After an appearance by financier Marc Andreessen on the Joe Rogan Podcast, Elon Musk’s X exploded with indignation that tech entrepreneurs were being debanked owing to government pressure.

Musk himself promoted the appearance, recommending, “Forward this video to friends & family to understand just how evil the government has been.”

Progressives pounced, saying that the story was exaggerated, and agencies had been trying to stop debanking. Yet to seasoned observers of the administrative state, the news came as no surprise, and the whole controversy summarizes what has gone wrong with American government.

We should first be clear what debanking means. It does not mean that a government agency has told a bank to close someone’s account. That is generally done for good reasons, usually connected with either fraud or threats to national security. Debanking in the current context means that a bank has closed a customer’s account because they find costs imposed by regulators associated with running the account outweigh the benefit of keeping it open.

Those costs are not necessarily actual costs, but often the threat of costs. At heart they stem from the fact that during the 1980s and 90s, government agencies deputized banks to be their agents. The government was concerned about money laundering, which was and remains a crime, and decided that banks should do a lot of their investigation of the issue for them to prevent the crimes from happening in the first place. So, anti-money laundering (AML) and “know your customer” (KYC) rules were put in place to deputize banks in this law enforcement role.

This was a quiet revolution in how banks operated in American society. Banks went from custodians of their customers’ funds to agents of the state, filing more and more “suspicious activities reports” (SARs) under KYC rules, in order to avoid charges of facilitating crime. In 2023, almost 4 million SARS were filed, a number that has steadily increased each year, and up from 2.2 million in 2019. While FBI statistics do suggest that money-related crimes have increased since the pandemic, it is also likely that many of these SARs are defensive, filed to shield banks from regulatory intrusiveness.

All this activity, however, seems to have little payoff. According to the best research on the subject, “anti-money laundering policy intervention has less than 0.1 percent impact on criminal finances, compliance costs exceed recovered criminal funds more than a hundred times over, and banks, taxpayers and ordinary citizens are penalized more than criminal enterprises.” Indeed, the author of that research, Ronald Pol, calls AML “the world’s least effective policy experiment.” The AML model is ineffective on its own terms.

More fundamentally, however, these laws represent a change in the relationship between banks, customers, and the state. As Richard W. Rahn put it back in 2000,

A civil society depends on the separation of duties and responsibilities of institutions. By passing the responsibility of detecting money laundering on to banks and their personnel, the government destroys this separation. Loyalties become muddled. Bank employees who are expected to spy upon their customers will lose the bond of trust that is necessary for a civil society.

A free society rests on some general presumptions, one of which is that most people are honest. Banking regulation turns that principle on its head — all are suspect, and your bank needs to work on that principle. That’s what KYC means.  

Yet once the idea has been established that banks are more beholden to the government than their customers, and that the government can cause you (the bank) a lot of problems if it starts taking an active interest in your affairs (known in the business as “enhanced supervision,”) the door is open for government abuses.

One such abuse was Operation Choke Point. Beginning as an initiative within the Department of Justice, its lawyers had gone after some genuine bad actors and found that “choking off” those actors’ financial oxygen was effective. Their tool for this was a regulatory circular from the Federal Deposit Insurance Corporation that told financial institutions to pay attention to the “reputational risk” that came about from associating with a variety of businesses, from the legal (payday lending, firearms sales) through the sleazy (pornography, get-rich-quick products) to the outright illegal (Ponzi schemes, cable box descramblers). Banks were told that all these businesses alike carried an outsize risk of being associated with fraudsters, and so posed a risk to banks’ reputation that would invite regulatory scrutiny.

Banks responded as might be expected. Rather than run the risk of having to deal with regulators combing through every aspect of their dealings with these companies, they closed their accounts without notice. Webcam girls, mom-and-pop payday lenders, firearms dealers around the country started reporting that they had had their accounts closed. At the same time, Operation Choke Point coordinating committees were pleased with their progress in starving what they saw as potential fraudsters of financial sustenance, oblivious to the very real struggles many businesses and individuals were encountering.

What clued these businesses in to what was happening was that some of the account closure letters mentioned things like risk of regulatory intervention. Without these letters, Choke Point might have continued indefinitely. However, thanks to the leadership of Congressmen like Blaine Leutkemeyer (R.-MO,) Congressional investigations were able to find a treasure trove of internal agency documents about the operation, and the regulators were forced to admit that their reckless approach to the matter had led to collateral damage.  

Choke Point finally sputtered out its last breath during the Trump administration. However, the model remained intact — use agency guidance and the threat of regulatory intervention to get financial institutions to cut off customers whose activities you disfavor. This model gives plausible deniability to the agencies (“we only use enforcement against real bad actors,” “banks can choose whom they serve — we have nothing to do with it”) while still enabling the agencies to use what is known as “jawboning” to indirectly compel behavior of the private actors.

That appears to be what has happened with what became known as Operation Choke Point 2.0, which Andreessen talked about in his interview with Joe Rogan. The idea that something coordinated was going on was first investigated by podcaster Nic Carter for Piratewires. He identified a concerted attack on financial services access for people operating in the cryptocurrency space. Not only were their businesses and personal financial services under attack, but so were the specialized banks that serviced them. Once again, the FDIC was in the lead with guidance (joined by the Office of the Comptroller of the Currency and the Federal Reserve). 

As a result, fintech entrepreneurs have been at the forefront of calling foul. Unlike Choke Point 1.0, banks rarely gave any explanation for their actions, making the paper trail more difficult to trace.

Yet it isn’t just crypto, or organizations targeted explicitly by guidance. Religious conservatives like the National Committee for Religious Freedom, headed by former Kansas Senator Ambassador Sam Brownback, found themselves debanked. Others have been “de-insured.” Yet others have been debanked seemingly for the offense of providing a platform to now President-elect Donald Trump.

There is evidence that regulators required banks to search their customers’ transactions for terms only tangentially related to political activity after the January 6 Capitol riot. Purchases like religious texts and at vendors like Bass Pro Shops were all grist to the mill. Bank of America even voluntarily provided evidence on which of its customers had been in Washington DC on the day. The net for “domestic violent extremists” and “suspicious transactions” was cast far and wide, according to the House Judiciary Committee.

Indeed, Bank of America’s unilateral actions seem to suggest something more serious than jawboning is going on – banks have essentially developed a form of Stockholm Syndrome, wanting to please their regulators rather than the people who pay them to provide a service. Regulators don’t even need to threaten anything anymore.

This is, however, the natural end point of the introduction of AML and KYC laws so many years ago, and the breaking of the bond of trust between banker and customer that is necessary for a civil society. It is also what regulators really want – a compliant populace, the real end goal of the administrative state.

Which also means that regulatory fixes like requiring fair access and so on will not suffice. As long as the threat of KYC supervision is there, bankers will find ways to cordon off customers likely at some point to incur regulatory disapproval. What is instead needed is discipline on the regulators, not the banks, and eventually the unwinding of the whole failed AML/KYC experiment.

With Andreessen and Musk as important voices in this, however, perhaps such an outcome is not as pie-in-the-sky as it would have seemed a few weeks ago. If the Department of Government Efficiency sets its sights on our many financial regulators, then perhaps real financial freedom is within reach.