If You Use a Bank Account, Don’t Get on the Wrong Side of the Government

With the financial system almost entirely digitized, the state now wields tremendous power to cut off people, companies and industries it doesn’t like

By Brian Knight

The truckers’ protest in Canada feels like something from the distant past. But even after global attention turned to Russia’s invasion of Ukraine, I haven’t been able to shake my discomfort with the Canadian government’s actions to end the protest. The government invoked emergency powers to freeze the bank accounts and other assets of protesters and their supporters. While this action was short-lived, it was still effective in chilling support for the protest and in demonstrating the weight of such powers. The events in Canada should serve as a wake-up call and prompt us to change the laws, regulations and institutions that govern who controls whether you get to buy or sell.

The emergency powers are intended for when regular legal powers are insufficient. But in this instance the government used them to suppress a largely peaceful protest that police eventually broke up using traditional tactics. One doesn’t have to support the truckers to view this with foreboding. David Sacks on Substack highlighted how the government was taking away the right to transact, and @punk6529 pointed out on Twitter that without access to financial tools allowing people to buy and sell goods and services, all other rights become much harder, if not impossible, to exercise.

Of course, the fear that the authorities would abuse their control over who is allowed to make and receive payments goes back to at least the first century. The Bible contains this passage, for example:

“He causes all, both small and great, both rich and poor, both free and slave, to receive a mark on their right hand or on their forehead, so that no one may buy or sell, except he who has the mark or the name of the beast or the number of his name” (Revelation 13:16-17, emphasis added).

Pressure To Get in Line

Cutting people off from the financial system is a fantastic way to persecute people, especially if a government wants to maintain a patina of legitimacy. As Howard Anglin at Oxford University points out, cutting off people from commerce is much cleaner than sending in troops. There is no video of riot police breaking up crowds, and there are no dead protesters to rally behind.

Meanwhile, the state can just starve people out. People can’t buy food or medicine or pay their rent, but the hand of the state remains invisible and bloodless. Executives at banks and other companies feel compelled to comply with the government’s orders. The fear of facing the same fate discourages people from helping anyone the government has cut off, and the target of the state’s action is forced to either capitulate or break the law by stealing what it needs or revolting. Resorting to violence weakens a group’s case by delegitimizing the protesters in the eyes of the public and by providing the state with less controversial reasons to arrest the protesters.

As Anglin notes, the government’s ability to cut off people from the financial system has become only more powerful as our economy has gotten more centralized and digitized. Today’s system has many advantages in terms of efficiency and security, but it also enables the state to observe and interfere with transactions. Can this be a good thing? Sure, if we are talking about preventing a terrorist attack or other serious criminal activity. But it can also empower oppressive regimes to punish the innocent or over-punish individuals who challenge the regime.

It's Not Just Canada

While Canada may be the most recent and brazen example of abusing this power, the U.S. has a far from spotless record. Federal bank regulators and other authorities have sought to suppress access to payments for legal but disfavored businesses. The New York State Department of Financial Services sought to do this to the National Rifle Association because it didn’t like its political advocacy. And politicians and activists have pressured banks to cut off services to groups such as payday lenders, oil producers, gun makers and the adult entertainment industry.

These cases highlight another factor that makes controlling payments a powerful tool for oppression—the lack of due process. When federal or state regulators want to separate a company or industry from the financial sector, they don’t need to bring a lawsuit or even let the target know. They may not even have a specific target in mind. Instead, they’re able to raise the specter that certain types of customers might pose a risk to the banks’ reputation, and that might pose a threat to the banks’ safety and soundness.

With that justification in hand, regulators can use the possibility of supervisory and enforcement actions to raise the cost of serving certain types of companies beyond the point where it’s worth it for a bank. The bank then cuts its ties with these customers, not because it was ordered to, which would be a direct government action, but because the regulator changed the calculus of whether the relationship was worth it. After all, any one account is unlikely to be worth the cost of a regulator making life difficult.

Regulators Resist Reforms

While in some cases regulators have backed off after lawsuits or congressional investigations, efforts to fix this problem have been frustratingly ineffective. The Federal Deposit Insurance Corp. settled with a payday lender and promised to revise its training, but it committed to nothing more binding. The NRA’s claims against New York officials have been steadily whittled away, not because the claims were found to be meritless, but because the defendants enjoyed immunities that prevented them from being sued.

Cryptocurrency is often suggested as a solution to this problem. Some very smart people see promise, but I’m skeptical, at least in a country with very well-funded and powerful governments at all levels and a digital record of almost every transaction. For crypto to be a useful medium of exchange, businesses and people must be willing to accept it, and in the end it faces the same hurdle as any other form of payment. In a period of political hostility, what business (whether the bank that holds your mortgage or the drugstore that fills your prescriptions) will accept a payment from a prohibited or redlined customer that creates a permanent financial record that the state will be able to peruse?

There are brilliant people working on more private, less traceable ways to use crypto, but even if the technical problems are solved, there will still be practical and legal roadblocks. If we are talking about a spontaneous popular movement, such as the truckers, the participants are unlikely to be up to date on the latest in stealth crypto technology. These folks aren’t professional revolutionaries; they are people who hit a breaking point. They likely didn’t take the time and effort to reconfigure their economic lives on the off chance they found themselves at a protest.

Are We Actually Free?

Even if these people can access the latest technology, what about the companies they transact with? Will their bank or grocery store install the necessary technology and train its workers to accept this stealth payment? Probably not. It doesn’t make sense for businesses to do so if 99.9% of their customers are happy using the traditional payments system, especially if they are also risking legal trouble.

But aside from the logistical hurdles of a different form of payment, there is something offensive about the notion that nominally free people need to evade their government’s efforts to oppress them. It is inherent in a dictatorship that people need to stay one step ahead of their government because their government is a predator. In a free country the government is the servant of the people and protector of their rights. Free people should not need to hide unless they are doing something sufficiently bad and illegal that the government, consistent with its duty to protect peace and order, needs to apply an appropriate sanction after due process.

So, what in the U.S. system needs to change? The answer, as Sacks and blogger Doomberg note, is not to evade bad laws, but rather to replace them with good ones. Then replace the officials who administered those bad laws.

In our somewhat free system, laws matter as a constraint on government action. Yes, there is the risk that some laws are ignored or become nothing more than “parchment barriers.” But many laws, and the norms they can help spawn and reinforce, do constrain government action and establish expectations among citizens as to how their government should treat them.

Ideas for Reforms

For laws to work, however, the constraints they put on the government need to be meaningful and predictable. Otherwise, they risk giving arbitrary actions an air of legitimacy. For example, while the FDIC inspector general’s office criticized the agency for the excessive and abusive actions of its employees against banks that offered refund anticipation loans, it also noted that it has “broad statutory authorities” to protect the safety and soundness of banks. While its statutory authorities are likely less broad than the inspector general believes, they are broad and vague, a feature shared with much of financial regulation. It is in this breadth and vagueness that much capacity for mischief hides.

To be sure, there is a legitimate governmental interest in controlling access to the financial system under specific and very serious circumstances. But that need must be balanced with the very real threat to liberty that abuse, or even inadvertent misuse, of this power will create.

One thing that should be done and done soon is to demarcate the powers of the government more clearly regarding who gets to use the financial system and when. That reform should consider the sheer power that control of the financial system can wield over people and therefore build in the necessary due process, notice and privacy protections to preserve people’s liberty.

A good place to start is no longer to allow regulators, as part of their supervisory role, to hold the possible risk to a bank’s reputation over the bank’s head if it serves certain lawful customers. To be clear, this is different from the compliance risk that a bank faces from regulators if it fails to implement mandated safeguards aimed at preventing money laundering and terrorist financing.

Doubts About the Secrecy Act

It’s also worth reevaluating our anti-money-laundering laws. Supreme Court Justices Lewis Powell and Harry Blackmun were the margin of victory for finding the Bank Secrecy Act constitutional in 1974. They were concerned that the law could lead to violations of a constitutional right to privacy but felt that because it applied only to transactions of at least $10,000 (roughly $60,000 today), it was not an undue burden. One wonders whether they would rule the same way today, given the law’s expansion and the lack of any adjustments to the threshold for reporting transactions. Perhaps the law should be reconsidered, but at a minimum, the threshold should be updated for inflation.

Finally, the structure of the regulatory system needs to be evaluated. Financial regulators tend to be insulated from political control and accountability. This is defensible if the regulators are mere caretakers pursuing clear directions from Congress, but that is no longer the case, if it ever was. They need to be legislatively de-weaponized or made more politically accountable—or both.

There are even thornier questions around how much the law should protect citizens from financial coercion at the hands of other private actors. The answers are not easy, but they are important. The next time a government decides who does or does not have access to financial services, it could be a government closer to home.

Editor’s Note: An earlier version of this article was taken down after it was accidently posted before it was ready. 

Author’s Note: My wife works for a cryptocurrency company. She did not read this article before it was published.