Yesterday, the Treasury Department released an Illicit Finance Risk Assessment of Decentralized Finance (DeFi). Looking past the report’s, frankly half-hearted, fear mongering and skepticism that disintermediated financial tools deserve different regulatory treatment than financial intermediaries, the report makes important acknowledgements that DeFi’s illicit finance risk is relatively small and that DeFi technology is unique. The report’s sparks of recognition that, on some level, DeFi is different from traditional finance—in enabling peer-to-peer financial transactions and potentially mitigating illicit finance risk through technology—ought to be noted by other U.S. policymakers who actively apply ill-fitting legacy rules to new tools and exaggerate those tools’ risks.

While the report states that criminals and rogue states exploit DeFi to launder money and carry out cyberattacks endangering national security, it tends to bury the lede with respect to the scope of the problem. Still, Treasury ultimately acknowledges that, all told, crime is a “subset” of overall DeFi activity, which itself is a “minor portion” of crypto activity, and that the crime Treasury is concerned with is mainly a problem of traditional finance:

[M]oney laundering, proliferation financing, and terrorist financing most commonly occur using fiat currency or other traditional assets as opposed to virtual assets.

Perhaps for this reason, the report insists that its limited identification of examples of illicit activity over DeFi should not be taken to indicate, well, that there are limited instances of illicit activity over DeFi:

Given how recently the DeFi market has developed and expanded, there were relatively few case examples that this assessment could include. The number of case studies does not, however, reflect the level of risk identified in this assessment.

Of course, it may be that a non-exhaustive list of examples doesn’t reflect the full extent of a problem. But persuasively making that argument generally requires providing additional evidence that speaks to the scale of the problem, beyond mere conclusory statements regarding a vague “level of risk.” However, in the rare instances where the report does address scale, it largely undermines the idea that DeFi is anything other than a relatively minor contributor to overall illicit finance risk, including for money laundering, proliferation financing, and terrorist financing, as well as drug trafficking, where the report notes, “[T]he size and scope of drug proceeds generated on the darknet and laundered via virtual assets remain low in comparison to cash-based retail street sales.”

Similar to the tension between the report’s disquiet over DeFi’s “level of risk” with respect to illicit finance and its recognition of the limited scope of the problem, there’s also a tension in the report’s approach to whether disintermediated financial tools can properly be regulated under an Anti-Money Laundering/​Countering the Financing of Terrorism (AML/CFT) framework designed to address financial intermediaries. On the one hand, the report insists that financial activity carried out over DeFi can be covered by the AML/CFT regime regardless of the degree of decentralization:

AML/CFT obligations in the United States are based on the activities in which a person engages.…While the degree to which a person is centralized could impact the service it provides, persons engaging in the activities of financial institutions as defined by the [Bank Secrecy Act (BSA)], regardless of whether they are centralized or decentralized, will have these obligations.

Yet, on the other hand, the report acknowledges that the lack of a financial entity can pose challenges to the application of existing AML/CFT frameworks:

Globally, under the standards set by the Financial Action Task Force (FATF), the global standard setting body for AML/CFT, DeFi services that lack an entity with sufficient control or influence over the service may not be explicitly subject to AML/CFT obligations, which could lead to potential gaps for DeFi services in other jurisdictions.

The report also provides reason to think that the possible mismatch between existing frameworks and the reality of DeFi is not just an international problem, stating:

In cases in which a DeFi service falls outside of the scope of the BSA, this can result in gaps in efforts by the DeFi service to identify and disrupt illegal activity and identify and report suspicious activity to law enforcement and other competent authorities.

The report’s very recommendation that the U.S. AML/CFT regime as applied to DeFi should be enhanced “by closing any identified gaps in the BSA to the extent that they allow certain DeFi services to fall outside the scope of the BSA’s definition of financial institutions” reveals that the current application of existing provisions to DeFi is not cut-and-dried.

It’s a positive step that the report recognizes that DeFi can lack an intermediary entity and that existing laws may not be well-suited to address this type of technology. The question then is how the gaps end up getting filled. The report offers little insight into what such a solution might look like. But other proposals, like Senator Warren’s Digital Asset Anti-Money Laundering Act, which would subject self-hosted crypto wallets (i.e., the digital equivalent of cash in your own pocket) to certain AML/CFT requirements, would be an undue invasion of what limited financial privacy Americans have left. Given the gravity of proposals that would regulate individual digital wallets as if they were financial institutions, the report’s relative silence on the nature of its proposed gap filling is not reassuring.

A possible bright spot in the report is the recognition that the DeFi ecosystem is innovating new tools—including blockchain forensics and zero-knowledge proofs—that can help to mitigate the risk of illicit finance over DeFi protocols while also preserving some degree of user privacy. Contrary to the stance of other U.S. regulators, Treasury’s report recognizes that “[p]olicymakers and regulators should also seek and assess necessary changes in regulation or guidance to support these developments.” As with the rest of the report, however, countervailing passages suggest that extending the existing AML/CFT status quo has become a priority unto itself, separate and apart from a cost-benefit assessment of its practical implications for mitigating illicit finance harms.

Like the President’s Council of Economic Advisers (CEA) report before it, the Treasury Department’s DeFi risk assessment contains internal inconsistencies—both between rhetoric and substance, as well as between certain substantive claims. Yet unlike the CEA’s report, at least Treasury’s had the wisdom to avoid assessing the value proposition of a class of financial instrument and technology, noting that its assessment “does not evaluate the relative merits of decentralization compared to centralization.” The glass-half-full take on these recurring tensions is that there may just be something to DeFi and crypto that confounds easy efforts to force the square peg of disintermediated technology into the round hole of intermediary regulation.

When it comes to social justice and the advancement of marginalized groups, the “politics of pity” brand of activism posits trauma as the salient aspect of a downtrodden group—especially African Americans. The idea is that playing the victim can be an effective rhetorical practice for achieving social justice, and sometimes it can. People may not help you if you cannot sufficiently prove that you do, indeed, need help.

However, there is a difference between pointing out instances of victimhood and defining an entire group as the collective personification of victimhood. Is a political tactic worth using if it necessitates the infantalization and degradation of the people it is meant to help?

In “Moving Beyond the Politics of Pity,” published by Quillette, I reference prominent black thinkers from the past and present who spoke against pity politics and for dignity and agency. The politics of pity are detrimental to the mindset of downtrodden people and normalizes their designation as pitiable.

Under this philosophy, black misery is seen as the norm. For many “pity politicians,” as it were, black joy is politically useless at best and abnormal at worst. The below excerpt shows some of the disempowering effects of the politics of pity on the very people it is meant to empower.

From my article:

The politics of pity render what otherwise may be beneficial and dignified practices as sites of racial misery. Restorative justice has its good manifestations, but, when applied to the politics of pity, makes bad situations worse by foregoing punishment for the most egregious infractions, and determining harm based on positionality. For example, if a victim of car theft is in a privileged class and the perpetrator is in an oppressed class, the victim isn’t truly a victim; the real victim is the perpetrator.

Educational reform is a potentially good and noble endeavor, but when applied to the politics of pity, it manifests as pedagogies like “equitable math,” in which getting the right answer and the very act of teaching are considered inherently racist harms to black students.

Agency is a good thing, but when applied to the politics of pity, it is something that simply isn’t available to black students. The politics of black pity may be a significant cause of what Martin Seligman and Steven Maier have called “learned helplessness.” This is how contemporary manifestations of the politics of pity put forth by teachers, administrators, and politicians “play the mischief” with black Americans.

The black thinkers discussed in the essay saw the politics of pity as formidable obstacle to self-actualization, self-determination, and general fulfillment. These thinkers embraced dignity and respect, not pity and condescension.

Unfortunately, a multicultural group of activists and politicians who claim to want what is best for black people are determined to make the term “black” or “African American” synonymous with “pitiable” or “miserable.” There has to be a better way.

You can read the full article here.

Previously, I reported on an Archbridge Institute analysis that ranked Arkansas first in the nation for imposing occupational licensing burdens. “The Natural State” has erected licensing barriers to more professions than any other. After Texas, the study placed Alabama at number three. Although Texas does not appear to be doing anything about its licensing barriers, Arkansas and Alabama are making some progress.

This week, Arkansas became the 21^st state to adopt universal licensing recognition when Governor Sarah Huckabee Sanders signed SB 90 into law. The act requires Arkansas agencies to automatically grant occupational licenses to applicants that hold comparable licenses in another state, have been in the licensed profession for at least three years, and meet other requirements.

In Alabama, State Senator Chris Elliott introduced SB 156, which, if enacted, would centralize all state licensing operations under the Secretary of State. The bill does not include a universal licensing recognition provision, nor does it immediately change any of Alabama’s extensive licensing requirements.

However, consolidating licensing activities—a step recently taken in Iowa—may make life easier for applicants who might otherwise be confused about where to turn in the state bureaucracy. The bill also states: “the total amount of fees charged by the board shall approximate the total of the direct and indirect costs to the state of the operations of the board.” This may result in some lowering of fees, which range up to $900 for orthotists (professionals who make and fit braces and splints) and prosthetists (professionals who make and fit artificial limbs).

Stephanie Smith, President and CEO of the Alabama Policy Institute, cautiously welcomed the new bill, stating:

Alabama’s onerous and expensive occupational licensing system is an impediment to starting a small business in our state. SB 156 is the first step to bringing that system to account. While the bill doesn’t eliminate or reduce the number of boards or licenses required, as API’s report suggested, it would bring oversight of those boards under the purview of the Secretary of State and help put an end to the exorbitant fees and questions about management that small businesses have had to deal with for decades in the state of Alabama.

Unfortunately, even this modest reform will have a tough road to adoption. Secretary of State Wes Allen, whose office would house the consolidated licensing unit told 1819 News: “Although I understand the purpose of the bill, I do not feel that the Secretary of State’s office is the right vehicle for its implementation.”

Finally, it is worth noting that neither the new Arkansas law nor the Alabama bill, if passed, will improve their respective states ranking in the Archbridge State Occupational Licensing Index. The index assesses states solely based on the number of occupations affected by licensing barriers. To improve their rankings, Arkansas and Alabama should perform a systematic review of all their licensing requirements to see which ones can be pruned.

Judge Don Willett of the Fifth Circuit has long been one of the foremost judicial critics of qualified immunity and a leading voice urging the Supreme Court to reconsider this unjust and unlawful doctrine. In 2018, he wrote a separate opinion “concurring dubitante” in a decision granting immunity to register his concern with “the kudzu-like creep of the modern immunity regime” and explaining how the doctrine “smacks of unqualified impunity, letting public officials duck consequences for bad behavior—no matter how palpably unreasonable—as long as they were the first to behave badly.”

Over the last few years, Judge Willett has written several additional opinions elaborating on various concerns with the doctrine, both in terms of its underlying justifications and practical application. And last week, in a case called Rogers v. Jarrett, he added to this judicial anthology, with a concurring opinion highlighting Professor Alex Reinert’s recent scholarship, which explains how the legal justifications for qualified immunity are even weaker than previously believed.

On the merits, Rogers isn’t the most remarkable qualified immunity decision. The case involves a prison inmate, Kevion Rogers, who was working unsupervised in a hog barn when the ceiling collapsed on him. He told several prison staffers that he needed medical attention, but they told him his injuries didn’t look serious enough. Shortly thereafter, he blacked out and was taken to a nearby hospital, where he was diagnosed with a traumatic brain injury. Rogers subsequently brought a Section 1983 claim against these prison officials for alleged violations of his Eighth Amendment rights, but the district court held they were entitled to qualified immunity.

The Fifth Circuit, in a majority opinion authored by Judge Willett, affirmed, holding that Rogers had failed even to substantiate an underlying constitutional violation. Though the defendants’ failure to get Rogers medical attention might have been negligent, the panel held there was no evidence the defendants acted with “deliberate indifference,” the high bar necessary to show an Eighth Amendment violation. The panel then explained how the alleged right here wasn’t “clearly established,” but this isn’t really a case where qualified immunity mattered, because the court concluded there was no rights violation in the first place.

However, Judge Willett wrote a separate concurring opinion “to highlight newly published scholarship that paints the qualified-immunity doctrine as flawed—foundationally—from its inception”; specifically, Alex Reinert’s recent article Qualified Immunity’s Flawed Foundation.

To briefly summarize the relevant background, the basic legal case against qualified immunity is that (1) Section 1983 make no mention of any immunities and (2) the modern doctrine is inconsistent with the nineteenth-century common law against which the statute was passed. This is the thrust of Will Baude’s 2018 article Is Qualified Immunity Unlawful?, and though some scholars have argued that the common law included more robust immunities than Baude suggests, all agree at least that the modern “clearly established law” standard is historically unsupported.

As it turns out, however, this historical debate about the scope of nineteenth-century immunities is irrelevant, because the first version of Section 1983 passed by the Reconstruction Congress (in Judge Willett’s words) “explicitly stated—right there in the original statutory text—that it was nullifying all common-law defenses against § 1983 actions.”

Reinert’s article reveals that original language of the law we now call “Section 1983” stated as follows:

[A]ny person who, under color of any law, statute, ordinance, regulation, custom, or usage of any State, shall subject, or cause to be subjected, any person within the jurisdiction of the United States to the deprivation of any rights, privileges, or immunities secured by the Constitution of the United States, shall, any such law, statute, ordinance, regulation, custom, or usage of the State to the contrary notwithstanding, be liable to the party injured in any action at law, suit in equity, or other proper proceeding for redress .…

The emphasized language—what Reinert calls the “Notwithstanding Clause”—makes unmistakably clear that, whatever common-law immunities might have existed in 1871, they were not meant to preclude relief under this new civil rights law. In other words, they clarify that Section 1983 means exactly what it says—a public official who violates someone’s constitutional rights is liable, period.

But for reasons lost to history, this “Notwithstanding Clause” was “inexplicably omitted from the first compilation of federal law in 1874.” To be clear, this is not a case of an earlier draft of legislation that was changed before enactment; this is an example of the Reviser of Federal Statutes making an unauthorized change to the law Congress actually enacted. That error, whatever its origin, has never been corrected, and today, 152 years after its original passage, the “official” version of Section 1983 continues to omit the language explicitly negating the availability of common-law defenses.

As Judge Willett correctly concludes, “[t]hese are game-changing arguments, particularly in this text-centric judicial era when jurists profess unswerving fidelity to the words Congress chose.” Though there was already a clear consensus that the “clearly established law” standard was unsupported by the text or history of Section 1983, scholars and jurists disagreed on what, if anything, should replace it. Now, however, that potentially difficult question has been answered—the precise scope of nineteenth-century common-law immunities is irrelevant, because the original version of Section 1983 explicitly stated that no such defenses were available. This is all the more reason for the Supreme Court to finally do what it ought to have done years ago—reconsider and abolish the fundamentally flawed doctrine of qualified immunity.

Yesterday, the Brookings Institution hosted an online debate titled Should the Ceiling on Deposit Insurance be Lifted?

Most of the participants did not support lifting the cap so that all deposits would be covered by FDIC deposit insurance, and everyone seemed to acknowledge (at least some of) the risks and challenges of federally insuring all deposits. They also seemed to agree that raising the cap above $250,000 would only help the wealthiest depositors at the expense of everyone else.

While the participants did use data to support their arguments, and we have no quibble with their figures, there is important additional evidence that further emphasizes just how few accounts are above the $250,000 FDIC insurance cap.

For starters, the Federal Reserve’s most recent Survey of Consumer Finances shows the median transaction account balance – defined to include checking, savings, money market, call accounts, and prepaid debit cards – was $5,300. And, as pointed out in the Brookings debate, the average (mean) balance was $42,000. But it’s also important to note these are conditional averages, ones calculated after eliminating all accounts with zero balances.

A more detailed look, by income percentile, shows that even most high-income families have balances well below the $250,000 cap. For instance, the (conditional) median balance in the 80^th to 89^th percentile was $20,000, while the median for those in the 90^th to 100^th percentile was $70,000. Even the conditional average (mean) balance for the highest 10 percent of income earners, one that is surely biased upward by very high earners, was $229,000 — still less than the FDIC cap.

But the most recent call report data collected by the Federal Financial Institutions Examination Council (FFIEC) paints an even starker picture.

Of all the financial institutions reporting, including commercial banks and federal savings banks, there are approximately 860 million deposit accounts (not including retirement accounts). But fewer than one percent–just 0.83 percent–of these accounts have more than $250,000. It is true that almost 60 percent of total deposits, by dollar amount, is in those accounts. But relatively few accounts have balances greater than $250,000, and only the amount above the cap is uninsured.

Moreover, roughly half of the accounts with balances larger than the $250,000 FDIC cap are in the nation’s 13 largest banks, all of which have assets greater than $250 billion.

And while the total number of accounts does exceed seven million, and some of the accounts are owned by the same person or business, it simply is not the case the most people – or most businesses – have accounts exceeding the $250,000 FDIC cap. For instance, according to the Small Business Administration, there are more than three million small businesses (and a J.P. Morgan study of 600,000 small businesses suggests the average deposit balance is less than $20,000).

It is very difficult to see the Silicon Valley Bank depositor bailout as anything other than a policy mistake that benefited a very small number of wealthy individuals. Eliminating – or even raising – the FDIC cap for deposit insurance coverage would only further entrench some of the worst aspects of the current regulatory framework.

Mariana F. Trujillo contributed to this article and provided substantial research assistance. All calculations using the Federal Financial Institutions Examination Council call report data are the sole responsibility of the author.

Former UK Conservative MP Nigel Lawson passed away this week. As Margaret Thatcher’s longest-serving Chancellor of the Exchequer (1983–1989), Lawson’s legacy on economics is a complex one. While his policies in the late 1980s led to a boom and bust cycle, exacerbated by the mistaken decision to enter the European exchange rate mechanism, his overall impact was positively transformative, steering the country towards a smaller government, free-market economic policy.

Lawson’s ingenuity came to the fore in opposition, when he brokered an amendment with Labour rebels to the 1977 Finance Act. This ensured that income tax thresholds would be uprated by inflation as the default each year — creating a new hurdle to prevent governments from sneakily taxing households when inflation was high.

His early tenure in the Thatcher government saw Lawson as a driving force behind the abolition of exchange controls. As energy secretary, he then masterminded the stockpiling of coal. This strategic move empowered Thatcher’s government to confront the militant trade union in that industry, allowing the country to pursue labor market reforms. Impressively, Lawson also laid the groundwork for the privatization of nationalized industries such as British Gas, British Airways, and British Telecom.

As Chancellor, Lawson oversaw a growing UK economy that caught up with its European counterparts. The combination of strong growth and restrained public expenditure saw the state shrink from 42.8 percent of GDP in 1983/84 to 34.7 percent in 1989/90. Tax cuts saw revenues relative to GDP fall too, from 39.5 to 34.7 percent of GDP. When Lawson resigned, the country was running a balanced budget.

Lawson’s 1984 Mais Lecture remains the best articulation of Thatcherism’s economic shift away from Britain’s post-war Keynesian consensus. Governments after World War II had tried to use macroeconomic policy to pursue growth and microeconomic policy to fiddle with prices and wages. Lawson said this was “precisely the opposite” of their “proper role.” Monetary and fiscal policy instead should aim to keep inflation under control, while regulatory and tax reform should be focused on removing market distortions that harm growth, investment, and employment.

On the latter, Lawson enacted several pro-growth reforms, including cutting corporation tax, abolishing a tax in every annual budget, and initiating crucial industry-specific regulatory reforms such as the Big Bang deregulation for the City of London. His 1988 budget abolished all income tax bands except two — at 25 percent and 40 percent.

Aside from his policy legacy, Lawson played an important role in propagating free-market economic concepts through his writings and speeches. Here are a selection of his best quotations:

• “It is the rediscovery of the enterprise culture, operating within the framework of markets progressively liberated from rigidities and distortions, that will provide the only answer to the curse of unemployment, and the only true generator of new jobs.”

• “…the real evil of excessive government spending, and the excessive taxation that must necessarily accompany it, lies not in the probability of inflationary pressure but in the certainty of misallocation of resources, economic and social debilitation, excessive state power, and –very far from least—the erosion of personal freedom.”

• “If you work harder than I do at the same job, and are commensurately better rewarded, then that is ‘justice’. If your extra reward is then taken from you in taxation, then that is ‘social justice’. Concepts which are intended to sound much the same are more like polar opposites: to use language thus is to pervert it.”

• “It is commonly overlooked that the disincentive effect of a high marginal rate of tax depends not only on the rate itself but on its persistence. The reason an 83 percent marginal rate is such a burden is not just the rate itself, but that, once a taxpayer reaches it, there is no escape from it.”

• “Capitalism works – and works far better than any other system – because the discipline of the marketplace keeps greed, folly and incompetence in check.”

• “While in the private sector persistence in failure is likely to lead eventually to bankruptcy or at least severe financial loss, the incentive for self-correction on the part of the State is very much weaker: indeed, nothing is harder than the admission of failure in the political arena.”

• “far from ever more State intervention being justified by virtue of the admitted imperfections of the market, a greater reliance on markets is justified by virtue of the practical imperfections of state intervention.”

In his later years, he made several high-profile interventions in politics. The most striking was his early backing for Brexit. Lawson was eventually named chairman of Vote Leave — the campaign group that won the referendum on EU membership.

On March 28, the House Oversight Committee held part one of hearings on the Food and Drug Administration (FDA) and its handling of the infant formula crisis. Former FDA Deputy Commissioner Frank Yiannas testified that the crisis could have been averted, or at the very least, the magnitude lessened. At Cato, we completely agree.

Unfortunately, Yiannas’ proposed solution was more of what got us into this mess in the first place: overregulation of the formula industry and overbearing FDA authority. Other policymakers argue for much the same.

Yet the infant formula industry’s weakness is not owed to a lack of regulation or FDA authority. In fact, as explained in a recent Cato briefing paper, overregulation of the U.S. infant formula market turned what should have been a temporary headache into a yearlong crisis. After Abbott Nutrition—the largest U.S. infant formula manufacturer—shut down its Michigan factory and nationally recalled its products, several different U.S. laws and regulations prevented other formula suppliers from plugging the hole punched in the U.S. market. Thus, this overregulation left retailers with few to no alternatives to Abbott’s brands, creating a massive supply shock that rippled throughout the country.

The federal government responded in multiple ways and the crisis waned in the fall of 2022. But, as the paper details, the successful responses did the opposite of increase regulation.

First, high tariffs and tariff-rate quotas on infant formula imports, along with onerous FDA rules for formula made abroad, effectively walled off the U.S. market from imports—even ones from large and reputable multinational producers located in highly-competent regulatory jurisdictions like Europe. As a result, a little over 98 percent of all formula consumed in the U.S. in 2021 was made here.

Recognizing this problem, Congress passed legislation last summer to suspend tariffs on most formula imports, and the FDA exercised “enforcement discretion” for a handful of new foreign producers (nine to be exact).

Sadly, this liberalization has mostly expired: on January 1, 2023, the tariffs went back into effect, and the FDA stopped accepting new foreign producer applications on January 6, 2023. (The nine approved companies can stay until October 2025 under this more lenient system.)

Secondly, onerous domestic regulations on formula—higher here than in most other countries and for most other foods—make it extremely costly for new manufacturers to enter the U.S. market. The only new market entrant since 2007, for example, spent more than five years and $190 million to navigate the regulatory process.

Finally, the Special Supplemental Nutrition Program for Women, Infants, and Children (WIC), which provides vouchers for low-income Americans to buy only a certain brand of formula (and at a steep discount) at approved retailers, has increased the market dominance of the three large U.S. producers that can meet WIC requirements. As such, when the crisis hit, the USDA temporarily allowed WIC beneficiaries to buy other formula brands, including imported formula. However, this reform expires in June at the latest, and only applies in store, not online.

Following these temporary reforms, the prolonged U.S. formula crisis—not experienced by any other country—began to ease and stock-rates improved. However, problems are now reemerging. As Chart 1 shows, imports rose after tariffs and FDA rules were liberalized, but have since fallen with the return of the prohibitive tariffs.

Now, retailers are warning again about empty store shelves, and consumers are complaining about price increases. Even more troubling, Yiannas warned the U.S. is extremely vulnerable to another major crisis, noting that disasters impacting the supply chain, like another bacterial outbreak or even a tornado, could rock the industry again.

In this regard, he’s unfortunately correct. But the solution isn’t more regulation; it’s deepening and making permanent the very trade, regulatory, and welfare reforms that tempered the crisis last year. Indeed, even the risk-averse FDA recognizes providing pathways for foreign producers to sell in the U.S. creates “more resiliency in the U.S. infant formula supply chain and [reduces] the risk of reliance on too few production facilities supporting the United States.” Yet high tariffs and other barriers remain in force.

If Congress fails to eliminate these barriers and enact other long-term, market-based reforms, America will continue to be uniquely vulnerable to another formula crisis, and one entirely of its own making.