fraudster a bank account, you are affecting a financial institution yourself. And so, the DOJ can go after you, for selfharm. Note that you do not need to lose money, oh no, the DOJ can also go after you because the way you affected yourself was to cause your regulator to like you less. When you settle with the DOJ, it will extract an enforceable promise in writing that you will stop your campaign of selfharm, and also stop banking specifically enumerated industries, like payday loans. I realize that this sounds unlikely. The following is a direct quote expanding acronyms from the DOJ Office of Professional Responsibility, in the report pg 16 where they exonerated DOJ lawyers. As more fully explained below, the Consumer Protection Branch has relied on the “selfaffecting” theory, as well as additional theories of liability, in three cases arising from the Operation Choke Point initiative. Now when the DOJ or FDIC tells you, a bank, to do something, or strongly suggests that you do something, that usually isn’t the end of the argument. You can certainly haggle. You can even fight… to a degree. This is a multiyear iterated game with repeat players, each of whom has limited resources and very complicated preferences. Both sides are constantly picking their battles. There is give and take. When your counterparty is happy with you, your emails get returned faster, you get more of your asks, and you can report smooth sailing to your boss. Both banks and regulators are ultimately made up of people, with emotions, career paths, and annual performance reviews. Banks do not actually make a lot of money from servicing debt collectors. The culture that is banking looks at the culture that is debt collection and sees slimy people who are beneath it. And so the banks frequently obliged. Many of them, in their offboarding letters to debt collectors, were unusually candid relative to the standards of offboarding letters it’s not you, and we apologize for this, but we’ve received regulatory guidance about your industry, and as a result our appetite to serve your industry no longer exists. As it turns out, the Obama administration had many diverse policy preferences. It wasn’t particularly in favor of guns, for example. Gun sellers don’t use banks in the way that debt collectors use banks. They do not routinely trick customers into the gunformoney transaction. They don’t make particularly intense use of ACH pulls confidence 99, on general industry knowledge and don’t have particularly high dispute rates confidence 95, same. But regulators, having discovered that “reputational risk” attached to anyone you didn’t like with nary a whisper of complaint, believed that banking gun sellers was highrisk. Haven’t you read the newspapers School shootings. Do you want any of that sticking to you You are imperiling your good name, and therefore the stability of your deposit base, and therefore your bank, and therefore the insurance fund, by accepting the business of gun sellers. In Congressional testimony, the FDIC said that it hadn’t ordered anyone to debank disfavored businesses. What we have done is we have tried to be very clear in putting out our guidance to say very publicly and clearly that as long as banks have appropriate risk mitigation measures in place, we are not going to prohibit or discourage them from doing business with anyone with whom they want to do business. This individual might perceive themselves as telling the truth here. “Justify to me why the payday lenders are not on your highrisk list.” and then “Do you have a builtout EDD program for the deposit risk caused by payday lenders” followed by “Then are you sure you should accept that business” are consistent with this statement, individually and as a script. Those are not quotes, but rather indicative summaries of stages in a conversation. I believe them to fairly characterize conversations that the record abundantly shows happened. The FDIC Office of the Inspector General, in an investigatory report, attempted to shift all blame for Operation Choke Point to the DOJ. We found no evidence that the FDIC used the highrisk list to target financial institutions. However, references to specific merchant types in the summer 2011 edition of the FDIC’s Supervisory Insights Journal and in supervisory guidance created a perception among some bank executives that we spoke with that the FDIC discouraged institutions from conducting business with those merchants. This perception was most prevalent with respect to payday lenders. When a regulator publishes position papers that it wants you to do something, and reiterates this in individualized supervisory guidance, that tends to create a perception in this author that the communicated policy direction was not YOLOed onto the Internet by a room full of monkeys banging keyboards randomly. As frequently happens, the individual officials who had instructed banks to debank the targeted industries ignored Stringer Bell’s dictum on taking notes on a criminal conspiracy. Emails sent within the FDIC and DOJ were routinely archived, and banks of course keep copies of correspondence from their regulators. Those emails said what they said, and what they said was pretty damning. For example, the Department of Justice’s internal Six Month Status Report On Operation Choke Point excerpted in Congressional reporting said Finding substantial questions concerning the legality of the Internet payday lending business models and the loans underlying debits to consumers’ bank accounts, many banks have decided to stop processing transactions in support of Internet payday lenders. We consider this to be a significant accomplishment and positive change for consumers . . . Although we recognize the possibility that banks may have therefore decided to stop doing business with legitimate lenders, we do not believe that such decisions should alter our investigative plans. Not once, not twice, not a handful of times, not a loose confederation of rogue examiners. Three of six regional directors of the FDIC offices told the OIG that they understood Washington to want payday lending discouraged and two of them said there was an expectation to, in the words of the OIG, direct institutions that facilitated payday lending to “pursue an exit strategy.” Did that require topdown direction You can, in fact, generate nationwide programs with local offices doing strikingly similar things without topdown direction. The combination of a monoculture plus a policy direction that lowerlevel staffers believe in is often sufficient to make it happen. We have extensive experience of this in tech and finance, as discussed later. Japanese has a beautiful word, sontaku, for the attitude and actions a diligent subordinate would take without his superior’s explicit instruction, believing them to anticipate his boss’ desires. Sontaku is a core skill in the American professional class. People possessing it are sometimes described as “motivated selfstarters”, “highagency”, “bold”, ”takes initiative”, ”acts like an owner”, etc. You are a very, very bad Compliance professional if you aren’t constantly sontakuing your regulator. You are also a bad Regional Director of the FDIC if you aren’t constantly sontakuing Washington. But Operation Choke Point, specifically, simply was official policy. If it wasnt, no entity as complicated as the United States can ever be described as having even once had an official policy. As the former Chairman of the FDIC wrote in a WSJ editorial Internal Justice Department papers released by the House Oversight and Government Reform Committee make it clear that Justice prefers coercing banks to drop customers through Operation Choke Point rather than prosecuting illegal or fraudulent businesses directly because it’s easier, faster and requires fewer resources. Operation Choke Point wasn’t just targeting debt collectors, gun sellers, and payday lenders. No, the FDIC’s bulletpointed list was 30 entries long. They range from clearly abusive and illegal scams to “One could construct a narrative by which banking that industry is challenging” pornography to “a grab bag of things we dislike” racism and… fireworks Really Operation Choke Point, once it came to light, caused a media and Congressional furor, because it was arbitrary and lawless. I am using that in the ordinary sense of an American who took civics, not in the specialized sense of a DOJ lawyer, who might bristle for being called “lawless” when they had three court cases and one 25 year old statute which are clearly explained in the memo as adding up to them being able to do everything they did. The architects of Operation Choke Point steadfastly denied it was designed to do what it was manifestly designed to do. They denied it did what it manifestly did. The agencies were then pointedly accused of lack of candor with Congress. If you tell a Congressman he isn’t reading the WSJ right, but internally your bosses are highfiving themselves over that WSJ article, and they are highfiving themselves because finally the WSJ is covering their important work accurately, Congress will not be pleased. Then they will show you a copy of your bosses’ emails, which they can subpoena, because they are Congress. House Oversight Committee report, ibid, pg 10 Some scholarly literature is sympathetic to the regulators’ point of view. More is not. If you want a steelman, that’s the best one you’ll likely find. It acknowledges the DOJ’s efforts to interdict fraud by creatively interpreting FIRREA and targeting thirdparty payment processors and banks, accuses the financial industry of making a fuss over this for selfinterested commercial reasons, performs a modified limited hangout of the highrisk list, and claims that the gun industry cynically glommed onto the news cycle for political reasons despite no actual enforcement specifically addressed against it. My point of view I can read emails. They say what they say, even when acknowledging what they say would cost a public servant their job. I read the postmortems including many years ago this sort of thing was my hobby before it was my job. I view them as facesaving exercises written, in no small part, by civil servants mortified that their peers could lose jobs and pensions simply for implementing the Administration’s policy preferences using colorable authority. Sometimes, people have been known to lie in politics. Sometimes justice is not done. I know, try to weather the shock you must feel. Operation Choke Point was mostly forgotten, except by banking nerds. Until… Socalled Choke Point 2.0 Nic Carter, a crypto VC and podcaster, who occasionally does very good work, has been steadfastly attempting to brand a constellation of regulatory activities regarding crypto as Choke Point 2.0. This branding is an attempt to delegitimize them by associating them with politicallymotivated lawlessness. It has since become popular among crypto advocates. Unlike Operation Choke Point, which actually was a centrally directed operation with written project plans, status meetings, ongoing progress reports, and a code name decided by the participants who, in hindsight, should have talked to their own Comms department and picked something that didn’t sound nefarious to describe their plans, Choke Point 2.0 stretches like taffy to attach to any recent regulatory activity crypto advocates don’t like. So we’ll have to review quite an involved history of very disparate issues to give advocates a fair hearing. Carters work, which is extensive on this topic, exists in pieces like Did the government start a global financial crisis to destroy crypto To answer the question in the title no, it did not. We started a financial crisis which todate is mercifully narrow as an underappreciated side effect of interest rate hikes to tame inflation. Silvergate Crypto had a bank, doesn’t now, and misses the good days Crypto advocates have specific and general concerns about banking supervision at a small number of banks acutely relevant to their interests. They have tied these concerns to the debanking narrative. They do not evince attention to detail or familiarity with the procedural history of specific examples they invoke, though some have attempted some original reporting with respect to these issues. That is to their credit. As we’ve established, almost all banks consider crypto businesses to be highrisk, and avoid them. There was a small cadre of banks which had active crypto practices. Those banks purported, to the public and their regulators, to have the EDD required to bank them compliantly. This was incredibly operationally useful for crypto, for one very obvious reason substantially every business needs a bank account and one less obvious one. Crypto talks a great game about decentralization, but centralized systems are more efficient than decentralized systems. When riding banking rails, making transfers outside of regular banking hours which have five twos of uptime is difficult. This exposes firms to risk and acts as a constant cost of capital. Crypto trades 247. Crypto firms would like to settle crypto trades, particularly between stablecoins and the USD backing them, 247. Crypto’s solution to this was to all bank at the same bank, Silvergate, which I described with some surprise, when they IPOed as the First National Bank of Crypto. Silvergate had a particular product called the Silvergate Exchange Network SEN. SEN was both a boring infrastructural plumbing and b extremely important to the crypto industry. Oh boy, do crypto companies miss SEN. In sum, SEN would allow substantially 247 book transfers between Silvergate customers to shift USD balances between their bank accounts. This would let them constantly settle the USD leg of crypto trades between each other. This was particularly important for stablecoin issuers, like Circle, which issues USDC. Circle’s main custodial bank for USDC was SVB. Circle wanted to be able to issue marketmakers like DRW and Alameda Research hundreds of millions of USDC 247 at any hour on any day with no more than a few minutes of latency, or redeem USDC for greenbacks in a similar fashion. Now, a thing you will frequently see in fintech banking, and which is not itself at all inappropriate, is a fintech having multiple banks with a division of labor. One of those banks might agree to have a fintech’s customerfacing highvelocity lowEODbalance transactional activity. And one of those banks might agree to have a fintech’s lowvelocity highEODbalance deposits. These are very different business propositions for the banks They imply different risks, different core competencies, and different revenue opportunities. If you are running businesses which both a have high daily inflows and outflows and also b want to keep billions of dollars in the regulated banking perimeter, you very much need partners comfortable with both halves. The argument you make, as a fintech, to the bank with your deposit business is that the other bank is also a competent, U.S.regulated financial institution, with good AML and KYC controls among others. Therefore, when your business makes one wire at the end of the day to settle up with its omnibus account at that bank, netting over several hundred thousand customer transactions, perhaps for several hundred million dollars, your bank should be comfortable, even if it has very little exact knowledge about what happened today. Probably the same story as yesterday, and tomorrow, and Compliance can sleep the sleep of the righteous, because their trusted peers have an appropriate degree of controls in place. The bank custodying the money mountain is thus certainly not aiding and abetting money laundering. It can rely on the second bank’s own surveillance and controls, in addition to the crypto firm’s compliance department. There will be many formal contractual promises and informal verbal or written assurances made about this. And this works and serious people can accept it but the factual probity of the highvelocity transactional bank is extremely loadbearing. Silvergate was not a competently run institution. SEN did not, in fact, have a robust controls environment. It, in fact para 70, had functionally no transaction monitoring. Silvergate had bought a standard package that a lot of banks use for automated monitoring, but due a configuration issue, it was off for SEN transactions. Carter describes this state of affairs as follows “Silvergate’s transaction monitoring system for SEN had gone through an upgrade and experienced an outage.” Silvergate was institutionally aware of the “outage” but unable to remediate it. I have an engineering degree, have founded five software companies, have worked in the tech industry, and in my entire career, I have never described an engineering investment I failed to make for fifteen months as an “outage.” After a day it is an outage, after a week it’s a human competence issue, but after a year it ferments into sparkling tech strategy. During that period, SEN transacted over a trillion dollars. Silvergate was not unaware that SEN had an upandtotheright usage graph congratulations. They were just routinely ignorant of funds flows they were facilitating with their banking license, sized in the billions of dollars per day. We know this because of Silvergate’s contemporaneous internal communications, the technical reality of the artifacts they had purchased and implemented, and sworn statements in litigation and to regulators. It is beyond intellectually serious dispute. What of it, though Is that just a harmless paperwork glitch Im glad you asked. Intrabank book transfers are historically lowrisk for money laundering because they’re ineffective at accomplishing layering the same Compliance department can see both legs. Moreover, the majority of them are between entities known to be under common control. The purpose of layering is to break the chain of surveillance swapping between your left pocket and your right pocket in front of a Compliance officer doesn’t accomplish this. This assumption of lowrisk was apparently, per Silvergate’s employees, baked very hard into ATMSB, the newandimproved monitoring suite Silvergate had implemented. However, SEN transactions, while implemented as intrabank book transfers, are in fact highrisk. The designed intent of SEN is to allow counterparties not under common control to settle one half of a transaction, at very high velocity. The other half generally occurs on a blockchain, unsurveilled by the bank. Seeing one half of transactions is fairly risky. Seeing neither half sounds like you are swapping bank deposits for cash equivalents, at the scale of billions of dollars per day, with no functional AML monitoring program in place. This is not just me saying it. Kathleen Fischer, Chief Risk Office of Silvergate, said internally, of the lack of SEN monitoring “We have known of this issue and either we have established other controls to account for it or we haven’t, and we have to take our lumps.” Silvergate had not, in fact, established other controls. Carter claims that all clients of the bank had gone through rigorous KYC and onboarding processes. Silvergate may have consistently conducted KYC and onboarding processes, but one could forgive a skeptic for believing them to be pro forma. Silvergate onboarded several entities relating to Binance, a confessed criminal conspiracy which extensively engaged in money laundering. Binance and its management are Bond villains they gleefully flouted the law and engaged in jurisdictional gamesmanship to avoid financial regulation, for years. Binance et al transacted 22 billion through Silvergate. Mandatory compliance training is such a drag, and sometimes we like to spice it up with fun games. Lets play Spot the Red Flags together. We have just received an account application from a Seychellesdomiciled corporation beneficially owned by a globally notorious billionaire. He disclaims any permanent address. The beneficial owner receives regular negative news coverage. He and his company have received multiple orders to cease business from peer nations. Those orders cite offering financial services without a license, suspicion of money laundering, willfully noncompliant posture, and extensive documented lies to regulators. The corporation has no operations or employees it is strictly a shell. The planned funds flow is receiving inbound wire transfers, including international wire transfers, from counterparties which the bank will have only fragmentary third degree knowledge of. The corporation intends to immediately transfer those deposits to a thirdparty financial institution. This is to facilitate those counterparties’ purchase of pseudonymous bearer instruments, specifically, cash equivalents. The corporation anticipates billions of dollars of volume, in transaction sizes up to eight figures. Silvergate happily opened an account pg 4 for Key Vision Development Limited, the abovedescribed shell company, and allowed it to deposit and withdraw over 11 billion. Now, credit where credit is due, Silvergate did debank Key Vision Development Limited in 2021. The record doesn’t say why, but perceptive readers may be able to hazard a guess. But Binance’s main entities still enjoyed attentive service, or perhaps more to the point they enjoyed all the inattention they were getting with their service, until the bank folded. But the main rake Silvergate stepped on, repeatedly, was its relationship with FTXAlameda and its executives. They were collectively the bank’s largest client and comprised tens of percent of its deposits. Silvergate’s monitoring of their usage was minimally grossly inadequate, as the bank and its executives admit. Carter quotes an unnamed Silvergate executive as saying the following, which is roughly consistent with their prior statements to the media and to regulators. Where we were not as buttoned up as we should have been was in regards to the FTXAlameda clients. That was a function of the bank growing incredibly quickly. … Probably we could have figured out FTX was brokering deposits via Alameda. In retrospect I think we could have pieced this together and figured it out. But this is not a legal failure and we’re not required to catch everything. Our program passed legal muster. That’s something we could have done a better job of. But there was no intentional wrongdoing or cooperation with the bad guys. This is consistent with things they have said previously, but does not demand unlimited deference. Ryan Salame, a subject matter expert in laundering crypto money through the banking system skills described by his lawyers, see pg 7 and onwards, tweeted that it beggars belief that Silvergate did not know that Alameda Research and North Dimension were in fact receiving FTX customer funds flow. Salame has repeatedly stated that Silvergate intentionally orchestrated that funds flow in concert with him. Even if it had not, Salame is just right even if FTX concocted the scheme internally and even if Salame somehow managed to push all the buttons himself, Silvergate had to know. But suppose you credit neither Salame nor I with understanding how banks work, or you demand unquestioning deference to executives’ denials, perhaps because one believes that a bank executive would never ever lie. The picture most favorable to Silvergate is that, during multiple years of being monomaniacally focused on growth to the neglect of its responsibilities under the law, it routinely underperformed the competence bar required of regulated financial institutions in the United States. Silvergate voluntarily liquidated in the wake of the FTX implosion. Limited props for them here they managed to do this in a mostly orderly fashion, as opposed to Signature, which had substantially less crypto exposure but blew up. Signature had an analogous book transfer API product, called Signet. It is a smaller part of their story. Carter has a number of complaints with regards to supervisory activities relating to Silvergate Bank. One of those is that he alleges the Office of the Comptroller of the Currency disallowed Silvergate from selling SEN. I find this allegation very plausible, if not specifically evidenced. Silvergate was operating a trillion dollar laundering machine which had drawn immediate demands for corrective action for an extended period, had not taken aggressive corrective action, and then had proximately caused enormous consumer harm in a way which was maximally embarrassing to many policy actors. When the bank’s Chief Risk Officer predicted incoming lumps, these were the sort of lumps she was predicting. Carter further alleges, and I think this is substantially original reporting and good on him for it, that the FDIC and other banking regulators gave verbal guidance that banks should get crypto deposits below 15 to be “safe and sound.” If a banking regulator invokes those words, they are not making a suggestion. Carter complains that there is no statutory authority to pick this arbitrary number, that this threshold makes banking crypto functionally impossible, and that it is specifically chosen to kill targeted banks. Some regulators are disclosure regulators. The SEC comes to mind. Some regulators are prudential regulators. The ordinary operation of prudential regulators is to take broad statutory direction and transform it, sometimes via the rulemaking process and sometimes via more informal guidance and, even the FDIC will tell you, “moral suasion”. This process yields both concrete asks and fuzzier spectral ranges subject to ongoing negotiation between regulators and the regulated. Does the FDIC have statutory authority to pick magic numbers Yes, in the political system of the United States, it does, and it can cite that authority to you at length. The FAA has statutory authority to pick magic numbers for bolt torque. The FDA has statutory authority to pick magic numbers for permissible flow rates for ketchup. Are regulators overreaching here Not obviously so Look at the above description of Operation Choke Point and their theory of regulatory authority there. It requires magical thinking to connect banking a payday lender, reputational risk, a run on your bank, and endangering the deposit insurance fund. It very much does not require magical thinking to think that crypto deposits are flighty, correlated, and could cause a run We were experiencing actual cryptoinduced runs A reasonable argument can be made that the problem with regulators was not abuse of discretion. It was needing to pay for past regulatory mistakes andor missed opportunities with overcorrection following substantial consumer harm. Examiners stunningly missed that Silvergate’s new business model, which they had IPOed on the strength of, had materially changed from its days as a sleepy twobranch real estate bank That reasonable argument has been alluded to… by the Federal Reserve See Findings, pg 2. Does the 15 threshold make it generally impossible to bank crypto Empirically not other bank’s crypto practices are well beneath that threshold, which likely informed how it was chosen. Metropolitan, for example, had about 25 at the peak and then drew down to 6. It fairly persuasively told stakeholders that it had done a good job of risk management. And, not incidentally, Metropolitan is still with us. And so regulators could very reasonably say “OK 6 is allelseequal green, 14 is yellow, we don’t want you spiking to 25 anymore, 96 is deep ing don’t even think about it red.” And you could make this same observation about many banks with a crypto practice. Coinbase doesn’t keep customers money in a mattress. Their main bank’s crypto exposure is… Jamie Dimon grabs the keyboardFORTRESS BALANCE SHEETDimon not actually grabbing the keyboard. Carter further alleges or insinuates it’s a bit unclear at times which he is going for that Senator Warren andor regulators colluded with short sellers to intentionally kill Silvergate, via sparking a liquidity crisis. He specifically cites this letter by Warren et al, which includes the sentence “Should it need extra liquidity, your bank has access to taxpayer dollars through the Federal Reserve Bank of San Francisco and the Federal Home Loan Bank of San Francisco.” Carter argues that sentence was intentionally inserted to put pressure on FHLBSF to demand repayment of advances. That would force Silvergate to find liquidity at a time where that would be incredibly difficult. Silvergate, subsequent to that letter, did repay those advances, and said in a securities filing that this required them to accelerate securities sales, leading to rumors in the industry that this forced their hand on deciding to close. FHLBSF has squarely denied pressuring them to accelerate repayment. Short sellers made a killing on Silvergate, certainly. I absolutely believe that short sellers communicated with Senator Warren and regulators and additionally would credit that they did this strategically to bring pressure to bear against the bank. Evidence in favor they say they did and bragged about it, while nailing Silvergates hide to the wall. But the reason short sellers made billions shorting Silvergate is primarily because they were right and early about Silvergate. Marc Cohodes a noted short who was deeply short Silvergate and Ram Ahluwalia a crypto investor with a very good understanding of bank regulation had a debate about Silvergate prior to its collapse. I will not recount it for you on a linebyline basis, but on listening to it at release, I felt “Cohodes is winning this by a mile, despite Ahluwalia being better calibrated on whether banking a single money launderer would indict a compliance program in the eyes of a regulator.” I was at the time effectively constrained from trading in bank stocks, but I took professionally significant action after listening to that podcast. I think one could make some criticisms of Cohodes, or of short sellers generally, but “They were fundamentally more wrong than right about the short thesis, and needed government intervention to make it pay out” requires ignoring mountains of evidence. You are invited to look back, with full oracular hindsight, on what Cohodes said in that presentation. A heuristic I have long used, as a onceuponatime debater if one side is impressively detail oriented, and randomly selected details are trivially sustained, and the other side doesn’t allege details but pounds the table a lot, bet on the first team. Or, if you want, you can bet on their former executives. Their former CTO after being Chief Operations Officer, who is also the CEO’s son, has a Twitter account. You can find his side of the story on it. For a bank executive he is remarkably cavalier with characterizing the contents of communications from his regulators. For example, he writes “The Sunday after Thanksgiving in 2022, regulators went after 5 banks simultaneously. Up to that point the regulators were not objecting, Silvergate brought them along, and suddenly everything changed.” In fact, in April 2022, Silvergate had received a Matters Requiring Immediate Attention MRIA from the Federal Reserve specifically concerning the adequacy of its BSAAML monitoring program. They received a similar MRIA in November, but by that time, they were cooked. See SEC complaint, para 80, substantially confirming representations made in a deposition by “Former Employee 5” a Compliance official in this lawsuit, which explicitly allege MRIAs. A MRIA, as distinct from a Matters Requiring Attention MRA a formalized supervisory directive which they expect you to pay substantial attention to in the ordinary course of business, is a dropeverythingandfiximmediately command. The Federal Reserve has required language pg 3 for when it communicates MRIAs. The Federal Reserve supervises many banks, at all levels of scale and sophistication. This includes small town community banks where board members are typically local real estate developers. To ensure that lowsophistication bank executives or board members do not miss the fact that an MRIA is both an order and a shot across the bows and should be understood as such, that language is “The board of directors or executivelevel committee of the board is required to immediately…” bolded in original The SEC has since charged Silvergate executives with misrepresenting the truth to investors about the depth of their liquidity problems in the immediate wake of the FTX collapse. Suppose one believes, arguendo, the protestations of Silvergate management that it had seen the implosion of their largest customer, and a 70 outflow of deposits, and was still ready to keep chugging along. In that world, is the regulator saying approximately “We support banking legal industries, given an adequate controls environment. However, you must get your crypto deposit concentration to below 15” compatible with the continued existence of Silvergate specifically, after early November 2022 I agree here with Carter and crypto advocates no meaningful concentration limit on crypto is compatible with the continued existence of Silvergate after early November 2022. Even a 50 concentration limit is impossible 15 is worse. Simple math for each dollar of deposits that you don’t bleed off, and you really can’t bleed off many postrun, you need to find someone willing to deposit about 5. Even if your sales pitch made angels weep to hear it, that is an impossibly tall order. Silvergate had no path to swiftly raising many billions of dollars of deposits from noncrypto depositors. Silvergate had attracted its existing deposits via what would most charitably be described as intense attention to the needs of the crypto industry. It had no advantage over any bank in the U.S. vis banking any other individual or industry, and it had many disadvantages. It was under a PR cloud, because facts about its behavior over the last few years were being reported. It was obviously wobbling as an enterprise. Most deposits are attracted by offering routine bank services the sort that Silvergate had no edge on providing to noncrypto clients. This is referred to in industry as the “deposit franchise.” Banks have an immediate option to raise deposits in a hurry, forgoing years of sponsoring Little League teams, showing up for the annual town festival, and asking about your holiday plans over a coffee. You can skip the sweatandsmiles business and proceed directly to paying through the nose, by attracting the custom of sophisticated financial professionals who place money at the banks bidding highest for it in the country. This is called deposit brokering. At any price Silvergate was capable of paying for deposits, there was a regional bank that would have matched or exceeded it, because unlike Silvergate many regional banks have a material firstparty loan book and ongoing origination apparatus which they reasonably believed would continue to exist, and deposits are a funding source for that loan book and apparatus. A deposit broker would reasonably model that hypothetical replacement bank as being a higher priority for receiving extraordinary backstopping if that ended up being necessary. This would play into their credit analysis of that replacement bank if the deposit broker was trying to place, for example, a 200 million certificate of deposit, almost all of which is uninsured subject to bank credit risk absent extraordinary government backstop. Crypto advocates are notably incurious about noncrypto banking and don’t seem to understand why noncrypto regional banks were being heavily shorted in late 2022 and early 2023. I believe that, for many crypto advocates, including some who are welleducated financial services professionals, including some whose portfolio include many financial services companies, this is not very cynically ignoring background unfavorable to their narrative. Rather, it is because they genuinely do not understand what a sudden hike in interest rates would do to the balance sheet of a bank, in the same way that many software engineers do not understand what a sudden interest rate hike will do to the value of their equity. I would credit the possibility that some crypto advocates do understand how bank balance sheets are affected by interest rates, and are choosing to not contradict their standard bearers in public. I am unconvinced that the concentration limit was the butfor cause of Silvergate’s demise, though I could be persuaded to that view. My default view is that if every government employee had been furloughed on Thanksgiving Silvergate would likely still have closed. Its regulators had utterly lost confidence in it, true, but its customers had also lost confidence in it, in no small part because a they knew they had wired money to Silvergate and b they knew they now didn’t have their money because SBF et al had misappropriated it. That’s a bad set of facts for a long, happy banking relationship. I also think, and won’t ask advocates to acknowledge this, that a postinvestigation Silvergate which managed to exist would be unable to offer the product that people were really buying. It was the Schelling point for everybody in crypto. That is why SEN worked. In no conceivable universe does Silvergate keep Binance as a client after it gets put under the microscope. A crypto Schelling point which Binance can’t touch is not a crypto Schelling point. Absent that Schelling point, if Silvergate was simply a bank that would let you park a 3 million seed round and cut paychecks while you worked on your solidity… that Silvergate is not a business. And it’s a bad time to not be a business while you’re sitting on a portfolio of MBS in late 2022 and early 2023. But suppose arguendo that the government intentionally precipitated conditions incompatible with Silvergate continuing to remain in business and also that this was the butfor cause of Silvergate’s demise. Is that a norms violation Do we allow the government to close banks If you’ve worked in the financial industry in any capacity, you went to mandatory Compliance training. Attendance is taken and you likely had a refresher annually. And there were smirks, and jokes. And your trainer said, very seriously, “Pay attention. This is important. If we eff this up, they can do anything to us, most likely large fines but up to and including closing this firm. You, personally, could go to jail.” Most people in finance heed this lesson. Every year, some don’t, and they learn why this training is mandatory. Should we allow government to close banks Yes. Reasonable people can disagree as to the thresholds that extraordinary remedy should require and the procedural form it should take. If we were still on debate team, you might ask me for a concession “Government needs to specifically admit that Silvergate was intentionally closed” and I’d counter “Sure, will trade you opposition needs to concede that Silvergate was actively aware including at the executive level that Alameda and North Dimension were intentionally receiving incoming FTX customer funds flows.” About fifteen minutes later, I think neither side is thrilled, both sides learned something they find edifying, and there probably exists mutual agreement that either Silvergate had to go. or in the alternative Absent extraordinary government support, Silvergate was doomed after the FTX fiasco. Complaints that Signature Bank did not need to be placed in receivership Carter believes Signature was targeted in an analogous fashion. In part this is in reliance on their board member Barney Frank, who maintained in media interviews contemporaneous with the collapse, and after it that Signature was solvent and had sufficient liquidity at the end of a week which had seen a bank run. Perhaps some have forgotten the context of that week. On March 8, Wednesday, Silvergate announced it was closing. On March 10th, Friday, SVB was placed into receivership, after the most explosive bank run in history. On March 10th, still that same Friday, Signature experienced a run of 18.6 billion of deposits in the space of hours. That context refreshed, let’s review where Signature believed its business was on March 11th and 12th, over that weekend. Signature experienced difficulties telling a plausible story involving numbers which added up pg 35 that weekend. Quoting that postmortem Signature needed to provide reliable and realistic data, particularly concerning immediately available liquidity and ongoing deposit withdrawals, to inform the analysis the Regulators and Signature needed to perform to understand the Bank’s liquidity position. Once Signature began providing any data on these key issues, the Regulators found the data was inconsistent and that it continuously changed in material ways. Signature execs, et al, were on a series of conference calls with regulators for an entire weekend. They began with regulators taking note of the bank run and candidly announcing the bank was in mortal peril. Signature proceeded, in the regulators’ view, to confabulate about liquidity sources, composition and quality of assets, and current withdrawal requests pending, through either malfeasance or spectacularly poorly timed technical incompetence. Regulators felt that, at this pivotal moment, Signature was dangerously disconnected with reality, like an executive describing the weekend as this is a quote “uneventful thus far.” It is a serious accusation to say Signature was confabulating. Banking regulators are mostly serious people. Quoting the postmortem again For example, through Sunday afternoon, Signature represented to the Regulators that nearly 6 billion in liquidity from its commercial real estate portfolio would “Very Likely” be available to the Bank on Monday. The Regulators were aware, however, that it would take weeks for the FRBNY to review and value that portfolio. Was Signature aware that its commercial real estate portfolio could not possibly be good collateral on Monday Manifestly so. A brief explanation for the benefit of readers unfamiliar with commercial real estate CRE banking Signature’s plan was to pledge portions of its CRE loan portfolio to the Federal Reserve Bank of New York the Monday after the critical weekend. It thought that the Fed would credit them for the value of the portfolio less some haircut. Signature would then immediately wire what the Fed credited them to the customers demanding their deposits. Simple as. However, CRE loans are not fungible, easytoanalyze assets like e.g. Treasury bills or even mortgagebacked securities. They’re complex, bespoke legal agreements, in the best of times. 2023 was not the best of times for the New York commercial real estate market, as anyone who reads the newspaper is aware, and so you can’t simply value those loans by copying outstanding balances into Excel then chugging a tiny bit of math. You’ve got to read the darn things, construct a model which, if you were someone with skin in the game, would asymptotically approach reunderwriting those loans because New York CRE is that bad, come up with your impaired valuation, and then, haircut that. Signature Bank had a crypto sideline but its beating heart was the New York CRE market. This is a bank that breathed New York real estate. It beggars belief that they thought that portfolio would be Very Likely to be good collateral in merely wallclock hours of work. You know what this reminds me of This reminds me of one Sam BankmanFried who, on finding himself in what he believed to be a survivable liquidity crisis, began wildly writing indicative numbers down on napkins andor Google Sheets. SBF still doesn’t understand why nobody believed him. Just look at the napkins We are not required to believe your napkins, Signature, if they contain obvious untruths, or if the napkins evolve wildly in inconsistent ways over the course of a single meeting. The most critical question for Signature’s liquidity position was “How much money will customers wire out on Monday” This is straightforward banking, which regulators pressed them to do all weekend a sum up how much money customers have asked for on Monday, in the hundreds of current pending wire requests b project a worst case scenario for how that number will evolve, as more customers put in wire requests, before Monday morning. Here is the time series taken from above report, pg 40 of those two questions being asked repeatedly in a 48 hour window. Observe how often, a few hours after Signature has made a new, evenmoreworstthanprevious worst case scenario, the known wire requests have already exceeded that worst case scenario. Signature then communicated a new worst case scenario, which felicitously was only as far away from known wire requests as their previous worst case scenario had been, almost as if they were learning nothing from repeatedly being wrong. This played out multiple times. Signature believes it understood where it was that weekend. The above picture is almost proof positive that it did not. They also understood their experience of the weekend to be signaling how the worst was over. Quoting postmortem again pg 6 Over the weekend, Signature’s estimates of pending deposit withdrawals increased, going from 2 billion on Saturday evening to 4 billion Sunday morning, and then to 7.4 billion to 7.9 billion by Sunday evening. These numbers represented known deposit withdrawals. Despite the run on Friday, March 10 and the negative news over the weekend, Signature insisted that additional withdrawals would be minimal on Monday. The Regulators assessed this projection as unrealistic and that the Bank needed to be prepared to handle another significant deposit run. emphasis added Signature believes it could have white knuckled through the hurricane and emerged victorious on Monday. Then it had projections by which it would suddenly, indeed miraculously, have sufficient liquidity on Tuesday, Wednesday, Thursday, and Friday. And then the hard work would start. It would bank the heck out of its remaining customers, start finding buyers for its valuable assets over the ensuing months, and somehow pull this off. Because it was solvent Signature had critical liquidity issues, no real path to solving them, and lost the confidence of its regulators, during a bank run which was worsening by the hour. That is a recipe for receivership. No conspiracy is necessary to explain what happened. The rest of the postmortem is worth reading, too, and deeply wonky in the way that excites banking nerds. Where else can you read a scintillating discussion on what capital call loans are acceptable collateral at the Fed emergency window Crypto likes novel cryptousing banking products In 2022, the FDIC sent out a wave of letters to banks. Prying these letters from the FDIC has been a bit of a project, requiring Coinbase and other interested parties to do quite a bit of arm wrestling. The letters which have been released, grudgingly, are heavily redacted. A brief commentary on transparency democratic governance simultaneously requires substantial transparency and also requires the government to be able to have private conversations. Curtains of secrecy are frequently invoked cynically to cover abuses. For example, you could say “That protest is a foreign influence operation I cannot disclose my basis for thinking that, for reasons of national security You should therefore act as my proxy to suppress this protest” Uh, spoiler alert, we will return to this later. In the culture that is banking supervision, however, privilege will frequently be asserted fairly maximally on routine supervisory communications with banks. This is because they are institutionally wary of causing risk to banks by signaling to the market or depositors that those banks have lost the confidence of regulators. Banking regulators are terrified of “selffulfilling prophecies.” You need to be able to have candid conversations with regulated entities for the same reason coworkers need to be able to have candid conversations with each other. Privacy enhances candor, even when those conversations implicate third parties, even when third parties would really love to be a fly on the wall. And so I think there is a legitimate balancing act to be done here. But I’m sympathetic to crypto advocates who say paraphrase “This is backroom maneuvering to do something we don’t like. You won’t even admit the thing you are doing And, confound you, after you are dragged kicking and screaming to admitting the thing, you’ll probably claim it is good Like they did after Operation Choke Point” Conversely, when the government is capable of publishing extensively researched position papers and extensively footnoted indictments, that should give you more confidence that it is less likely to be engaged in lawless, arbitrary behavior. Not limitless confidence, certainly, but it is evidence in a direction. Carter surmises that the expurgated supervisory letters are regarding NYDIG’s proposed product which would allow banks and credit unions to offer customers direct Bitcoin exposure. You can analogize this to the feature in Cash App which allows you to buy Bitcoin, without being able to transfer it, except it would happen in your banking app. I think Carter is very likely 90 correct with respect to identifying the subject of these letters. Much of the pack is dated shortly before the FDIC did, indeed, publish public guidance about banks directly offering crypto products. NYDIG was the firm with the most progress against the opportunity source general industry knowledge that otherwise fits with what we can read of the letters. So is this a stunning inversion of our democratic norms No. Banking regulators get to weigh in on proposed banking products. That is the absolute core of the job. That will extremely routinely result in saying something which rounds, like many of the letters do, to “We are going to have a considered think about this and get back to you, but in the meanwhile, please don’t roll this out widely.” The think was had the results were published. Many crypto advocates do not like those results, and are asserting procedural irregularities because of that. Does this meaningfully prohibit the crypto industry from offering retail users financial services No. You can buy Bitcoin exposure in Cash App, Venmo, Robinhood, Coinbase, Fidelity, Interactive Brokers, any brokerage account capable of trading U.S. ETFs, and many more places besides. Crypto advocates cheerfully blast out press releases about how many ways are coming online every week to buy their tokens from them at very reasonable prices prior to lunar travel. Is there a facially plausible reason for attempting to institute a consistent policy among regulated banks, in a way there was not for Operation Choke Point Again, a core concern for the FDIC is that unsophisticated customers don’t assume that their risk assets get FDIC insurance. Customers naturally assume their bank app gives them FDIC protected things. For those bank apps which include nonFDIC insured products, like insurance offerings or e.g. affiliated brokerage accounts, the disclosures are bespoke and extensive. Some crypto advocates would prefer to have screen real estate in community banking apps. I bet FanDuel would, too. But them being disappointed is not the claimed threat to democracy. Some politicians exercised extraprocedural influence Some readers might remember Libra, Facebook’s attempt at creating a substantially worldwide economic network with a token which was variously described as a USD stablecoin or perhaps some sort of currency basket. Libra was a consortium project, with Facebook as the de facto anchor and a number of industry partners. Stripe, my former employer, was a consortium member at one time. I reiterate the above disclaimer that they do not necessarily endorse things I say in my personal spaces. Libra did not live to see the light of day. Some time later the project was abandoned by Facebook and the technology was sold. It sold to Silvergate, back when Silvergate felt like despite the stupendous growth in the core business, sure, it had managerial attention to devote to MA, what else would bank management possibly find to fill its time David Marcus, who led Libra, recently wrote that Libra was killed by extraprocedural influence aimed at consortium members. He specifically identified Secretary of the Treasury Janet Yallen as directing the Chair of the Federal Reserve Jay Powell to kill the project. He then alleges that, quote Shortly thereafter, the Fed organized calls with all the participating banks, and the Fed’s general counsel read a prepared statement to each of them, saying “We can’t stop you from moving forward and launching, but we are not comfortable with you doing so.” And just like that, it was over. I have never worked at a bank and so never been a fly on the wall with a conversation with the Fed’s general counsel. I can, however, read. I have read many letters in my life written by serious people in positions of authority. And I once happened to read one which threatened the recipients in a clumsy, unambiguous way. That letter was sent to all members of the Libra consortium. The letter is mostly about Facebook, rather than Libra. A representative sample Facebook is currently struggling to tackle massive issues, such as privacy violations, disinformation, election interference, discrimination, and fraud, and it has not demonstrated an ability to bring those failures under control. You should be concerned that any weaknesses in Facebook’s risk management systems will become weaknesses in your systems that you may not be able to effectively mitigate. This was written after the Cambridge Analytica affair, when the security state and New York media mutually convinced each other that it is possible to steal a U.S. presidential national election with a copy of the social graph and an advertising budget of approximately 180,000. They seemed quite sure Russia had already shipped a working proof of concept. Of course, after 2020, we know that only enemies of democracy make specious and unevidenced accusations of fraud in U.S. elections. The rules change so quickly in Washington, it sometimes confounds my poor techie mind. But this letter was written in 2019 and democracy still hung in the balance like an embattled chad apologies to younger readers your central association with that word is not the central association of older millennials. And so the authors of that letter, Senators Schatz and Brown who sits on the Financial Services Committee, observed that the recipients had an excellent business and it would be a shame if something happened to it. And something would certainly happen to it if they went forward with Libra. I realize this sounds like paranoiac ramblings. Here’s the exact money quote If you take this on, you can expect a high level of scrutiny from regulators not only on Librarelated payment activities, but on all payment activities. It would be grossly improper for me to use nonpublic information about what a particular payments company understood that to mean. But, in my capacity as your friendly neighborhood financial infrastructure commentator, I predict that a typical financial industry CEO, threatened in that fashion by two senators, would be appropriately alarmed. Threatening the core business over Libra hits partners with reverse operating leverage, a concept which more people in startups and finance should be aware of. One reason for the Innovator’s Dilemma isn’t within the four corners of the innovation itself, and it isn’t simply that the incumbent firm has gotten fat and happy, and wants to enjoy its margins rather than cannibalize them. It is that the innovation may require taking a risk that, if it blows up, blows up not just the tiny, at the margins innovation but the gigantic existing business which incubated it. Google invented transformers, and they are more interesting than anything Google has done since Search, but you use ChatGPT and Claude because no Google exec was willing to blow up Search or AdWords over the geeks’ shiny new toy. It was the largest missed opportunity in the history of capitalism and they did it entirely to themselves, in relatively tiny part out of fear of what Washington would say. In the worst scenario of the government relations team, I doubt they conjured up “Oh two U.S. senators will explicitly threaten us with being dismantled brick by brick before this even gets to alpha.” It is sometimes said that the dictionary definition of chutzpah is murdering your parents and then begging clemency from the judge because you are an orphan. A close runner up when you threaten consortium members to peel them from the consortium then cite the consortium’s declining membership as a reason to threaten the consortium. Quoting a Hill staffer, who believes that in hopefully fair paraphrase Facebook was simply wildly underprepared for political reality and that there was nothing improper done Libra’s extremely cold reception could be because it was tied to Facebook or could be the consortium bleeding members each leave prompted a NYTWSJ story which every Member of Congress read. So yeah, that’s what the naked exercise of power looks like. And yeah, it happened. I have no strong view on whether the Fed calls also happened but, uh, that claim sort of rhymes with the letter, doesn’t it. I will say one positive thing about the Senators writing the letter they were sufficiently proud of their work that they posted a contemporaneous press release with the full text. Transparency is not dispositive proof of virtue. The extraprocedural threat is right there in the text. But a democracy should naturally prefer transparency, and for political decisions to be made by elected officials, over secret decisions by people who will, even in the event of extraordinary malfeasance, still have a job, a pension, and power after the inquiry. The CFPB Andreessen also claimed to Rogan that Senator Warren created the Consumer Financial Protection Bureau and that its purview is doing, quote, “Whatever she wants.” … Yeah, that’s pretty much my read, too. I agree with some of their substantive positions and disagree with others, but it seems like a cadre of young, ambitious acolytes who understand their founder’s vision and are eager to implement it. I’ve been orbiting Silicon Valley for a long time and know the type of organization. I didn’t realize official Washington also had them. I am insufficiently politically aware to name another agency in Washington which demonstrates such a pronounced founder effect. The CFPB’s interaction with debanking, however De minimis. The CFPB wrote a position paper against it. I expect people sympathetic to the CFPB to use that position paper as politicalPR armor against their opponents, who are banging the drum about the broader debanking issue. That position paper and 5 will buy you a cup of coffee at Starbucks, because the debanking bits are buried under issues the CFPB actually cares about, like taking a stick to Big Tech companies. Have you ever wondered about the consumer harm caused by… Apple Pay Then you’ll be happy to know that they’re on the case. Specifically commanded politicallymotivated debanking of individuals It has been alleged that there were toplevel decisions to debank individuals on the basis of their political views. There is overwhelming evidence that this happened systemically at the formal direction of national political authorities… in Canada. Briefly, 2020 and 2021 saw substantial disruptive political protests. One of them, chiefly targeted at pandemic lockdowns, was conducted by truckers in Canada. It was unusually effective, in part because the socalled Freedom Convoy physically blocked roads in Ottowa, the capital, and at at least one border crossing to the U.S. Blocking roads is a protesting tactic frequently employed by a variety of mostly leftwing activists. It is extremely annoying, arguably ineffective, and sometimes results in punishment. Punishment in a democracy customarily follows the ordinary operation of the judicial process. In the classical case, there is a formal particularized accusation, a trial, and a conviction, and only then, punishment. Blocking roads sometimes suffers no real sanctions, because annoying and ineffective leftwing protesters still have expressive rights. Sometimes, prosecutors exercise their discretion to favor those rights over the freedom of movement and economic activity implicitly granted to other members of society. So that was two scenarios for how things normally play out punishment under the law, or, no punishment. Not this time, though. Prime Minister Trudeau reacted to this protest as if it were a prompt national emergency andor statesponsored terrorism a claim which was contemporaneously made about it, out of the side of officials’ mouths. He invoked the Emergencies Act, which would have the effect of awarding temporary, extraordinary executive power. The government then directed the immediate freezing of the financial accounts of anyone connected to the protests, at banks and nonbank financial platforms which Canada believed had been used to fund the protest. There were also some ancillary actions, like directing the truckers’ insurance companies to suspend their driving insurance. Officials in Canada claimed that they were selectively targeting the ring leaders or organizers of the protest narrowly, and were not attempting to consequence people for protected political speech. These claims were lies. The orders were, in fact, not narrowly drafted. The assistant deputy finance minister admitted to an inquiry that the government had contemporaneous knowledge that it named accountholders who were not present at the protests, and ignored this to prioritize speed of implementation. She further said, and this is a quote, “The intent was not to get at the families”, and when a democratic government starts a sentence that way something deeply ed up has happened. Canada believes more than 200 accounts were frozen, and that is an interesting selectivity for “ringleaders” or “organizers” of a protest. By my count, Canada itself has only a few hundred ringleaders. This is almost certainly an undercount, and if one does not understand the mechanism, one is not competent to work in or regulate the financial industry. Pop quiz to see you whether you were paying attention in Compliance training Abel transfers Bob 25, ostensibly for charitable or political purposes. Bob is specifically identified to you by the government as a terrorist later that week, his charitable fundraising apparatus is specifically called out as a concern, and you are directed to move with the utmost urgency to interdict all financial activities of Bob in any form whatsoever. Abel is not mentioned to you by name. And thus the question this a should have no impact on your relationship with Abel, b should have an immediate, profound impact on your relationship with Abel, or c I don’t know. The government’s answer whether individuals not named by the government specifically were impacted was paraphrasing “I don’t know.” I don’t know whether any donors were impacted. I certainly wouldn’t expect anyone to have understood our intent to be applying the text of the order to the sender of a 25 donation. I don’t know if anyone did. I don’t know if shooting someone will injure them or not. One might miss. I do know that my estimate of them being severely injured that day moves substantially up relative to similarly situated individuals one did not shoot. That is, presumably, why one chose to shoot them. The invocation of a national emergency was pretextural. In the parliamentary inquiry, the deputy minister of finance said that the protests were a, this is a quote, “firsttier issue” because they… threatened U.S.Canadian negotiations on subsidies for electric vehicles. And so when people say that targeted debanking can be used, even in a democracy, for arbitrary and capricious punishment of disfavored individuals on the political speech, laundered through the banking system, with no substantial procedural recourse, I agree with those people that that is a risk. We just watched it happen. Politicallymotivated debanking of individuals by firms Some people claim politicallymotivated debanking is not merely a risk but is, in fact, the ordinary practice of the United States. It is not. Some people claim it is the ordinary practice within the United States to debank political conservatives, to cause them to be unable to purchase food, to interdict their child support payments as happened in Canada. This does not happen as a matter of routine in the United States. Some people passionately believe that unarmed black men are routinely murdered by police officers. That is untrue, no matter how passionately it is believed, no matter how central that narrative is to a political project, no matter whether one supports the broader aims of that political project. That is not to say that it has never happened. Michael Jordan once had a great line, explaining his political neutrality “Republicans buy sneakers.” Imagine, for just one moment, what it would look like to live in a nation where Republicans actually were at constant and material risk of being debanked for their political views. Republicans would, notoriously, only buy their sneakers in cash. Fundraising dinners would customarily have large burlap sacks next to the swanky tablecloths. You yourself, because you have at least one conservative friend, would have had an awkward conversation at some point where you suggested splitting a dinner with Venmo or tried to swap investing tips, and then realized this was a faux paus, because as everyone knows, conservatives are routinely denied access to the financial system. This is not the world you live in. You would only need to trust your own eyes and common sense to comfortably exclude it. There exist occasional abuses by individuals at private actors which are politically motivated. There exist some private actors who have made policy decisions, sometimes accidentally and sometimes because they have corporate or influentialsubgroupwithinthecorporation preferences, which structurally disadvantage certain relatively narrow segments of the political spectrum. In a world where that much more limited claim is happening, one will be able to assemble some data points to tell a story about the much larger claim. It’s important to understand what the actual true story is, because we should want to invest our collective efforts in avoiding abuses, and that requires one to know how they actually happen. Politically exposed persons Andreessen said the following to Joe Rogan “Here’s a great thing. Under current banking, regardless, regulations, after all the reforms of the last 20 years, theres now a category called a Politically Exposed Person PEP. And if you were a PEP, you are required by financial regulators to kick them off, to kick them out of your bank. Youre not allowed to have…” Rogan interjected “What if youre politically on the left” Andreessen answered “Well, thats fine. No, because theyre not politically exposed.” I have some challenges in life. One of those is that sometimes I am unable to tell if someone is making a claim about the reality we live in, or if they’re bullshitting with a bro. This has, over the years, caused me much embarrassment. You obviously do not want to intrude on a bullshitting session and say “That isn’t true”, because truth is not the point of a bullshitting session. And you don’t want to say “And once a monkey flew out of my butt” if someone is trying to describe reality. They will not laugh, and you will be sad. So I recuse myself from the above conversation, that I have no usable bead on, and will take this opportunity to lecture the Internet about PEPs. Politically Exposed Person PEP is a term of art in Compliance, arising from Bank Secrecy Act BSA reporting requirements. It means a nationallevel senior official, most typically in U.S. usage, one attached to a foreign government. Quote “The Agencies do not interpret the term ‘politically exposed persons’ to include U.S. public officials.” Like many financial regulations, the U.S. has intentionally caused its concern with PEPs to metastasize to aligned countries. In some of those countries, financial institutions are obliged to treat fromtheirperspectivedomestic senior political officialsetc as PEPs. PEP status also attaches to the close family members and close associates of a PEP. Who is a “close associate” Write down your understanding of that, run it by your regulator, and then comport your affairs consistently with your written understanding. Lots of banking regulation works like this plodding, iterative development of internal policies, with occasional spot checks on performance under those policies, including as part of scheduled bank examinations. PEPs are believed to present elevated money laundering risk. Some of them control national resources directly, and others may be at risk of e.g. bribery. There is not an official regulatorblessed list of which positions are presumptive proof of PEPiness. This is one of those things that banks need to write down in their procedures then run past their regulator, who will either say “Sounds good Definitely EDD those PEPs”, or “I dunno. I know it’s a schlep but you’ll want to grep more PEPs.” A typical list will include e.g. president, head of state, members of the national legislature, cabinet officials, supreme judiciary body judges, head of the central bank, cabinetequivalent ministers, etc etc. You can absolutely bank PEPs, just like you can bank highrisk businesses. You need to EDD them. Certain banks, largely ginormous money center banks with global operations, put in the specialized work to do this. This is because with absolutely no insinuation of impropriety here private banking, and their banking activities on behalf of e.g. governments and multinational corporations, benefit from paying attentive service to rich and powerful people so that they talk you up to their rich and powerful friends. Now, an individual private banker might be tempted to give more than attentive service. Regulators frown on that, hence PEP status and PEP screening tools. What is a PEP screening tool I’m glad you asked. Many people will open accounts with you every day. You can, if your policies and regulator allow it, ask all of them “Pardon me sirmadam are you the president of a foreign nation Answer quickly because I’ve got about 15 more of these.” But the vast majority of new customers will think you are very stupid. You can’t not know, though. Very plausibly, you don’t trust a 22 year old drawn at random from your employee base to have comprehensive knowledge of the spouses of the current membership of the Sąd Najwyższy. Since software is eating the world, you can buy a product from any of a number of firms that will ask software these questions. You run an identity by it, and it says “Elected to the upper house of the Japanese Diet in 2022 likely a PEP” or “Unlikely to be a PEP.” This will allow you to decrease customer and employee friction in many of your product lines, while having a responsive answer to your bank examiner when they ask about your PEP program. The other parts of your PEP program will be dreadfully boring. You will write a procedure which says that e.g. that if news reporting or facts available the bank cause it to understand an existing customer to be newly a PEP or uncover previously missed PEPness, this will trigger a review of their account relationship, which you would duly document. Then, you would add them to your EDD process for PEPs. EDD for PEPs is bottom line here going to require someone to write a quarterly memo saying “Uneventful quarter. The 1.2 million incoming wire was sale of private residence. We commissioned an appraisal attached and, based on comps, seems reasonable. Account holder’s title to property confirmed via title search attached it substantially predates most recent election. No other items of note.” And that’s all you need to know about PEPs. PEPs are extremely uncommon in the world relative to all peoplefirms. My one professional encounter with the concept when a particular bank claimed a European mayor of a small city was a PEP, on basis of being a politician, and would require EDD to onboard. I protested on behalf of the user. Compliance got annoyed at me for PEPsplaining them. Politically motivated debanking of individuals, redux Earlier we mentioned that the combination of a monoculture plus a plainly stated or implied policy directive can cause ambitious or ingratiating individuals to take action in the absence of any order to do so. This is very much a risk. And if you care about debanking, you should care about this mechanism a lot more than you care about PEP minutiae. Permit me a brief detour from banking to the Internet companies that run so much of our modern world. It is fairly well understood by people that closely follow the tech industry that Trust and Safety teams were for years a locus of micropolitical action, some of it originating with uninvolved users on Twitter, and some of it originating within the house. Trust and Safety is a platform function which will always be with us, even if the teams involved are rebranded in the future. A platform without it will routinely expose users to child pornography and videos of people being beheaded by terrorists. Some people commit evil and depraved acts and they want the world to know. Internet platforms understand there are legal consequences if they have no Trust and Safety function. Internet platforms are built by people who have strong moral intuitions. Internet platforms are businesses, and they understand that they will not stay in business if they allow their gardens to be choked by weeds. The prevailing political culture of Trust and Safety teams was, well… look, let me level with you. Get a group of twentysomething San Franciscans with college degrees together. Now, filter out all the ones who can get a highpaying engineering job or would be reasonably fundable. Now, select of the remainder those who would want to stay, for several years, in a position where they are in charge of being a hall monitor on every human utterance which travels over electrons. I think fairminded individuals of many political persuasions will understand that the population who gets through these filters uses the spelling “freeze peach” instead of “free speech” at a much higher base rate than the American population does. Individuals in Trust and Safety, and sometimes Trust and Safety as a system, at various times in various places, may have engaged in some shenanigans. That isn’t a loadbearing claim for the below extension of this argument to debanking, but it happens to be true, and I’d be remiss if I didn’t say it. Senior management at AppAmaGooFaceSoft doesn’t really keep a close eye on lowpaid operational employees making decisions unless they cause substantial PR or government relations backlash. Trust and Safety is staffed mostly by lowpaid operational employees, and frequently most of the operational work is outsourced, because there are some aspects to the job which are soulcrushing. And so Trust and Safety was not exactly under a constant microscope. Senior executives had businesses to run, and were happy that they never saw beheading videos. Trust and Safety would happily “deplatform” people whose politics they disliked for fairly benign reasons, while zealously defending people whose politics they liked. This is an iterated game, and people realized you could just ask Trust and Safety to deplatform someone. Product teams built some flows to expedite this. You could “brigade” those automated tools e.g. act in concert with friends to mass report a social media post, or make a fuss on Twitter and wait for a company to perceive brand risk, or just ask an individual Trust and Safety person at a party. And thus, shenanigans. This was substantially exacerbated once government actors realized they could make Trust and Safety feel really special by having them have monthly meetings with Certifiably Important People. Does senior management not appreciate your important work A pity. We at the FBI, at the CDC, at the White House certainly do. We want to have an ongoing dialogue about your important work and how it contributes to the national interest. Eventually, at and around these meetings, those attendees began to ask Trust and Safety “Will no one rid me of this turbulent priest” And then after having done that for a while, we slouched into a situation where there was an official at the White House who understood his job to be being the Illegal Orders Czar. He badgered Facebook, Twitter, and similar on a postbypost basis and also zealously advocated at the platformwide policy level. I’ve never met him but I bet he thinks he is a good person and very good at his job. We had a number of officials, in various government departments, who believed they could enact policy preferences more effectively by working through catspaws than by the ordinary operation of the government. But it is a singular fact that one of them was in the White House. He once invoked direct personal interest, from POTUS, explicitly, in writing, to jawbone Youtube to up its censorship game. Citation pg 19. These communications were frequently in the style of moral suasion. Were all on the same team here, and we just want to make sure were on the same page. This was very frequently true and not all of those overlaps in preferences would seem shocking to people who passionately believe in the U.S. Constitution. On those occasions where platform policy didnt appear to be on the same page with the preferences of government actors, the velvet glove came off. Explicit threats were made, in writing. They were made in the context of a larger explicitly communicated campaign to put Big Tech under a microscope and break it up if it got out of line. Andreessen, who is on the board of Facebook, has discussed the perception and mechanisms of the shenanigan era and then the attemptsatexplicitcompulsion era. I refer interested readers to his words in other places, because I really do want to get back to banking regulation. I only know what I read in court documents, hear on the grapevine, and very occasionally see with my own two eyes. What I know is sufficient to agree with Justice Alito “If the lower courts’ assessment of the voluminous record is correct, this is one of the most important free speech cases to reach the Supreme Court in years.” The weaponization of Trust and Safety by the “misinformation” industrialacademicNGO complex and partners in government is a scandal. Tech was… complicit I think that is a fair characterization. We were complicit for a few years. We have since found our spine, and expressed some amount of regret for decisions made contemporaneously with the demands. One notable specific example of this change Mark Zuckerberg, in a letter to Congress “I believe that the government pressure was wrong, and I regret we weren’t more outspoken about it. I also think that we made some choices that, with the benefit of hindsight and new information, we wouldn’t make today.” What do Trust and Safety decisions on e.g. misinformation or hate have to do with debanking Regrettably, more than one would think. Compliance is also a monoculture. Good news Compliance across the banking industry and related companies is substantially more politically diverse than Trust and Safety was in San Francisco. Compliance decisions are also much more commercially meaningful, directly, than Trust and Safety decisions are. Compliance has to sacrifice a paying customer Trust and Safety just needs to sacrifice advertising inventory. Its hard to recruit customers but ginning up more advertising inventory is fairly straightforward. You can do it simply by making different product decisions about ad load, for example. Bad news Compliance is designed to be a monoculture. First among all things, if you work in Compliance, you must be good at being an ingratiating rulefollower. I do not mean the word “ingratiating” as a criticism. I mean it as a description of an affect. You must perform compliance to work in Compliance. If you do not, if you have a rebellious streak, if you throw elbows in meetings with your regulator, you will be replaced by someone who is not incompetent at the job they were hired to do. Compliance staff, particularly at senior levels where they are deciding policy instead of merely clicking on alerts, are central members of the American professionalmanagerial class. And the culture that is the American PMC has some quirks. The Current Thing is dead long live the