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“Cancel Culture” Comes to Financial Services

Eric E. Murphy
Christopher L. Peterson
Paul N. Watkins
Todd J. Zywicki

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The 2021 National Lawyers Convention took place November 11-13, 2021, at the Mayflower Hotel in Washington, DC. The topic of the conference was “Public and Private Power: Preserving Freedom or Preventing Harm?”. This panel discussed “Cancel Culture Comes to Financial Services.”

Under the Obama Administration’s Operation Choke Point initiative, bank regulators sought to de-bank various legal industries such as payday lenders, firearms dealers, and home-based charities. Today, banks have increasingly acted on their own initiative to operate a new voluntary form of Operation Choke Point effectively. In January 2021, Florida’s Bank United closed Donald Trump’s personal bank account. Other banks have cut off others seemingly because of political views and have been pressured by activists to cut off funding to politically-disfavored industries, religious organizations, and others, effectively a new voluntary form of Operation Choke Point.

Is this voluntary activity the free exercise of business judgment, or is it an inappropriate response to external pressure?  What kind of unintended consequences might occur where banks use their business to punish based on viewpoint? Could this behavior make banks into utilities subject to more financial regulation or even government actors carrying out government directives? What are the appropriate responses to “cancel culture” or “choke point” tactics in banking? What steps are appropriate either through governmental or private actions?


  • Prof. Christopher Peterson, John J. Flynn Endowed Professor of Law, University of Utah S.J. Quinney College of Law
  • Mr. Paul Watkins, Managing Director, Patomak Global Partners
  • Prof. Todd J. Zywicki, George Mason University Foundation Professor of Law, Antonin Scalia Law School, George Mason University; Senior Fellow, Cato Institute
  • Moderator: Hon. Eric Murphy, U.S. Court of Appeals, Sixth Circuit

Event Transcript

Hon. Eric Murphy:  Hello. I think we’re going to get started if everybody could take their seats. First, a few housekeeping introductions. The panel discussion today, “Cancel Culture Comes to Financial Services,” was organized by The Federalist Society’s Financial Services Practice Group and its chair, Wayne Abernathy. He was planning on attending to introduce the session, but unfortunately, he had a private matter to attend to.

With that, I think I’ll introduce the topic briefly first and then introduce our distinguished panel of speakers. As for the topic, “Cancel Culture Comes to Financial Services,” I thought as a generalist judge, I’m not all that sophisticated in financial services or banking, but I would try to give just my view of the debate and the dimensions of the debate. This is a debate that a lot of these panels in this National Lawyers Conference have focused on—the debate between public power and private power. The showcase panel from just nine o’ clock today was with respect to media platforms, and I think it’s the same type of perspective that is going on here. And the perspective is, what should we do with undue public power? What should we do with undue private power? Is it really undue? I see it as a dichotomy between three types of interest.

The first interest in this consumer or financial perspective is, “Hey, sometimes individuals are using banking services to commit crimes or other things that we think are inappropriate, and so perhaps the government—the federal government or the states—should come in and tell banks and other financial institutions that they need to really police this and stop providing their services to those who, say, are committing fraud against hapless consumers.” And so, that would be a perspective of government needs to intervene in the banking industry to prevent things that we think are harmful to society.

If you equated this with the debate we just had on the media platforms, it would be the analogy of, “Hey, should we regulate Facebook to get off speech that the government thinks is harmful, whether it’s true threats or other types?” And we can have debates about what is the speech that qualifies as harmful. But it’s the same type of debate that the government should intervene to prevent harms that we think financial institutions are helping to facilitate. So that’s one perspective. And on that perspective, I think we might talk a little bit about Operation Choke Point, but that was the perspective of some in the government when they went after these different types of industries.

The second perspective is that, set aside government, private banks have market power. They have significant abilities to affect people’s lives, and they are doing so. They’re depriving industries of credit on their own, disfavored industries politically, politically unpopular industries, and this could be a use of private power that we deem problematic. To give a perspective — so the last session was, again, about media platforms and de-platforming individuals from speaking. While that may — the impact there is obvious with respect to the First Amendment. But when it comes to ordinary Americans or the ordinary person, this might be much more significant. I’ve never used Facebook or Twitter, for instance, but if somebody took away my ability to bank, that would really seriously affect my life, but not in a way that if somebody told me I couldn’t use Twitter. I’d be like, “Okay, that’s a good thing, actually.”

Although that one might be more high-profile, this kind of discrimination could affect people’s lives in a more significant way, small businesses or individuals. And so, then maybe we should be thinking about the government intervening from the opposite perspective, to ensure equal treatment or fair treatment of all individuals in making sure that banks and other financial institutions aren’t depriving people of the access to credit that they need to perform their jobs or whatever their business is on grounds that we think are bad—like political grounds if you’re depriving them because you don’t agree with their viewpoint. And so, that would be kind of the fair access principle, that treating businesses just like we treat media platforms. Should they be treated as common carriers? Maybe these banks should be treated as common carriers to have an equal access, and the government should intervene from that perspective.

And then the third and final perspective is more of a libertarian perspective. Why do we think that government should be involved at all? Why not just allow the market to take care of things? If we think banks are a completive industry, if you get deprived somewhere, somebody will come in to fill the void because there’s enough consumer demand. And so, the government shouldn’t really be involved at all in either perspective. So I think that’s the range of the debate. And we’ll talk about this and other issues, but that’s the range of the debate as I see it.

And our distinguished group of panelists that are going to have this debate, I will briefly introduce them. Paul Watkins will speak first. He is the Managing Director at Patomak Global Partners, where he focuses on state and federal regulatory issues surrounding financial technology. He has oversight responsibilities over payments, consumer and small business lending, open banking, data privacy, and digital assets. He joined Patomak following a stint with the Consumer Financial Protection Bureau, where he founded the Office of Innovation and was the director’s primary advisor on innovation. Perhaps, most importantly, from my perspective, before joining the CFPB, Paul worked in the Attorney General’s office for Arizona, and I worked with him briefly when I was in the Ohio Attorney General’s Office. In Arizona, Paul managed the state’s enforcement of consumer protection, data privacy, antitrust, and civil rights laws. Before his public service with the state, he spent some time in private practice and for a nonprofit and clerked for Judge Dennis Shedd on the Fourth Circuit Court of Appeals.

The next speaker will be Professor Todd Zywicki. Todd Zywicki is the George Mason University Foundation Professor of Law at George Mason’s Antonin Scalia Law School and a senior fellow at the Cato Institute’s Center for Monetary and Financial Alternatives. From 2020 to 2021, Todd served as chair of the Consumer Financial Protection Bureau Taskforce on Federal Consumer Financial Law. He also served earlier as the Director of the Office of Policy Planning at the Federal Trade Commission. He is a senior fellow of the F.A. Hayek Program for the Advanced Study of Politics, Philosophy, and Economics at George Mason University. And before his career as a law professor, he served some time in private practice and clerked for Judge Jerry E. Smith of the U.S. Court of Appeals for the Fifth Circuit, who we all know well.

And last but not least, our third speaker, Chris Peterson. Chris Peterson is the John J. Flynn Endowed Professor of Law at the University of Utah’s S.J. Quinney College of Law, where he teaches contracts, commercial law, and consumer protection courses. And like our other two speakers, from 2012 to 2016, he served some time in the CFPB as the Special Advisor in the Office of the Director — at the CFPB in the office. He also served in the Office of Legal Policy for Personnel and Readiness in the United States Department of Defense and as Senior Counsel for Enforcement Policy and Strategy in the CFPB’s Office of Enforcement. And before his academic career, Professor Peterson also spent some time at a nonprofit, and he clerked for Judge Wade Brorby of the U.S. Court of Appeals for the Tenth Circuit. So with that, I think Paul Watkins will begin.

Paul Watkins:  Well, thank you so much. Thank you, Judge. And it’s wonderful to be here at FedSoc. Now, if you look at your program, you will notice you are supposed to be hearing from the Honorable Paul S. Atkins, the former SCC Commissioner, who unfortunately was not able to be with us. Now, you have Paul Watkins.


So that was a very nice introduction. But, Judge, I think it’s very clear the reason I’m on this panel is because I had the most similar name.

Now, at this conference each year, we’re surrounded by likenesses of James Madison. So I want to pick up on some of the themes that you mentioned in your intro by referencing a 1792 essay that James Madison wrote on property. Now, before I read this quote, in accordance with the best practices of the National Archives, I need to note that this is a historical document. Some of you may find it triggering.


Here’s what the document says. This is his famous essay where he talks about how you have a right to property. You also have property in your rights. And here’s his sentence. Madison says, “Where an excess of power prevails, property of no sort is duly respected. No man is safe in his opinions, his person, his faculties, or his possessions.”

And I would assert to you as a theme what we’re talking about here is an excess of power. We’re talking about an excess of government power, or we’re talking about an excess of market power. And that is the cause of the issues that we have when we’re talking about cancel culture in financial services. Now what I want to do is talk a little bit historically about examples of how this has been manifested in financial services, talk about how we might see similar phenomena today, and then briefly touch on how I believe technology might provide a way forward.

So one of the first iterations of cancel culture in financial services, as already mentioned, and of course that’s Operation Choke Point during the Obama administration. In fact, I think it precedes cancel culture. So maybe we should call this chokepoint culture. And Chokepoint really highlighted a traditional supervisory concept in banking regulation, which is reputational risk. And it makes sense to supervise for reputational risk because, for example, if you have a bank and you know that it’s run by folks that embezzle or are otherwise unethical, you might pull your money out. Other people could do the same, and this could cause a run on that bank, instability to the system.

What was creative, I think, about Operation Choke Point is that they applied this sort of framework to the banks’ customers and said, “Hey, if people only knew that you were banking gun manufacturers, payday lenders –” similar effect to, maybe, your own personal reputation—if you were an embezzler, people could pull their money out, cause a run. “We’re going to prevent you from harming yourself, just don’t bank with these people.” You can see the attractiveness of this idea from a policy perspective. It’s pretty hard to pass a law to outlaw payday industry, restrict firearms, a lot easier to do this through bank supervision. So if you have a policy goal, I think this is a concept that probably will always be around.

So what are prospects for seeing something similar today in financial services? And here, I think you need to look at some of the big themes that are being introduced in financial services, some of which we’ve been talking about at this conference. One of them is ESG, which, as you know, stands for Environment, Social, and Governance. And here I’m just going to talk about the E, the Environmental, and within the E, talk about climate change, which is being incorporated into supervisory frameworks by a number of institutions. You can see this from the international community, from Europe, from something called the Sustainable Finance Disclosure Regulation, from the Feds—FSOC recently came out with a report on climate-related financial risk—and from some of the states that have put out documents on climate change and financial risk.

And when you look at these documents, you see some familiar themes. You see our old friend, reputational risk. “What if people knew you were lending to fossil fuel companies? They might pull out their money, might cause a run. We’ll stop you from harming yourself.” And there’s also a big theme that is based around this prediction of the valuation of assets. We’ve all agreed—the whole world’s agreed under the Paris Agreement—we’re going to net zero. That means we’re going to have all these stranded assets. They’re not going to be worth anything. You better start writing them down. You better incorporate this into your underwriting, into your capital reserve requirements. This, of course, increases the cost of capital for fossil fuel companies. But if you look at these documents, they say you can’t just limit this perspective to fossil fuels; you have to look at industries where fossil fuels are significant inputs. So you have to look at transportation. You have to look at manufacturing—happens to be a lot of blue-collar-based industries. But anyway, that sort of increasing the cost of capital, making it harder to access services, I think, is probably one of the most likely manifestations that we will see going forward.

And so, there we’ve talked about excess power in the government. Turn to the private sector. When you look at financial services, many of these markets are highly concentrated. I’ll pick mutual funds as an example. Three large mutual funds, BlackRock, State Street, Vanguard, are the largest investors in 90 percent of the S&P 500, own about 25 percent of each company, and these folks are forming agreements, various agreements, around this space, detailing activities that they seek to take that could have a similar effect, again, in increasing the cost of capital for various industries.

So, where do we go from here? And I think you’ll hear some ideas thrown out on the panel as potential solutions. One that I want to highlight is that I think we’re in this interesting historical moment where intermediaries are very powerful. We talked about tech. We’re in this Web 2.0 moment, where internet platforms have a lot of clout. Financial intermediaries have a lot of clout. I don’t think we’re going to stay here. There’s a lot of technology coming into the market that is empowering the consumer over the platform, over the intermediary. I think when you look at blockchain technology, when you looked at cryptocurrency, there is a business model based on blockchain that can replace just about every financial intermediary.

For example, if you look at the way we make payments now, you take your credit card; you have an issuing bank; you have a merchant bank; you have a payment processor; you have a payment gateway; you have a card network. Any of these points, if they decide to be activists, can mess up that credit card transaction. And then you have the government supervising and regulating each of these intermediaries. Well, now I can send money from my wallet to Todd’s wallet. You all can look at your phone—I’m talking about a virtual wallet here; I can send money from a wallet on my phone to Todd’s wallet—you all can look at your phones. You can confirm that that transaction happened fast, cheap, many fewer intermediaries, much less need, potentially, for government involvement, many benefits for the consumer and small businesses in lower fees, reduced market concentration. These are all things that I think have significant support throughout the spectrum.

And so, I hope that as we’re thinking about these policies, we’re also working to accelerate technology that can take us past this particular historical moment when we are so dependent on intermediaries, and move us into a world that I think is more of a Madisonian world, where this power has not been concentrated, and instead, it has been distributed to consumers and users. Thank you very much.

Prof. Todd J. Zywicki:  I like that part where you said you were going to send money to my wallet, so I’ll settle up with you later. So I’m going to kind of be a little bit madcap and throw out a bunch of ideas because I think there’s a lot going on here. And banking, I think it’s a particularly good case study of what we’re talking about this week along, as the judge mentioned — along with the internet and some other things. I’m going to circle back to that later. But I’m glad it’s getting attention. You may have noticed last night at the banquet, Senator Cotton made a passing reference to de-banking as well.

And what we’re seeing now is something that is pretty profound, which is — I don’t know if you know this, but after January 6th, the next day, Donald Trump’s personal bank account was canceled by his personal bank in Florida. And I assume somebody else took him on as a customer, but he had a significant savings account, checking account, and his personal account. Then he was just canceled. Then there’s also reports of people who are canceled because they’re considered white supremacists. It’s easy to imagine, just like we see in the internet and other eras, where this could be extended to charities, for example, that don’t believe in whatever the — same-sex marriage or whatever the case might be, individuals that they don’t like. And Paul specifically mentioned various industries.

For example, the nominee to be the new Control of the Currency came out this week. And one of our recent law review articles said she thinks that she’s the banking system to bankrupt the fossil fuel’s industry. And this is, — boy, why do they call it Operation Choke Point? Because bank accounts, financial services — they called it that because they were going to choke off the air they need to breathe. And so, if payday lenders can’t get a bank account to cash your check, then you can’t, basically, have a payday lender. If you’re a firearms dealer, if you can’t get a bank account, then you can’t really have a business. And this idea of politics and banking being entangled is an old idea. It goes way back, and it’s kind of ubiquitous in the world. But it’s really kind of accelerated in recent years.

And so, Paul started the story with Operation Choke Point. But I would argue the story actually goes back to the financial crisis, which is when, basically, all the big banks took our money, and they made all their crazy loans, and we bailed them out. But when they did that, they basically got in bed with the government. And there’s a lot of stories that come out with this, right? In fact, the government owned huge stakes in some of these, like Ally Financial. And so, that basically put them under the government’s thumb, which made it very easy to force something like Operation Choke Point to come through. And they’re basically still paying, I think, the ransom on those bailouts that they got. And so, now what we see is this development where it’s not just the government through Operation Choke Point, but this confluence of activists, the government, and all these other sorts of cancel culture-type pressures coming together to potentially use this leverage as a way of getting at individuals, even stifling their free speech, potentially, and the like.

And so, the question is, to me, what do we do about this? Right? Is this a problem, or should we do something else about it? And so, I’m going to talk about just a couple ideas here that I think are worth exploring in the larger thought for those of us in the conservative-libertarian legal movement. And one of the things I want to think about is, are our old tools—the way we thought about this traditionally—up to the job of dealing with these new threats of public/private power? And I think financial services is a particularly good way of looking at this because this is entanglement is so deep. And what goes on in financial services is not anything that we would recognize as any real system of regulation. It’s basically the system of supervision. Like the whole Operation Choke Point, it was really hard even to establish that was going on because it was basically done through this supervisory activity.

It’s not like they promulgated a rule and said, “We’re going to try to put payday lenders out of business.” It was just basically done through this sort of network of these examiners, and these supervisors started carrying out orders. And it took years for it to come out in FOIA and all this sort of stuff. All the payday lenders, for example, knew was their bank accounts were getting canceled. And they couldn’t get a straight answer as to why it was. So banking has this particularly nontransparent way in which regulation is conducted. And in that sense, banking is kind of the apotheosis of the regulatory state—this way in which regulation is entwined with everything with public and private power.

The second thing that’s important about that is there are very high barriers to entry in banking, and they can use this as leverage. And so, Paul suggested the end-run around it would be basically to go around banks, to do cryptocurrency and that sort of thing, which I think we’ll come back to. But the reality is, what these payday lenders, for example, found was if they got their banks canceled at one place, odds are they weren’t going to get a bank account somewhere else, that basically, the word had gone out that these guys were toxic. And this isn’t a market in which entry is easy. Right? You basically have to get permission from those same regulators to be able to enter a market. And they’ve kind of made it clear what the rules of the road are going to be if you’re going to be able to enter the market. So it would have to actually go around the market then.

So what we have here, I think, is how do we think about these questions in the world of the second-best. Right? Once we have this entanglement of regulation with this private power, barriers to entry where people can’t just come and offer an alternative product, how should we be thinking about this? And I think there’s two ideas here that are worth grappling with, which is, traditionally, we thought in a very binary distinction between public and private. Right? Even this talks about public and private power. Right? That is an idea that has served us very well for a very long time, which is that there is public action that requires certain rules on it, and then there’s private action, which we think of as being completely subject to different rules. And so, the judge mentioned the libertarian view is, the market will sort this out. The market will take care of this. Right?

But it’s not clear to me that that is a viable solution in a situation like this. And if you think about the internet as well, what if you really do have antitrust issues? What if you really do have substantial barriers to entry? What they said was, “If you don’t like Twitter, start your own Twitter.” So Parler did, and you see what happened to them. Right? And so, I think in terms of public/private distinction, we’re in a realm here in which it’s starting to look like, once you put the regulatory state into the mix, it’s more of a continuum than it is an either/or. Over on one side, you might have banking. And so, over at the other side, you might have something like Uber and Lyft. Right? But of course, what do see in there? That is purely market activity, kind of pure freedom of contract. But of course, what’s happening? Now, basically, the left wants to turn all those people into employees and bring them under the umbrella of the regulatory state. And to your point, Paul, that’s my impression of what Rashida Tlaib has made sounds like this, which is they want to take all of this unregulated internet stuff and suck it into the banks so that then they can control it. Right? They want to suck everything into the regulatory systems precisely to be able to do this and use this clout.

I think the second question it leads me to think about is whether or not our traditional way of thinking about legal solutions through Chevron deference and Seminole Rock and all that stuff you administrative law people do that causes my eyes to glaze over, whether or not that’s — is that the right way to think about dealing with the regulatory state when the regulatory state now is what Wayne Crews calls “a lot of this regulatory dark matter,” where it’s things that they’re just evading—notice-and-comment rulemaking? And look, we’re going to just have one of the most profound changes to American society—this new OSHA rule. Right? And they’re not going to do that through standard notice-and-comment rulemaking. Right? And who knows what’s going on behind the scenes? But can we really look and think in terms of deference doctrines and these sort of generic, dry legal concepts in getting at these kinds of questions once you really have the regulatory state and leveraging this private power through the regulatory state in a way that can have real consequences for people.

And so, this leads me to something like, what’s a middle solution? And one of the last things that Brian Brooks did when he was—I think it was the last thing he issued when he was Control of the Currency—was he issued a rule called the Fair Access Rule. And basically, it’s a rule that doesn’t make sense in the world of the first best, where you just leave it up to markets and let banks bank whoever they want to for whatever reason they want to. But I asked the question whether it makes sense in the world of the second-best. And the Fair Access Rule basically says—it’s a very blunt rule—but it basically said, in deciding whether to bank somebody, you have to basically only base it on financial variables, objective, clear, transparent financial variables, not all this other stuff, reputation, risk—not it’ll be a reputation risk because this person did a tweet that made some people think that they’re a white supremacist, or they were seen in the Capitol on January 6th or whatever the case may be. But basically, you can’t take care of that. You can only look at people’s objective financial records.

Now let me make it very clear, that sends a chill up my spine to be thinking in those terms. Right? It is very discomforting to me to think about the idea of whether or not the response to this might be something like the Fair Access Rule, something that basically requires the government to do something proactive in order to provide — to overcome these other problems. I think the regulatory state is here to stay. I think it’s basically a variable here where, are we in the world of the second-best, or can we escape the world of the second-best? And I think this extends into other ideas. So think about internet regulation. Richard Epstein has this idea that’s essentially equivalent to the Fair Access Rule. Which it’s not; it’s just private. Not do something like Senator Holly’s proposed where basically there’d be comprehensive government regulation, but basically, a common carrier rule that required nondiscrimination with respect to people.

Think about areas such as employment law. Right? Employment law is an area now where we’re very wedded — I suspect the people in this room intuitively are wedded to the idea of freedom of contract and employment of will. But employment at will today basically applies only to straight, white men under the age of 40, which basically means you can fire any straight, white man under the age of 40 at any time that you want to, and everybody else is under a different employment law regime. Right? Is that where we want to plant the flag with respect to that principle in the world of the second-best.

And so, I fear, as I mentioned—I’ll close on this—we could come up with market alternatives. We could come up with the ideas that Paul was saying. But I just sense the regulatory state just gobbles everything in its view. And we can set out this frontier, but I think it’s going to be fleeting and potentially — and not end up being the kind of transformative-type thing it could be, as we’ve seen in other areas such as education and whatnot.

Hon. Eric Murphy:  Thank you. Okay. Chris?

Prof. Christopher Peterson:  Well, hi, everybody. I’m Chris Peterson. It’s nice to meet you; nice to be here. Thank you so much to The Federalist Society for the invitation to be, I guess, a cultural ambassador coming from the other side of the political aisle. I’m, I guess, the token Democrat on the panel. And thank you so much to Judge Murphy for hosting us today. It’s an honor to be here. I’m happy to engage in a constructive dialogue with The Federalist Society. When I told my wife that I was going to go give a talk at The Federalist Society, she kind of looked at me and said, “You sure?” But one of the things that Judge Murphy did not mention is that I was the Democratic Party’s candidate for governor of Utah, my home state, in the last election cycle. This is an easy room for me. It’s not that bad. I’ll be fine.


So, anyway, I’m going to try to persuade you. I mean, the topic of our discussion today is, cancel culture comes to banking. And I’m going to try to persuade you that, in fact, cancel culture has not come to banking. I guess I’m going to first talk about — I guess start out with the Choke Point thing that some of you are probably familiar with that we’ve been alluding to. I was in the Obama administration at the Consumer Financial Protection Bureau when this was allegedly happening. And so, I have some, sort of a bit of a ringside seat to that and can tell you my view of what that was about and then also some of the other risky products that are filtering through the payment systems in our banking industry. And then I’m going to talk about what — set out a framer for how we screen out those risky payments and then make just one last cultural point that I hope you’ll indulge me on.

All right. So first off, what was this Choke Point thing? All right. So back during the Obama administration, everybody presumably is familiar that we have, in some areas of our country, extremely, ultra-high interest rate loans. The average interest rates on so-called payday loans is about 400 percent if you get them from a storefront. And if you get them online, typically they’re more in the 600 percent range. And they often compound for very long durations. My good friend Todd and I disagree about whether or not that’s a good idea and whether or not we should have old-fashioned usury laws. I say, yes—I’m on Adam Smith’s side. Todd says, no—he’s on Jeremy Bentham’s side. And legislatures all across the country have been battling this out as part of the grand pageant of American democracy for 300, 200 years now.

In some states, Todd’s side has won. My home state, we have no interest rate caps, have at it. We’re arresting people that don’t pay their payday loans right now in my home state—thousands of them every year. And in other states, like along the Eastern Seaboard, Arkansas, North Carolina, Montana, Colorado, it’s not legal. You can’t make those high-interest-rate loans. In some states, it’s even a felony, like in New York. Now, across the country, there were online lenders on the internet that were trying to have a national market and sell these loans through creative methods, even in states where it was illegal. And they had some creative theories why that was not illegal, and those theories turned out to not be true. And several of the leading CEOs of those companies are currently in the federal penitentiary, having been prosecuted for racketeering.

But what do the banking regulators do when online high-cost lenders that are making loans at loan-shark prices that are illegal under state law, in any event in some states, legal in some states if you have the right license and are following those licensing rules, which they generally were not, and then totally, probably, legal in some states? What do you do with that? Well, I think the response was, “Look, for financial institutions and payment processors that are processing those payments, you need to be careful in screening out whether or not you’re facilitating crimes in the borrower’s home state.” It’s not okay to make a triple-digit interest rate loan in the state of New York where that’s a felony. But in Utah, probably have at it, take advantage of those poor people. Thank you for the chuckle, whoever that was out there.

Audience Member:  — Utah.

Prof. Christopher Peterson:  Yeah. All right. [Laughter] But the challenge was that it was really difficult to tell which companies have licenses and which companies don’t and which companies are doing it in a legal way. And there was also, across all of that, a cloud of legal uncertainty. And that wasn’t the only market where we were facing challenges like that for the financial services industry and for merchants. Some of the other examples were drug sales. So The Choke Point issue—the online payday loan issue—widely varying state law, some uncertainty about that state law, and no federal restrictions. In the drug sale market, some types of drugs, completely illegal everywhere. For marijuana, illegal under federal law across the entire country and also a serious crime under federal law. And then, in some states, they’ve decriminalized it and made it legal, and so it’s very complicated whether or not a bank can participate in that. Can you engage in processing payments for marijuana when that’s likely a crime under federal law still?

And then the other examples were — another one of the big problem areas is online—I don’t even like talking about it—but online pornography and sex stuff. Right? I mean, probably pretty similar laws all across the country. There’s not very much variation locally. But there’s great difficulty in determining whether or not any particular transaction is illegal because there might be a child involved, or there might be somebody who is coercing somebody that’s participating in the activity under duress—just offscreen or whatever, there’s somebody with a gun or some pimp or some horrible person who’s creating a victim in that transaction. Are we just going to have the financial services industry just turn a blind eye to this terrible victimization?

Then, two more I’ll mention. The gun sales, which I don’t actually think was that big of an issue, but the online payday lenders who were running a big lobbying blitz in Congress knew that if they brought guns into it and sort of drummed something up about a Second Amendment issue that there’d be a huge powerful wave of political support for creating, for perpetuating, the notion that liberals are trying to take away your ability to get guns through the banking system. I think that was almost all cosmetic and was smokescreen. But in any event, it is true that there is widely varying gun regulation across the country.

In some states, some cities, you can purchase it. In other states, you can’t. Back to the same example, in my home state, have at it. Carry your six shooter on your side and just try not to shoot anybody. And obviously, in Chicago or New York, very different rules. And then at the federal level, some certainty for some technical statutory stuff, but the constitutional questions are — who knows. I mean, the Supreme Court never grants cert to any of the constitutional questions, so nobody knows what’s legal and what’s not. So it may be the case that some financial institutions are a little bit worried about potential liability for violating local gun control ordinances.

The last example that we’ve heard out, and I think is the most plausible one for the cancel culture narrative in the sense that some financial institutions are becoming reluctant to bank with the fossil fuel industry — and here, unlike these other examples, that doesn’t seem to be a pocket of illegal activity that’s generating some of the screening behavior. But giving charitable interpretation to the other side of that, there’s nothing that’s illegal that’s happening, but there is something that’s horrifying at the far end of that. And I know that some people in this room probably think that climate change is a hoax, but some of us believe that the science seems to be indicating that there’s going to be massive sea level rise, worldwide global famines, refugees.

And it’s not just bleeding-heart Democratic candidate, lost cause, governor people like me. It’s also the Pentagon, where I used to work, views this as one of the world’s most important national security threats because as we start to displace lots of people — I mean, it’s part of what happened in Syria. There was a big climate-change-connected famine that caused massive dislocation of people from the provinces that became vulnerable to being co-opted by religious extremists and injected instability into the Syrian government’s regime. So look, that being said, I mean we got to do it through laws. I’m even a little bit uncomfortable saying we’re going to screen out fossil fuel payments until we come up with some political compromises about that.

But that being said, for each of those areas, there are legitimate underlying complicated legal concerns that are justifying trying to screen out illegal behavior from the banking industry. Now, what is this going to prevent us from having this snowball effect of all of a sudden just regular people off the street are going to have their bank accounts canceled? Also, I will say, it’s entirely inappropriate to cancel President Trump’s bank account. I mean, there are examples of inappropriate behavior. We got to do things with laws. But I do think that — and here’s my core point — it seems to me that merchants should bear the marginal costs of banks screening illegal activity out of our payment processing and banking system.

So if you as a merchant are engaged in a business where it’s difficult to signal to your payment processor whether or not you’re engaging in illegal activity, you should have to pay a risk-adjusted higher freight for getting your payments processed through our system. So if you look like you might, just maybe, can’t tell for sure, be an online sex trafficker, you’re going to have to pay a little higher price to get your payments processed. If you can’t tell whether or not that online payday lender has a license and is only making loans into states where it’s legally permissible because you have to a whole bunch of specialized underwriting to figure out whether or not that’s the case, you should have to pay a higher price.

Now, some banks and payment processors don’t want to engage in that process because coming up with granular risk-based pricing distinctions in a payment processing platform is pretty complicated. It’s not that easy. It requires specialization. And so, some banks made strategic decisions that we’re going to go in a different direction with our business. And that’s, in my view, a legitimate thing to do. So I think that that’s essentially what was going on, and I also think that’s probably the right thing to do. And there were specialized payment processors that started to develop that are niche-based processors that go and service those markets. There were very few legitimate payday loan companies that didn’t, after a period of restructuring, find a payment processor that was perfectly capable of processing their payments for them. It provided that they were not the same types of companies that ended up with their CEOs in the federal penitentiary.

Well, the last thing I’ll point out is that—and I say this with just a lot of respect and love—on both sides of — I mean it. I mean, I’m from Utah. Everybody, all my family, they’re Republicans.


I mean, I’m like the black sheep. I got a bleeding heart. I’m a sensitive guy. I say this with a lot of affection and love. Right now, in our society, we have people—groups—that are rallying around political brands and talking points. And when we do that, we are often building support for our own careers and our own ambitions by coming together in groups. But what’s happening is we are tearing at the fabric of our society with these talking points.

Saying that this is about cancel culture as opposed to marginal risk-based pricing on payment processing, it’s salient. It’ll get people to come into the room at The Federalist Society, and it’ll make us all look like we’re talking about edgy issues. But the reality is, I think, a lot more bland than that. And the price of it is that it’s going to make it a lot harder for us, for all of us, to get together and talk about things and be civil, have civic virtue, have political compromise, and give one another the grace to continue to have the republic that the founding fathers bequeathed to us. So I would encourage us to be a little bit more careful about saying that things are cancel culture, when maybe there are other plausible explanations for what was really going on. Thank you so much.

Hon. Eric Murphy:  Thank you. Okay. So I’m going to ask several questions myself, and then we’ll open it up to audience questions for the last half hour or so. I guess I’d like to start to see if there’s any room for agreement with respect to whether — when it’s appropriate for the government to intervene, to coerce banks, perhaps, to pay attention to their customers. And my question is basically, is the divide — I guess, Paul and Todd, the question for you would be, are you okay with the government suggesting to banks that they need to monitor things that we would all agree are illegal? So in the states where it was payday lending, and it was clearly illegal, is it appropriate for the government to intervene there and to try to kind of either encourage or somehow coerce banks to not give to the payday lenders who are engaged in illegal activity?

And then the follow-up for Chris — you may have already kind of conceded this, but the problematic nature of using these types of choke points, or whatever you want to call them, it seems to me, is that democratically, you can’t get the law passed to outlaw the underlying conduct. So if it is the payday lending in the states where it is legal, maybe there’s licensing issues. But if it is actually legal, why would we try to discourage the legal activity through banking rather — it seems like it’s a back end around democracy in some respects. So I’m just curious to get — the sticking point, maybe, is the legality versus the illegality of the underlying conduct.

Prof. Todd J. Zywicki:  Yeah. So I’m going to make very clear that it is not only legitimate but essential, I think, for financial regulators to monitor against illegal activity, the clearly illegal activity that Chris was describing. Where the problem comes in, and where I get nervous, is when they go beyond clearly illegal activity and start talking about the stuff like reputation risk. And that’s what comes out and sort of what the supervisors were telling the banks and this sort of nontransparent stuff. And so, they were basically like, “Well, you have a reputation risk when you provide bank accounts to payday lenders.” And basically, the question is, “Well, why?” And it’s, “Well, because we in this administration think they have a bad reputation. And so, as a result, we’re going to tell everybody they have a bad reputation, and if you bank them, then they have a bad — then you’re banking people with a bad reputation.”

And so, I completely agree with the idea of using the financial system and that it’s appropriate to keep banks from facilitating illegal activity, especially — and when you think about how that’s done, I mean, I think the anti-money laundering laws, for example, are a disaster. Right? I mean, I think there’s a pretty widespread sense that the cost of the anti-money laundering laws we have today exceed the benefits. Right? But I think that’s legitimate. And that’s where — or that end goal — but that’s where I get nervous is when you start allowing these more subjective things into the mix and especially when the subjective things are basically this nudge, nudge, wink, wink sort of stuff that financial regulators use when they lean on people or, as we see, when politicians lean on the social media platforms now, for example, to go after what they consider to be misinformation at the not-so-veiled-threat of taking enforcement action against them and that sort of thing. And that’s where I start having heartburn.

Paul Watkins:  And I would just add that maybe a potential way forward here, if there are neutral principles that are being applied, then those should be published through legislation or rulemaking, and the institutions should be able to refer to them and the person enforcing them should be held accountable and there should be a mechanism outside of the agency that’s implementing that rulemaking. And I think the opacity of the process was a big part of the problem. I also think we do need to look seriously about whether this regulatory regime is cost-justified. There are significant costs for what we have. We catch less, a fraction of a percent, of the amount of illicit funding that occurs in money laundering. Is this really the best way to do it? So I do not think that we should rest on the assumption that the structure, as we have it today, is the most cost-effective way to regulate.

Prof. Christopher Peterson:  Yeah. Judge, I think your question for me was, “Why should we discourage illegal activity, and doesn’t that undermine democracy?” I think I actually am saying the exact opposite of that. I’m not saying that we should discourage legal activity. I’m saying that there was illegal activity and that it was difficult to determine from the payment processor or the originating depository financial institution, the banks’ perspective, whether or not that activity was legal or illegal. And the cost of making that decision was creating lag in the pricing and the willingness of the banking industry to be willing to take on some of those potentially legal, potentially illegal payments.

And so, I think what we need is more specialization in the payment processing industry where you have input firms that can tell the difference between the payday lender that’s making an illegal loan and the payday lender that’s making a legal loan. And then, the banks should use those as agents to distinguish between the two. And if that payment processor is faking it, is hiding some payments in there, they should have serious liability for committing fraud, not only that affected the bank itself, but also all of the victims of the illegal activity that are downstream in the payment processing network.

The challenges, I think — a lot of the devil in the details of our disagreement here is not in what the basic rules should be. It’s in the words like “clearly” and “reasonable.” I agree that this can be expensive. I’m not saying that we should screen every conceivable illegal activity. It would be too hard. But what we need is reasonable screening, and we need some government incentives to ensure that the financial institutions have pressure to allocate that risk and create efficiencies in doing that reasonable screening behavior.

Hon. Eric Murphy:  Okay. So, Todd, you mentioned reputational risk and concerns about it. I guess I just wanted to follow up with — kind of the same way, both sides. It seems like in today’s society where everything is so divisive, people buy stuff based on politics and whether a corporation is on this side or that side — I suspect, Paul, maybe this is for you, too—kind of the corporate perspective. I assume when I was a practicing lawyer, they just wanted to stay out of it as much as they could. But if the reputational — to the extent it is a real thing if you think that if you do business with an industry that’s really unpopular and that could actually affect your own business, why isn’t that kind of a legitimate thing to think about?

And then I guess, Chris, for you — I guess the opposite of that is why isn’t that kind of concerning from a democracy’s perspective if this reputational risk is enough to allow the government – so climate change, I guess, is the one you already talked about. If doing business with oil and gas industry can be, itself, enough to allow them to kind of stop, even though everybody agrees that perfectly legal, that does seem quite intrusive.

Prof. Todd J. Zywicki:  Yeah. Well, I mean, we have people being fired. I mean, think about Brendan Eich and the whole Mozilla story from a while back. Right? He donated to the traditional marriage, anti-same-sex marriage proposition in California, and later was fired—was unable to be CEO of his company—for things he did in the democratic sphere — people being fired for things they do on their private time and things that they say on Twitter or Facebook.

And we know there’s only one side being fired. Let’s not be naïve about this. Yeah, in theory, it could be both sides doing this, but in practice, we know that’s not happening. This is why we have speech codes on college campus, for example. In theory, yeah, it could always be turned against the left, for example. But everybody knows that the college administrators aren’t going to do that. It’s not a plausible threat. And so, this sort of tit for tat is not a plausible threat. But I think it really is. I think that Brendan Eich and I think everything we’ve seen is kind of the preview of what we could easily see with financial services. And I think, again — the big thing I think is a problem here is that the barriers to entry are so high, that this is such a heavily regulated industry, that it’s not that easy to just start up another bank and bank everybody who doesn’t have a bank account.

But think about an example just recently. A bunch of the big bank CEOs testified in Congress. I think it was Senator Toomey. And they had all come out against the Georgia voting law. They all came out about it. And you can make an argument on whether it’s this, that, or the other. But he said to them — he said, “Tell me one provision in the — you all spoke out against it, so tell me one provision in the Georgia voting law that is problematic.” And they all kind of looked at each other. Of course, none of them had read the law. They all had an opinion on it, but none of them read the law.

And finally, one of these guys mumbles, “Well, we had some people in our company who ‘felt disenfranchised’ by it.” And so, he essentially said, “Even though I can’t tell you that there was any actual disenfranchise, some people felt disenfranchised as a result of this. And so, we felt it was important to speak out on this topic.” It doesn’t take much imagination to say that we’re going to have employees saying that “I’m offended that you give a bank account to the Alliance Defending Freedom,” or some other organization, just like they did with Brendan Eich. Right? And so, that seems to me to be where we’re headed inevitably is banks kowtowing to activists to start canceling people’s bank accounts. And I’m not just not sure what the response to that is, what —


Hon. Eric Murphy:  Well, do you think it’s legitimate for the banks to think, “Well, if we don’t kowtow, we’re going to lose business?”  Is that —

Prof. Todd J. Zywicki:  Yeah. In a competitive market, in the world of the first best, yeah, bank whoever you want to. If you don’t want to bank the undesirables, I’ll bank the undesirables. Right? But I just don’t think that’s the way the financial system works in this country. I just don’t think that’s the way the regulatory state works. And I think that Operation Choke Point was just a toe in the water, the way in the which — not used to legitimate purposes, as Chris was saying, but used to basically circumvent the democratic process. And I think they’re talking about doing that with different industries now and that sort of thing.

And I just think that’s probably where this seems to inevitably be going. With the example of Trump getting his bank account canceled — sort of an example of my fear as to where this could be heading and whether it’s the industries or individuals. I think that was the logic behind the Fair Access Rule, which is a very blunt instrument to deal with all these other dysfunctions, I think, in the regulatory state as it comes to financial services.

Hon. Eric Murphy:  Okay. Chris, I guess, just to follow up on that. I mean, reputational risk in some respects is about speech if you think you’re banking with people who are icky.


So isn’t that problematic from a kind of just — it may not be a First Amendment issue. But certainly, it’s not unprecedented, for instance, for a state to pass a law that says private employers can’t discriminate against their employees on the basis of their political activity. So it expanded Title Seven at the state level. Why shouldn’t we be encouraging speech in our society for all the reasons you mentioned and to kind of not allow these type of reputational risks to lead to de-banking?

Prof. Christopher Peterson:  Yeah. Yeah. I mean, it’s interesting to hear you, Todd. I love getting together with you. I love doing these panels with you, but I honestly — I think that you are overstating this quite a bit. I just do not see evidence that there is any real momentum for banks kowtowing to activists by just starting to cancel ordinary people off the street’s bank accounts. That’s not happening. I don’t think it’s inevitable. I think that you’ve got a well-organized group here who’s going to prevent that from happening. And I guess the notion that you say that people being fired, that that’s — so it’s an employment law issue.

The notion that that’s only happening on the right — I guess it’s different in your blue/purplish state than in my red state. But I worry about that quite a lot from the right. I am terrified of my Federalist Society students that I’m going to say something that’s a little too like “I kind of like vaccines,” and they’re going to — there was just a high school teacher in a suburb just south of me. She got fired because she went on a little Trump rant, which is inappropriate. She shouldn’t have done it. It does happen on the other side. And there are lots of, I think — especially, it’s hard for me understand—I’m not the messenger on this—but there is real discrimination against women, minorities, people of color, LGBTQ people, and they do get excluded. I think probably less in the ivory halls, the ivory tower where we work, but across the country in the marketplace, there is discrimination against it. So it does go both ways. I think that’s not fair.

So look, I think we’re kind of getting a little bit far afield. I have nothing constructive to say about the Georgia voting law. I’m a banking lawyer, and I only know a little bit about Utah law, and only just enough to make sure that I complied with every single statutory requirement that is necessary to run a campaign for governor. That seems a bit far afield for me. Look, again, I’m just going to try to emphasize we need to keep talking to each other. We need to not base our policy and our arguments on anecdotes. It has to be data-driven, to the best that we can—it’s always hard to do that—and it needs to be focused on finding reasonable compromises that take the temperature down a little bit, so people don’t start getting killed in this country because, let me tell you, there is a real risk of that on, frankly—just to be candid—on your side of the political aisle.

I cannot overstate how terrifying it was for me when I started getting bomb threats. People said the most horrific things about me and my family on Facebook. If you don’t think that there’s some ugliness on your side of the political aisle, you are being naïve. It’s scary out there. We need to take the temperature down, everybody. All right. Thanks.

Prof. Todd J. Zywicki:  Could I just—and obviously, I agree with that. I’m sorry that happened, Chris. And I admire your courage in running for governor, especially your tenacity to talk about taking on an uphill battle.


Prof. Christopher Peterson:  Everybody needs a hobby, Todd.

Prof. Todd J. Zywicki:  There you go. There you go.

Prof. Christopher Peterson:  My wife told me that. She didn’t know the hobby —

 Prof. Todd J. Zywicki:  That’s right.

Prof. Christopher Peterson:  — what the hobby was going to be.

Prof. Todd J. Zywicki:  And so, I get the point. Maybe it’s overstated. But if you had told me five years ago that Twitter would permanently ban the person with the largest Twitter following in the history of the world, who created Twitter, essentially, made it what it is—Donald Trump—people would have said, “Oh, that’s crazy. No self-interested profit-maximizing business is going to ban Donald Trump. And YouTube’s not going to ban Donald Trump. It’d just like be crazy to think that businesses might do something that.” And so, I just don’t — hopefully, it won’t turn out to be the case. And I agree that they should cut both ways, but I’m just not sanguine that that’s going to be the case in the direction where things are going.

And let me make clear, in the world of the first-best, I would say break down the barriers to competition—Fintech, industrial loan companies—give nonbanks access to the payment system, let Walmart have a bank charter, let all these people — let a thousand flowers flourish. But that just doesn’t seem to be where we are at with this. That would be the world of the first-best. It would a robust, competitive market with easy entrance. And that’s where I’m going to continue to push for that, right? That’s what we talked about the CFPB. But in the meantime, in the world of the second-best, I’m trying to think about where it seems like we might be headed.

Paul Watkins:  Can I jump in there? Just on the concept of reputational risk, so I didn’t live Operation Choke Point to the same extent as the panelists here. But you know, if you just look — I’m just reading from a supervisory document right now. “Insurers should consider the negative publicity that may be triggered by insurers underwriting or investing in sectors perceived as contributing to climate change.” That’s reputational risk because you’re insuring somebody contributing to climate change. That’s government-focused activity. So, where’s the evidence for that? Where is the crisis? We’ve had a lot of financial crises. Todd knows them much better than I do. Where’s the financial crisis that was caused by reputational risk? Is this a real thing, or is this just an end-run because passing laws is really hard, and then you’re held accountable, and you might be voted out of office in two years?

And I just want to jump on the innovation point. And I agree with Todd that it’s frustrating how slow innovation is, especially in financial services. But we have to break this cycle where one group comes in, and the incumbents say, “Oh, these regulations are too onerous. Take the regulations off of us.” And this group says, “Well, we don’t like regulation. All right. We’ll take some of the regulations off you.” Then the next group comes in, and the incumbents say, “Hey, our competitors are unregulated. Why don’t you go regulate them?” And they say, “Well, we’re here to regulate, so we’ll go regulate them.”

We need a sustained, bipartisan consensus around innovation, around promoting the insurgents so that they can take away this market share. This is a real problem, and it’s across both parties. And it’s because, I think, the political benefits of helping people who do not have capital is not that great. But we need — whether it’s a narrative or a movement or something, we have to attack that problem, or we’re never going to get past these issues. So I hope maybe this organization can be part of promoting that because it’s really a principal-based approach to some of these excess power issues.

Prof. Christopher Peterson:  Yeah. I mean, I was going to respond to Todd again. Professor, Twitter canceled the president because there was an insurrectionist mob that erected a gallows outside the Capitol and was going to try to hang the vice president and the speaker of the House—the first invasion of the Capitol building since the War of 1812. So it’s a bit of an extraordinary case. I’m not sure that that should be the data point that we should use to generalize about what we can anticipate for ordinary people and businesses across the country in terms of banking.

And I think that trying to draw a parallel between those two things, I think, is an extraordinary leap. That’s not the same thing. That’s exactly the kind of thing that I think — the debate about that is what’s poisoning our democracy. And we don’t want to let that very complicated, very important, and frankly above my pay grade conflict to spill into something as simple as who gets access to originating depository financial institution payment processing. Thank you.

Prof. Todd J. Zywicki:  Just to clarify, all I was saying, that is an example of people — when you argue that private market actors will be sufficiently motivated purely by the profit motive to not do these things, I think that’s an example that cuts against it. And it does happen, of course. And so, I didn’t mean to any way imply that whatever that was about had anything to do with ordinary people. But we do know a lot of things have happened during – you know, all the misinformation—what they call the misinformation stuff—with respect to the pandemic and everything. Or Alex Berenson — Bret Weinstein, who was demonetized by YouTube. Right? There’s a lot of people who’ve been permanently banned or disciplined by the speech platforms.

And it’s not at all out of the realm of my thought to basically say, “Well, somebody who’s promoting misinformation about COVID or something also shouldn’t have a bank account.” Right? They shouldn’t have a bank account where they can receive payments and that sort of thing. I hope it wouldn’t happen. It seems crazy, but I thought it would be crazy that they would do a lot of the things that they’ve been doing in exercising private power on those internet platforms. And maybe banking’s just different, but it’s not obvious to me that it necessarily is so intrinsically different that I’m not nervous.

Hon. Eric Murphy:  Yeah. So I just wanted to follow up on that. I guess we were talking a little bit about the appropriate role of government and now switching more to the libertarian, and why wouldn’t the market correct these things. And I forget the Australian — [inaudible 01:17:39] destruction. Right? I mean, new industries come about, or new technologies come about, and then they kind of blow up or destroy the existing markets. We see that all the time. You mentioned taxi cabs. They were very regulated. They loved their monopolies. And then Uber and these other groups come along, and now it’s incredibly competitive. Cable was seen as a natural monopoly on the distribution of content. And now there’s all these different ways you can get your content. It’s amazing. So why wouldn’t we think that the same type of development would happen? Why are these barriers of entry unique enough to require a fair access rule versus just thinking the free market will find a way?

Paul Watkins:  So there’s a debate right now. Innovation in financial services is the introduction of a form of digital assets called stable point, which have tremendous potential to transform payments, reduce costs for consumers—for businesses—because this item can be, again, transacted person-to-person without going through all the intermediaries that we talked about. So FSOC just put out a report about a week ago, saying, “Hey, you can only do this in the banking system, essentially.” Currently, there are state charters, non-depository, or other forms of regulation. Tone of the report — this is going to be — maybe some of these will be money market funds, but this needs to be insured bank deposits regulated by the FDIC, regulated by the fed.

There was not a lot of controversy around that. That is a very big deal if we care about this issue. If we care about this issue, we’ve got to fight for these little guys who have what — JP Morgan is like 3.2 trillion in assets, the largest stable point in the U.S. is 30 billion. You’ve got to fight for these little guys at this moment before they get pushed into this regulatory structure that is already dominated by the incumbents, and it’s going to choke off new ways of competing that are beneficial for this conversation but beneficial for consumers generally. Consumers are facing overdraft fees that they shouldn’t have to pay. They’re unable to receive the full benefit of their capital because that’s going through an intermediary. They’re forced to pick among a small number of institutions because there’s not enough competition. This is the moment when we need to engage and where folks who are not directly involved in this space need to fight for the insurgents.

Prof. Todd J. Zywicki:  Yeah. It’s this level playing field garbage that the big banks are always pushing. Right? And that’s the sense, right, is — there’s political incentives to throw out the net and pull them in, but then you also got the big banks lobbying to suppress any competition that they can get. And so, the way banks now get new accounts is they just buy other banks. Right? They don’t actually compete for customer business anymore. They just buy another bank. And so, I think it’s a real problem. This is one of the reasons why we raised — at the CFPB, we raised some concern about the idea of the OCC being the proper chartering authority for Fintech companies because even if they do get the chartering authority for fintech companies, they’re going to layer on the back end the fair playing field, the level playing field, of capital requirements for companies that don’t do things that need capital requirements in the same sort of way. And so, that’s my concern then.

Prof. Christopher Peterson:  I’m so excited to hear how interested you both are in more vigorous antitrust enforcement. Look, I want to have more competition in the banking sector, too. So maybe there is some measure of potential agreement there. I do worry about—I mean, this is becoming about bitcoin and the other cryptocurrencies; that’s maybe a different panel—but I am not entirely persuaded.

Paul Watkins:  Same panel.

Prof. Christopher Peterson:  Sorry.

Paul Watkins:  Same panel.

Prof. Christopher Peterson:  I’m not entirely persuaded that there’s really that much comparative advantage in that technology over traditional financial services other than a comparative advantage in facilitating tax evasion, online, and payment for illegal activities and that. The anonymity that tends to be — there’s a little bit more anonymity there. I mean, we have a relatively stable currency. Maybe there’s some advantage in Venezuela or something, where the government — if you’ve got currencies fluctuating wildly. Ours is — it’s under a little bit of pressure now, too. I admit that. But look, I’m not entirely convinced that bitcoin and these other cryptocurrencies are really going to provide that much value to low- and moderate-income people across the country. That remains to be seen to me. And I’m more worried that they’re going to facilitate more scamming and illegal activity that’s going to take advantage of those people.

Prof. Todd J. Zywicki:  Well, I don’t want to speak for Paul. But I think Paul’s point is that—I guess it’s appropriate I’m sitting in the middle—because I think what you’re –


Prof. Christopher Peterson:  No, you’re on the right, Todd.

Prof. Todd J. Zywicki:  I’m on the right.

Prof. Christopher Peterson:  You’re clearly on the right.

Prof. Todd J. Zywicki:  On this panel, which is — if I sort of paraphrase —

Prof. Christopher Peterson:  I am way more middle than you, Todd.

Prof. Todd J. Zywicki:  You are on the left there.


So there you go.

Prof. Christopher Peterson:  Fair enough.

Prof. Todd J. Zywicki:  But if I can paraphrase your position, Chris — basically, you’re saying Zywicki is imagining a problem that isn’t really a problem, that it’s not that bad, that this isn’t — people aren’t going to be getting their bank accounts canceled. This is a non-problem, and Zywicki’s getting his hair set on fire on. And Paul’s basically saying, “Well, if it is a problem, it’s not really a problem because there’s these other solutions, which is markets will solve the problem without government.” And so, I think that’s—I don’t want to put words in your mouth, Paul—but that’s what I interpreted your view to be is that, “Yeah, maybe banks will start doing this, but people will figure out a way to work around it, more or less. And so, maybe it’s not as big a deal as Zywicki thinks, even if it is a problem.”

Paul Watkins:  So what I was trying to say is that I think we are focusing a lot on the short-term policy solution. What are we doing within this space where we have the issue that we have right now? We’re not doing enough to just entirely change the conversation. And I guess it isn’t entirely a bitcoin conversation. I want to say I had the privilege of being in Professor Peterson’s classroom when I was working in the administration and went there with an administration official that I suspect he disagrees with on a number of issues. And it was a very substantive, thorough disagreement and respectful and just exactly the sort of interchange you’d want to have in an academic environment.

So whatever defense he’s making here, in his personal life, he is the exact opposite from what I’ve seen of cancel culture. So I do think there is real potential here. And if somebody wants to ask — I don’t want to hijack the panel. So if somebody wants to ask a question in response to those points about digital currencies, there are answers. This is not just a mechanism for fraud. The essential idea is that you’re using technology to replace an intermediary that is currently charging a fee. That’s where the cost savings come from. You don’t need the intermediary anymore because you can use the technology. And that is a real-use case. That is apart from all the kind of noise that is in the space.

Hon. Eric Murphy:  Great. I see we have somebody who wants to ask a question. So I’ll let you ask one.

Scott Univer:  Thank you. Is this –

Hon. Eric Murphy:  Yeah.

Scott Univer:  I’m Scott Univer, member of the Financial Services Committee Executive Committee. Mr. Peterson, I wanted to address my question to you. First of all, I think you were being unduly modest about the appropriateness of yourself as a spokesperson here. First of all, your arguments are entirely reasonable. And second of all, you look like Clark Kent.


But my question is this: Why do you think that it is necessary for opinion-based financial sanctions to reach down to the common person, a common financial user, in order to become a serious problem when all you really have to do is sanction a few high-profile users to tell people what the rules are and enforce compliance? As the French admiral was supposed to have said when asked why he hanged one of his ship captains after a losing battle, “To encourage the others.”


Isn’t it not necessary to go down that far?

Prof. Christopher Peterson:  That’s a great question. And also, yes, thank you. If you saw my bench press though, you wouldn’t think I was very much like Clark Kent anymore. It’s very, very mediocre. Well, thanks. I appreciate that. So it’s a great question. I mean, I agree with you that sanctioning a few high-profile things, illegal actors, is an important way to do it. One of the things that I think, in fact, happened is that some of the CEOs I mentioned that went to prison for illegal online — for violating the racketeering statutes in their online high-cost lending, they got a couple of those cases done. I think I was an expert witness for one of them when the Eastern District of Pennsylvania prosecuted.

But the administration changed, and those cases all went away. And everybody realized that there was a new sheriff in town and that there wasn’t anybody to prosecute those cases anymore. And a lot of the same kind of illegal lenders started to creep up again. And they got a little bit more sophisticated about sheltering their assets and hiding overseas and that sort of thing. And so, a lot of that same activity still going on today. I find it extremely frustrating. So I get that there is a potential problem. I don’t think that Todd is entirely making this up. We have a contentious society, and there probably are — there’s an examiner here or there who’s being unreasonable. I don’t doubt that. And they also probably can get in some real trouble if that emerges that they’re putting inappropriate pressure on.

It just strikes me that the larger problem is not disciplining the banking system, but are these — this constellation of other big problems that are out there, whether that’s the sex trafficking, the loan sharking stuff I worry about, or guns—and obviously very, very salient powerful debate on that—all of those big problems are enormous problems. And this is a very important lever that we as a society have to try to control these problems and facilitate tying our mixed federalist republic together. It’s important for the New Yorkers to be able to have a law that says they don’t want loan sharking. And it’s important for the Utahans to be able to say, “Yeah, let’s have some loan sharking. We’re good with that.”


I mean, that’s how we’ve managed to tie such a big, complicated country together. And the banking system has a role in respecting those regional differences and policing the payment systems based on the rules that are out there in society. And one component of that is sending some tough messages, maybe hanging a ship captain, using your metaphor once in a while. Little uncomfortable with the metaphor, but fair question. I don’t know if that was responsive or not.

Hon. Eric Murphy:  Great. Okay. Next question.

Questioner 2:  My name [inaudible 01:29:22]. I’m not from Utah. I’m from France, I’m sorry. I’m an attorney before the French Supreme Court. And I was very interested in what you say, Professors, about President Trump’s bank account closing. I’m not sure that in my country, and probably in Europe, such thing could be possible. In my country, we passed a law in 1998 which says that having a bank account is like a fundamental right and that no discrimination can be made in opening or closing a bank account. So I was wondering how such thing is legally possible in this country. And my question is about the border between cancellation and discrimination.

Prof. Christopher Peterson:  Well, I’ll take a stab at that. I mean, we have similar laws. The Equal Credit Opportunity Act specifies about nine different protected classes it’s illegal to discriminate based on, including race, national origin, disability status, which I think is—it’s also — the Americans with Disabilities Act has some separate rules about that—use of public funds or asserting your rights under the Consumer Credit Protection Act, which is an umbrella statute that has a lot of our consumer protection laws. And then some states have public accommodations laws that expand those protected categories and maybe change the remedies in some way.

One protected category under any of those is not Donald Trump. He’s not listed as a protected category. So I don’t know whether or not they were engaging in some law. It strikes me as inappropriate for the bank to do that. I don’t know why they did it. It seems like a one-off case. But he’s a special case. We should not use him as an example for any policy other than policy for him, in my view. If we did find that there were banks that were going around canceling Republicans’ access to credit, I would be completely opposed to that and would go to bat for you all just like you’ll go to bat for me if the mob comes for me in Utah.

Hon. Eric Murphy:  Yeah, Chris, I was curious — would you be okay adding political opinion to the group of protected classes?

Prof. Christopher Peterson:  Yeah, I think I would. I mean, that’s an interesting idea. I’d be open to that. It might create a — it might be a moment to build on this essence of commonality. I’m very in favor of that. I think the one example that I’ve read a little bit about was there was some white supremacists. And my understanding is that they were selling, what I view, as vile white supremacy kind of merch—Nazi flags or something like that. I mean, I kind of feel like if I were at a bank, and I found out that we were processing payments for a company that’s distributing swastikas, I kind of feel like I should be able to back out of that, and I should not have to be compelled to have my brand and my bank tied to your swastika. So, where we would draw the lines on that, I don’t know. That’s a tricky, tricky question. I think that we probably would need a fancy United States Court of Appeals judge to give us some guidance.

Prof. Todd J. Zywicki:  No. That’s funny because that’s exactly the example I was thinking about, where that has happened to, not Donald Trump, but ordinary people doing unpopular things.


Prof. Christopher Peterson:  Selling Nazi Swastikas.

Prof. Todd J. Zywicki:  Yep. And not being able to get a bank account to do it, a perfectly legal, constitutionally protected activity.

Prof. Christopher Peterson:  But vile.

Prof. Todd J. Zywicki:  But vile, yes. But that frames the question. Right? So the point is I think that frames the question perfectly, which is, yeah, you have a right to free speech, to say this stuff, to create the merchandise, to, in theory, sell it. Those are all legal activities. But if you cannot accept payments for it, if you can’t get a bank account to do it—I mean, I guess you could try to do like the marijuana industry—but that basically, effectively, it seems like raises a concern about whether or not you’ve effectively destroyed their free speech rights. You might not like it.

      And so, I think the French example’s a good example. What I was going to say is that the rest of the world, I think—and you guys, I know Paul’s done a lot abroad—the rest of the world has much more of a clear vision of banking as being more like a public utility. And I’m guessing France is like that, right? The guaranteed access to bank accounts and all sorts of things, there’s an acknowledgment of banking in most parts of the world being like a —


Prof. Christopher Peterson:  Postal banks.

Prof. Todd J. Zywicki:  Yeah, right, postal banks, that’s right. Here in the United States, we’ve continued to think of banking as a private activity. And in many ways, that sort of frames my question, which is, is it accurate to still think of banks as predominantly private businesses when they’re so intertwined with the regulatory process? Or is it useful to start thinking of them as being, maybe not completely public utilities, but being more like public utilities? And when you’ve got a public utility or something like a public utility, maybe we want to have a different regulatory regime than just pretending like they’re completely private.

      And I don’t know the answer to that. Right? This is why I’m genuinely trying to think this through because there’s all kinds of unintended consequences that could flow from that. But I think that’s what we’ve seen is a migration of private businesses and banking as being more like public utilities and what might that mean for how we think about our regulatory regime.

Hon. Eric Murphy:  Great. Next question.

Julie Smith:  Hi. Julie Smith. I’m with the Institute for Free Speech. Again, Mr. Peterson, not to pick on you, but you know you’re here to be picked on.


      So my problem with your framing of this issue is there are all these terrible things that happen, crimes, financial crimes, human trafficking, etc., and the burden of your argument seems to be, “Prosecution is hard. Wouldn’t it be nice if we could have an easier way to cut all these things off?” The problem with that is you are — when you’re talking about the lever of restricting banking services or other financial services, you are using a tool that is not suited to the prosecution or prevention of crimes. You are using a chainsaw to do brain surgery. And that is such a mismatch between the tool and the goal that I think inquiring minds are justified in asking if that’s the actual goal. So my question—and I do have one—is, aren’t you turning your back on all the reasons that prosecution is hard by using this other lever? Thank you.

Prof. Christopher Peterson:  So prosecution is hard. I mean, I worked in the Consumer Financial Protection Bureau trying to bring cases to police illegal markets, both through payment processors, but also just directly, and it’s extraordinarily expensive. And frankly, it’s a lot of the same folks that are in this room that made it so expensive by ensuring that we don’t have enough staff to go after it and by also having mandatory forced arbitration clauses that make it so the people can’t assert their private cause of action rights to go protect themselves. They can’t even get to court, and there’s no class actions that enforce directly against those lenders. So yeah. I mean, prosecution is hard. I think that this is one legitimate tool.

      I disagree that — it’s not fair to characterize my position as, “We should just cut off bank access.” My position was more nuanced than that—that we should engage in reasonable screening measures to exclude illegal activity from the banking system, which we already do. I mean, that’s what the anti-money laundering statutes are. That’s what the know-your-customer statutes are. We do that with tracking the amount of putbacks — or the amount of—the terminology’s escaping me—in the natural rules, they have to keep track of how many payments get sent back for allegations of fraud. And all of those are used to police access to the banking markets.

      I probably want a somewhat more muscular version of that than some folks have in the room, but that’s because I’m worried about a lot of these problems. And I don’t think that it’s a chainsaw for brain surgery. It’s the same kind of underwriting that you engage in when you make loans. You need to get to know the customer a little bit, see if they’re sketchy, maybe have some algorithms that help you out, make sure they’ve got the appropriate licenses in place, ask them who they’re doing business with. That all goes into making loans, and it should also go into that when you’re allowing merchants into the bank account vault to take money from customers through the payment processing system.

Hon. Eric Murphy:  Great. Next question.

Questioner 4:  Thank you all so much for coming and the great conversations today. As someone not familiar with complex fiscal services, it was both engaging and easy to follow. So I appreciate that. In the sake of looking for potential consensus, whether this might be consensus for or against, I wanted to ask a follow-up about the Fair Access Rule that Professor Zywicki had mentioned, which has now been repealed, but it’s been reproposed as the Fair Access to Banking Act. And it’s for the panel, but I want to phrase it first to Professor Peterson.

      So even if we accept your starting position that there is a legitimate need to potentially regulate this on the basis of differences in localities or states on what they may or may not permit to be legal or even a truly fiscal impactive change in the risk-based behavior of something that might be illegal, what concerns most of us is when we see that that legitimate starting point, accepting that if that is a legitimate starting point, it’s now moving to what appears to be JP Morgan saying they will cut off all ties to anything relating to coal, or Bank of America saying they’ll cut off all ties to anything that doesn’t meet their standard of clean energy, or even financial institutions saying that they’re willing to consider cutting off ties to institutions in Georgia. So that looks like a very troubling trend to us.

      So with the proposed act, what I understand to be the operate provision says that any financial institution operating in a geographical location has to offer their services equally based on quantitative means, impartially, including risk-based assessment. And now to me, that sounds like that does answer both of your starting two concerns but while allows us to avoid this, what appears to be, political nature of these other effects. So to you, would that be some sort of starting point that might be amendable to move forward on?

      To the rest of the panel, is this same act, something that starts as a legislative provision, an appropriate type of measure to move forward in the immediate future? Or does that still lend too much discretion to potential regulatory agencies that could abuse that in terms of too much delegated authority in being able to tinker with that under different administrations? Thank you.

Prof. Christopher Peterson:  Why don’t you guys go first? I want to think about it. It’s a tough question.

Paul Watkins:  Look, I mean, Todd, you’re the fair access expert here.


Prof. Todd J. Zywicki:  Fair access —

Paul Watkins:  So I’m going to be — I mean, what I would say — I’m going to be a broken record and say, really — how good do we think the process is going to be if it’s occurring tightly inside this regulatory space. Do we really think that this rule is going to solve it, that the government’s going to enforce it in a good way? Do we really want to trust our freedom with this? This was a big fight in the administration. I was on the committee that was supposed to be pushing digital assets policy—the committee that did nothing. There was a big outcry about this. Why wasn’t there a big outcry about us doing nothing? That needs to start happening from folks in this room and elsewhere, or else this problem’s not going to get solved.

Prof. Todd J. Zywicki:  Yeah. Right. I’ve learned this as a professor—everybody has a good idea, and they can tell you all the intended consequences, but it’s hard to think about what the unintended consequences are. And I think Paul justifiably does that. I try to think for the unintended consequences. I’ve kind of reached a stage where I think it’s probably a good idea, but I still haven’t made up my mind on it. I could try to think of all the unintended consequences and all the things that could happen. I think, as Paul suggests, maybe it’s not going to do that much. But I think it might do something. And so, I think it’s a very difficult question for precisely this reason, is that it’s actually increasing government supervision of these entities, government oversight of these entities. And that’s always a double-edged sword to think about. So that’s why I’m wrestling with it.

Prof. Christopher Peterson:  Yeah. So I understood the question that — would I support a fair access rule requiring banks to bank customers, provided that they were engaging impartially, based on a risk assessment. And for me, the tough word that I was scratching my head about is what impartial means. Impartial in what respect? I mean, we do already have fair access rules. Fair access, that’s what the Equal Credit Opportunity Act is. It’s a rule that says you can’t turn away a woman who applies for a checking account because she’s not married, which used to happen all the time. It was totally inappropriate. So I mean, it depends on what we’re going to pack into the word impartial there.

      I mean, I’m open to saying that we should not discriminate on the basis of banking because of ordinary political alignment. But that being said though, I do have some sympathy. I mean, it’s odd for me to be the one that’s defending Chase. I mean, usually, I’m the one that’s coming up with a way to sue Chase. It’s weird how this is the case. But I tend to have some respect for their right as a financial institution to say, “You know what? We don’t want to bank this neo-Nazi.” I mean, that seems like it’s a reasonable thing for them to tie their brand. They spend all this money and time and effort building these brands. And then, all of a sudden, they’re going to be compelled to bank somebody that’s trying to sell swastika flags. What about freedom, guys? I think they should have the right to deny that customer.

Hon. Eric Murphy:  Do you think—just to follow up—if the response was, “Well, we have to because the law requires equal access,” that that would kind of moot the reputational harm? If the response was, “Well, they established a rule for a reason because we don’t want folks making this distinction between what is, especially acceptable –”


Prof. Christopher Peterson:  And everybody in the country is going to be forced to facilitate payment processing for swastika flags. Is that really what we want? I don’t want that. If that’s what impartial in the question means, I don’t think that we should be forced to that. And if they’re struggling to get a payment processor to sell their swastika flags, tough luck, Nazi.


      My grandfather fought you and nearly died. You’re not on my side.

Hon. Eric Murphy:  Okay. Next question.


Prof. Christopher Peterson:  Thank you, Judge.

Emily Gao (sp):  Hi. My name is Emily Gao. I’m in Alliance Defending Freedom.

Prof. Christopher Peterson:  I can’t quite hear.

Hon. Eric Murphy:  It’s on now.

Emily Gao:  Okay. Can you hear me now?

Hon. Eric Murphy:  Yep.

Emily Gao:  My name is Emily Gao. I’m with Alliance Defending Freedom. I wanted to add three real-life examples of people who had their payment processing canceled, and they weren’t politicians. So the first is the Ruth Institute, which is a pro-life and pro-family, pro-traditional marriage group. Their payment processing was canceled. They were with Vanco, which is owned by Wells Fargo at the time. Barronelle Stutzman, a client of Alliance Defending Freedom—she was a florist in Washington State who serves all customers but does not create custom wedding creations for same-sex weddings because she believes marriage is between a man and a woman. And similarly, Aaron and Melissa Klein in Oregon, who are cake artists, and they also believe in marriage between a man and a woman because they’re Christians. They also had their GoFundMe campaign canceled.

      And I think it would be wrong to cancel someone because of their belief in same-sex marriage or their support for abortion. But I think it’d be very, very hard to find examples of that because the cultural and market forces today would punish any payment processor that would cancel someone on that side. So I do think all of the examples we’ve seen come in — they go in one direction.

Paul Watkins:  Sounds like a lot of support for Todd there.


Prof. Todd J. Zywicki:  Definitely not Nazis.

Prof. Christopher Peterson:  Maybe this is for me, I guess, again. Look, so if I were at the bank, I would not have done that. I mean, that’s not a great choice. I think the one that’s most troubling to me is the pro-family, pro-life institute because that clearly seems to be a politically motivated thing. I’m not seeing a clear undergirding legal justification for that. The florist that doesn’t do same-sex weddings, depending on the state that that’s in — a lot of states have now passed public accommodation laws that prohibit discrimination on the basis of LGBTQ categories. So the activity might have been illegal, and the payment processor might be worried that they’re going to be engaged in facilitating illegal activity. And that seems to me like they’ve got a peg to hang their hat on in making a decision about that.

      That being said, though, I suspect that most of these people are going to be able to find other ways to process their payments and that the overall — it’s not like they’re going to be — they’re going to be lots of payment processors and companies that are going to be sympathetic. They’re going to develop business niche models to cater to those potential clients. And the market should probably adjust to that pretty effectively. But I do have some sympathy. And it’s a fantastic question, so I really respect the question. It’s very detailed. But I just don’t think that in the end, this is as big of a concern as it is as sometimes we’re portraying it to be.

Paul Watkins:  Can we just go back to that flower example? I don’t want to misstate what you just said, but what I heard you say is — so there was some enforcement action because, I think, allegedly there was discrimination against a particular customer. So you’re saying a payment processor that is taking in payments from other customers, from lawful customers, because something was sold—so the money came in, so this is lawful money—they should still be able to cut off funding because there was an enforcement action on something unrelated? That —


Prof. Christopher Peterson:  No, no. That’s not quite what I said. And I don’t know the facts of any of these cases, so I have to be quite cautious about this. But I think what I was saying — it sounded like what you were saying—and I don’t know the facts—but what I was hearing is that there was a florist who was violating a public accommodations law and was doing it in an open and notorious way. And the payment processor realized, “Well, this company might be engaging in a violation of an ongoing public accommodations law, and our payment processor are trying to carefully screen out companies that are engaged in illegal activity”, which arguably, under state law, maybe that would be the case. I don’t know enough about that.

      It is part of the why I have some sympathy for financial institutions that are taking on payment processor clients. It’s very hard to do business in the modern society with all the complex, competing interests. It’s not easy to identify who’s engaging in illegal activity and who’s not. But if you have specialization, a company that’s specialized in identifying the distinctions between those two things, they very well could because they’ll get good at it. And that company that can tell the difference between what’s legal and not illegal, then the florist can go to that company if they’re not breaking the law and should have a robust market to facilitate her payments.

Hon. Eric Murphy:  Okay.

Paul Mahoney:  Hi, Paul Mahoney, law professor. This is mostly a question for Todd, but Chris, if you want to offer thoughts, that would be great. So, Todd, based on your view of the quasi-public utility nature of banks, I’m surprised that you so quickly concede that they ought to be in the business of preventing illegal transactions. One of the reasons that prosecuting is hard is that the government has to prove illegal activity.

Prof. Todd J. Zywicki:  Right.  Right.

Paul Mahoney:  In fact, it even has to prove it beyond a reasonable doubt. But all a bank examiner has to do is say, “Hey, if something smells bad, just cut off access.” So I’m surprised that you’re willing to concede that banks ought to be in the business of preventing activity that has not been adjudged illegal.

Prof. Todd J. Zywicki:  Right. Yeah. I mean, I think it’s a fair point, and I should probably think more about it. But I’m taking as my basis that things like anti-money laundering laws and anti-terrorism laws are in — having banks do that is a legitimate sort of thing. And that’s really what the question goes because it’s the same thing there, right? I mean, obviously, the same basic principle when you’re talking about noncitizens versus citizens and that sort of thing. And I’ll think more about your point, Paul. But it doesn’t intuitively strike me that anti-money laundering laws are inherently a bad idea in terms of doing that sort of thing. And I think they do it. As Paul said, it’s too expensive. They do it in a terrible way that doesn’t actually seem to accomplish the goal. And I think, probably, that’s a big impact on financial inclusion, for example, and form remittances and all these sorts of things. But it doesn’t strike me as an inherently improper use of government power.

Paul Mahoney:  Well, Todd, I’ll just make one very quick observation, which is in money laundering, part of the definition of the crime is the use of the banking system, which is not true of these other.

Prof. Todd J. Zywicki:  That’s a fair point. Yeah, right. Yeah. Right. You’re saying that this is just fraud, not criminal type, and necessarily criminal activity. And I think Chris is saying it’s criminal.

Prof. Christopher Peterson:  If you’re aiding and abetting, if you’re helping somebody hurt a child, seems crimey to me. You know? And if the way that you’re doing that —

Prof. Todd J. Zywicki:  Crimey.

Prof. Christopher Peterson:  — is specializing in hiding their illegal payments for you victimizing kids, that feels like the bank could be engaged in a crime there. And I’ll also mention, the online payday lenders that went to prison, their originating depository financial institution was US Bank, and they paid—I can’t remember what the settlement was to the Justice Department—but it was about — I want to say it was about $380 million that they had to pay back. So the financial institutions can be held accountable if they’re facilitating and should be held accountable if they are knowingly and maybe recklessly facilitating processing illegal payments.

Questioner 7:  Hi. Was along the same lines as that question and the earlier question, but I haven’t really heard anyone use the terms due process today. And the reason we leave it to the DOJ to prosecute crime and only prosecute crimes after they happen, not before, is because they are a subject to like 200 years of due process law that’s been really vetted, and there’s lots of protections for the criminal defendant. And it seems like the speaker on the end wants the CFPB or other agencies to have the authority to go in and actually take punitive measures against people that have never been charged with a crime—it’s never been proven; it may not even have happened yet—without any restrictions around due process that the DOJ or other crime-fighting agencies would be subject to. So my question is, why do you think the CFPB or any other agency should be able to take punitive measures against anyone without abiding by due process concerns that the Department of Justice would have to follow?

Prof. Christopher Peterson:  I just don’t — I mean, I don’t accept the analogy. We have all sorts of prophylactic safety rules in our society. We’re not allowed to drive down the freeway at 120 miles an hour. And banks should not be able to go into banking in reckless ways that facilitate —

Questioner 7:  [Inaudible 01:54:40] crimes specifically, so it’s criminal [inaudible 01:54:43].

Prof. Christopher Peterson:  So some of them are crimes, and some of them are statutory civil violations. And I don’t think that there’s punishment without due process. If the banking regulators take some action against the bank or the payment processor for facilitating illegal activity, then the bank is going to have a general counsel, and they’ll hire lawyers. They’ll lawyer up. And if the government did something wrong, they’re going to have access to due process. The question is whether or not at the outset, when we’re casting incentives across the society, are we going to create some incentives to try to ensure that the banks don’t become facilitators of illegal activity, whether that’s criminal or civil.

Prof. Todd J. Zywicki:  And I don’t want to overlook Paul’s earlier point, which is even if these are legitimate functions, the idea of having transparent, accountable rules, that sort of thing is an important part of it as well, which is not just having it be subjective standards. I mean, it’s an obvious point. But in banking, a lot of it really does seem to be very subjective, the way that supervision works.

Hon. Eric Murphy:  Go ahead.

Ethan Yang:  Hi. My name’s Ethan Yang. I’m a 1L at George Mason Law School. My question’s on the state actor doctrine component when private entities are sufficiently incentivized or coerced into enacting a government agenda. It’s therefore considered a public entity. So I was wondering, given that we heard about different agendas that banks are being incentivized for sue, it’s like fighting climate change or combatting gun control, at what point — when does it start to look and smell like the state action doctrine is coming into place given that the government may or may not be using incentives or coercive measures to enact a certain political agenda via the private sector? And I guess, on that note, is that — I guess, opportunities, concerns — are we even close to that yet? I’m just wondering about your thoughts. Thank you.

Paul Watkins:  I wish I had the black letter law in my head so that I could answer your question on when that line is crossed. But I do think it’s a very interesting issue and a real one. And the other interesting dynamic—and this goes back to Professor Peterson’s point about how polarized we are—is we’re probably going to see it on both sides, where I imagine there will be many institutions that are going to have to choose—we’re either doing business in some blue states and subject to those supervision rules, or we’re doing business in some red states, and we’re subject to, you know, Todd Zywicki’s rules, or whatever the alternative legal framework is. And it’s very likely that these things will not be compatible.

      I mean, you can look at Texas, which says, “Our state’s not going to do business with institutions that are going to refuse to fund fossil fuels.” And you could see another state saying, “Well, you’re not going to be able to do business here,” or, “We’re going make this supervisory burden so strict that you’re going to have a hard time with doing business here if you are serving those institutions.” And I think that’s probably going to create a bifurcation in financial services that we may not have seen before.

Prof. Todd J. Zywicki:  Unless I’m mistaken, I think Texas State Legislature may have actually passed a law that prohibits discrimination against firearms, maybe. Does anybody know? Firearms industry and banking services, which would be an example of that sort of tit for tat kind of thing.

Hon. Eric Murphy:  Okay. Next question.

Nick Matich:  Nick Matich, McKool Smith. And I guess this question is for anyone on the panel. What makes the banking industry unique in that we would want to use it to combat other seemingly unrelated crimes. I mean, all kinds of other industries support other industries. So should computer manufacturers have to figure out if their customers are using their computers for illegal things or if they’re selling to a business that discriminates? Or, I mean, should airlines ask you before you get on the plane, “Are you traveling for a business that doesn’t hire gay people?” or something like that? That seems like we wouldn’t accept that in any other industry, so why would we look to do it in the banking industry?

Prof. Todd J. Zywicki:  Well, we kind of do do it in the airline industry with the Do Not Fly list, right? We do have these intermediaries that end up helping — being pulled in to help enforce laws. And I think that’s — and obviously, there’s line-drawing problems here. But I think that would be what the idea is, is that it really is a choke point. That’s why it’s effective. Right? That’s why Operation Choke Point worked because they can cut off the oxygen.

Prof. Christopher Peterson:  I prefer bottleneck.

Prof. Todd J. Zywicki:  Bottleneck.

Nick Matich:  But the airline rules are to prevent people from blowing up the airplane itself. So that’s, I think — my question’s along the lines of what Professor Mahoney was asking. Like, sure, anti-money laundering laws — if you’re using the banks to commit a specific kind of fraud, that’s one thing. But we don’t use any other industry for the purposes of stopping crimes that are not directly related to the thing that’s going on.

Prof. Christopher Peterson:  Well, I mean, first off, I think that banking is somewhat unique. I mean, that’s why in all the states, the country’s big cities, it’s the banks that have the biggest buildings with their names on them. And banks stand at the fulcrum of all trade. They facilitate payment for all the stuff. And that’s an especially unique thing ever since we gave up barter. Maybe with the bitcoin, that’s going to start to change. So I think that they are an especially unique system. And they reap enormous profits. I mean, our money center banks have assets that dwarf the gross national product of most of the world’s countries. Right? It’s not like they don’t have resources to try to facilitate lending a hand to prevent some of the horrific things that happen in our society. We want our banks and our financial institutions to be good citizens that help us have an ordered and lawful, law-abiding society. That’s why. And nobody’s picking on the banks. They’re doing just fine.

Hon. Eric Murphy:  How about back here, please?

Jim Lindgren:  So, Jim Lindgren, Northwestern Law School. I was thinking about a possibility of either private suits or even prosecutions for taking away people’s civil rights. Some of the talk has been about, “Well, the banks choose to this or whatever.” But the problem is that the government conspired to take away the banking possibilities for gun dealers and tobacconists. You’re shaking you’re head, no.

Prof. Christopher Peterson:  I don’t believe that’s true. I’m sorry. I don’t believe that’s true.

Jim Lindgren:  Certainly, gun dealers reported this happening. It was —

Prof. Christopher Peterson:  Or lobbyists for online payday lenders said that the gun dealers were reporting this was happening.


Jim Lindgren:  It was on —

Prof. Christopher Peterson:  Maybe there was a little bit.

Jim Lindgren:  — there was an official list that the government put out of things that were supposed to be risky.

Prof. Christopher Peterson:  That’s incorrect. Well, no.

Jim Lindgren:  Okay.

Prof. Christopher Peterson:  Risky, that’s right. You got that right. They said that they were risky, and there might be a little bit —

Jim Lindgren:  Yeah.  And therefore –

Prof. Christopher Peterson:  — extra scrutiny to make sure that you’re not facilitating illegal payments.

Jim Lindgren:  Well, many banks responded to that by saying, “We just won’t deal with them at all.” And people were informed it was because a regulator came to their bank and said, “You should be careful about this. Maybe you should shut these off.” In any event, something like gun dealers, I’m sure there are corrupt ones, but most of them are not. Most of them are pretty meticulous. And tobacco stores, I’m surprised — they may be selling to underage, but that doesn’t seem to be a money-laundering operation—probably doesn’t make much money at all.

      So here you have the government that’s, essentially, in my mind, conspiring to deprive people of civil rights. And I wonder why there haven’t been prosecutions either under state or federal law for this or private lawsuits for deprivations of civil rights because this seems to be what’s happening. You’re just suggesting they’re facilitating, but they’re not really conspiring. Somebody’s conspiring to take these rights away. They didn’t happen in a vacuum. They happened because they were put on a list that the government was targeting for these things.

Prof. Christopher Peterson:  You’re using some words there that are kind of tough words, like targeting. I mean, I think what happened was that they recognized that there are some markets that are especially risky because there’s complexity of lots of different types and identifying what is legal and what is illegal. In some states, it’s illegal to sell — in cities, it’s illegal to sell a handgun. Right? Under current law, maybe there’s some Supreme Court jurisprudence that might be coming to provide some further light about that. But the laws in Chicago are not the same as in Utah. In Utah, we have a gun manufacturer that just created a gun that looks like a Lego, but it’s a real pistol. Like Legos, like the kids’ toys. You could Google it. The gun looks like it’s a pistol, but it looks like it’s made out of Legos. And that’s apparently legal in the state. Seems like a bad idea to me.

      It’s not legal in Chicago. And some financial institutions have a hard time telling which ones are — which manufacturers and sellers of those guns are engaging in legal versus illegal activity. And I think that that guidance — all it really said was that, “If you’re in one of these markets where it’s kind of complicated, and it’s hard to tell what’s legal and what’s not, you as the financial institution need to do a little bit of extra due diligence to make sure that you’re not facilitating illegal activity.” And some banks responded by saying, “Well, that’s going to be complicated. It’s going to be hard to build a pricing model for that, and that’s not the direction that we want to go with our financial institution. So we’re going to take a step back from that processing business.” And then there are other companies that are like, “Great. New market opportunity. I can tell the difference between illegal guns and not illegal guns. I’ll be your payment processor.” And the market started to adjust to that, and it accommodated it. And all the gun dealers, basically, are banked now. The notion that there should be prosecutions for that strikes me as just not appropriate. But I appreciate the question.

Prof. Todd J. Zywicki:  There was a lawsuit in — I know it’s in the Fifth Circuit. And I think it ended up maybe in Mississippi — that ended up — I think there was a settlement by the payday lenders. And I don’t know what the terms of the settlement was, but there was a private action brought by — I think Chuck Cooper may have actually been the lawyer on the case. And I don’t remember exactly how that played out.

Hon. Eric Murphy:  I wonder if we should distinguish because when we think about civil rights, I tend to think about speech, so if your banks are coercing because of speech, but – I mean, with respect to firearms, maybe there’s Second Amendment concerns. But is it even appropriate to think about a civil right to engage in payday lending?

Prof. Todd J. Zywicki:  Well, it’s basically illegal activity, right?

Hon. Eric Murphy:  Supposed, yeah.

Prof. Todd J. Zywicki:  I mean, I don’t know if there’s a civil rights — and obviously, also, we’re at a turning point here, which is, yeah, firearms companies are banked now, but we’ve just had four years of the Trump administration. Now we got a new sheriff in town. So hopefully, that will continue, but there is sort of a window of time there where the regulatory pressure was let up on some of these things.

Hon. Eric Murphy:  Okay. I think we have — how much more time? Just a few more minutes, so go ahead.

Michelle Roberts:  Good afternoon. I’ve really enjoyed all the examples and hypos. Michelle Roberts of BlackRock. And so, I’d thought I’d throw out one more hypothetical for the panel. On the wokeness spectrum, where would you rate sanctions against individuals, like in the Magnitsky Act?

Prof. Todd J. Zywicki:  Like in the what? The door opened. I couldn’t hear what you said.

Michelle Roberts:  The Magnitsky Act, having to do with Hermitage Capital. Their lawyer, Sergei Magnitsky, who was murdered, and then subsequently the individuals who were responsible were sanctioned individually. There’s some effort to expand the Magnitsky Act to apply to other bad actors around the world. And I’m just wondering on our cancel culture spectrum, what the panelists think of that approach.

Prof. Christopher Peterson:  Yeah. So I’m familiar with this a little bit. I mean, everybody that may not know the Magnitsky Act — this is the statute that they passed to sanction the members of the Russian government elite class who were conspiring with Vladimir Putin to kill this guy. Isn’t he one of the people that fell out of a window?  I can’t remember. Or maybe he died in prison, I can’t recall. So it’s a sanctioning method — mechanism on corrupt governments and oligarchs. I think that this is actually — it’s a really good hypothetical. So should a bank engage in reasonable due diligence to facilitate not banking people that are throwing Americans out of windows and are on a specific sanctions list? Yeah. That seems like that’s a reasonable thing to do. I think we already kind of do that. I think that’s part of what that statute is about.

Hon. Eric Murphy:  Okay. I think we only have time for one more. Back — yes.

Richard Clair:  Richard Clair from Virginia. What I don’t understand is why we don’t want all of this activity banked everywhere to create records for IRS to go audit. We could solve our deficit problem. Little lighter note.

Hon. Eric Murphy:  Okay. How about — go ahead. Go ahead.

Susan Aprill:  Okay. Susan Aprill from Fort Lauderdale. And thank you for a really interesting conversation. Professor Peterson—I was sitting real close, so I think I heard you—but when you were using the example of how a bank doesn’t have to deal with a customer who publishes swastikas, I think – and so I couldn’t tell if you meant Nazis because people who prepare Confederate flags, swastikas, other kinds of emblems that may not be popular with certain groups—pointy white hats—those people are generally distributors or manufacturers. So was that example meant to say that a bank doesn’t have to be tarnished with representing people who actually have political views, like Nazis—that’s their political belief—or people who are known to make these somewhat objectionable products even if they make other products.

Prof. Christopher Peterson:  Well, so maybe I’m being a little too glib in distinguishing between granularity and Naziism. I mean, one person’s — I don’t know. That’s a tough question. I guess I think the hypothetical that we’re talking about — it’s not even a hypothetical. I think this is the underlying factual story that we were both alluding to. My understanding is that there was somebody who was manufacturing — and when I say Nazi here, I think Third Reich merch—so swastika stuff. And the bank didn’t want to facilitate online payments for people that were acquiring this merchandise and said, “No thanks. That’s not our business.” And I think that seems pretty respectable to me. I mean, where we draw these lines, I realize, is a very tough question. I mean, how far would that go? I certainly would not say we should have banks stop processing payments for Federalist Society merchandise. Although, there are some folks on my side of the aisle that are pretty upset with you right now.

Susan Aprill:  Yeah, right. Exactly.

Prof. Christopher Peterson:  Going back to the whole storm the Capitol thing. Look, I think we got to keep talking with each other. Drawing lines is always very, very hard. And if you draw that line, does it need to be nudged over a little bit too far this way or that way? I don’t know. It’s messy. It’s really difficult. It’s the kind of dialogue that we have to keep on having. So I don’t know if that’s a helpful response or not.


Prof. Todd J. Zywicki:  And I think that’s the problem —

Susan Aprill:  Yeah.

Prof. Todd J. Zywicki:  is it starts with a — I mean, think about college campuses and speech on campuses. Right? It starts with the Nazis, and then it’s that Milo guy, and next thing you know, Charles Murray is —

Prof. Christopher Peterson:  Okay.

Prof. Todd J. Zywicki:  — not allowed to speak on campus. Right? And next time, it could be anybody.

Prof. Christopher Peterson:  Yeah. The problem with that is it’s a slippery slope argument.

Prof. Todd J. Zywicki:  Exactly. Exactly.


Susan Aprill:  It sure is.

Prof. Christopher Peterson:  And I get that there is some — we’re having a hard time drawing those lines right now, but that’s not to say that we should just give up with drawing lines. There is a clear distinction between Third Reich-style Nazis and Charles Murray. Third Reich-style Nazis advocated the genocide of a people and were criminals and were violent. And our country came around that and fought them. Charles Murray has some controversial views. We can draw those lines and say — just like we can on college campuses, we can do that in our banking system. And we just have to keep the dialogue going and be effective about it. And you know, at some point, we may get some more guidance from the government, and that might be helpful. Or we can let the market sort it out on some of those questions. That’s the kind of way — life is messy. It’s messy. But the notion that, somehow, we’re slippery sloping into Charles Murray not being able to bank right now, that’s the kind of fear-mongering that I don’t think we’re really at risk of, Todd.


Susan Aprill:  So can I —

Prof. Christopher Peterson:  I don’t think that’s going to happen.

Hon. Eric Murphy:  We’re going to have to end it.

Susan Aprill:  — I just wondered, can I manufacture confederate flags?

Hon. Eric Murphy:  Fifteen seconds. Okay.

Susan Aprill:  Just wondered.

Hon. Eric Murphy:  So we’re going to have to end. Couple comments. First, a quick update, just happening now, I guess Todd is on his way over to have a Fireside Chat with Vivek Ramaswamy. And then other than that, I’d like to thank our panel. This was a great panel that The Federalist Society puts on. It’s prototypical of a great debate. So thank you.

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