Pandora’s Precedent
“The prosecutor, who is supposed to carry the burden of proof, really is an author.” – Scott Turow
On Friday, April 15, 2011, US federal prosecutors in New York used an obscure local law to crush the online poker community nationwide. Although the industry enjoyed spectacular growth in foreign markets, it had always operated with legal uncertainty in the US. Congress had nearly passed a bill the previous December that would have definitively legalized and regulated online poker, but momentum stalled under significant lobbying from forces opposed to the legislation. Impatient with Congress, prosecutors decided to act on their own.
There were no specific federal statutes that made online poker illegal, so Preet Bharara, then US Attorney for the Southern District of New York (SDNY), relied on a New York law “that makes it a Class A misdemeanor, punishable by up to a year in prison, to run a game of chance where bets are placed within the state.” With criminality established, any associated activity that even tangentially leverages the banking system brought with it a plethora of follow-on felony charges for prosecutors to choose from, and the SDNY used this awesome power, along with a tortured interpretation of the Unlawful Internet Gambling Enforcement Act of 2006, to bring the poker industry to its knees. The “.com” domain sites for PokerStars, Full Tilt Poker, and Cereus Poker Network were seized, several arrests were made, and bank runs ensued as players rushed to get their funds out of the poker ecosystem. Many players saw their money tied up in the legal limbo that followed, and it took years for some to be made whole. Most importantly, the industry became unbankable overnight, putting waves of associated companies firmly out of business.
Unsympathetic though the industry may be, the damage a chokehold on access to proper banking levies upon the many law-abiding individuals affected is breathtaking. We know well one such individual – a brilliant and successful former professional poker player and all-around decent person – who got swooped up by the government’s dragnet. (He agreed to speak with us for this piece on the condition of anonymity.) Before what became known as “Black Friday” in the poker community, he was competing and winning at the elite level and had amassed ownership stakes in various companies that were valued in the tens of millions of dollars. After that fateful day, he saw his assets wiped out and was forced to the edge of bankruptcy. He was never charged criminally, and his attorneys strongly suggested he settle civil charges with the Department of Justice (DOJ), which he did without admitting to any wrongdoing. To this day, he struggles to keep banking and brokering relationships – the risk of being associated with him is just too high. Looking back on his experience nearly 12 years later, he had this to say (emphasis added throughout):
“When the US government decides that it wants to put you out of business, the specifics of the law aren’t nearly as important as the intent of the prosecutors. The amount of leverage they can bring to bear against you is formidable and vastly outweighs the protections of due process.”
While the legal justification for the Black Friday raids was flimsy at best, prosecutors demonstrated at least some compulsion to tie enforcement actions to existing law. Such impulses were tossed aside a few years later during Operation Choke Point, when members of the Obama administration secretly and illegally leaned on regulated banks to cease doing business with entire industries it wanted to cripple for political reasons, including payday lenders and gun shops (once again, an unsympathetic bunch). The situation erupted into a scandal, with Republicans accusing the administration of unfairly weaponizing access to banking and circumventing the order of the legal system. Although the payday lenders successfully sued the Federal Deposit Insurance Corporation (FDIC) for its inappropriate behavior, the fact that nobody so much as lost their job for this flagrant abuse of power only served to dull sensitivity to the ongoing debasement of individual rights.
It is through this lens that we observe with some trepidation how the US government is going about shutting down the entire crypto industry. From the earliest days of Doomberg, we never doubted the authorities would eventually crack down with severity. Frankly, we are surprised it took this long. Despite this, the way this mission is being carried out should give even crypto’s harshest critics pause. As crypto enthusiast Nic Carter recently lamented, the Biden administration has embarked on what he calls “Operation Choke Point 2.0.” While this operational variant certainly resembles its predecessor in the tactics used, it vastly exceeds the prior’s scope, involving virtually every aspect of the US financial regulatory system working in tandem and out in the open. As with the poker industry, these actions are being taken while the broader issue of how crypto should be regulated is still pending before Congress.
What can the crypto world expect in the weeks and months ahead? What risks do these precedents imply for other politically controversial sectors – particularly the fossil fuels industry? Let’s ante up.