When Banks Fall: How GPT-4 Analyzes Allegedly Unlawful Administrative Action in a Hypo
AI delivers comprehensive insights in the wake of a financial catastrophe in the US
Happy Brief Friday!
I thought I had a ton of ideas for writing this week’s Brief, but I couldn’t decide which one I wanted to write about. After perusing two excellent books—Designing your life and Designing Your New Work Life—I really want to share what I’ve learned from these two books so that I can internalize the designer’s principles in my work and life.
However, I couldn’t write about these two books because, on top of that, we witnessed the second-largest bank failure in US history: three US banks were shut down, and USDC was de-pegged last weekend, followed by the Bitcoin price soaring.
Now on Friday night in Taipei, I finally had the time to read Jake Chervinsky’s tweet thoroughly:
Meanwhile, the ChatGPT-4 is available.
Synthesizing all the information above, I relied heavily on ChatGPT-4 this week, as my Friday deadline is approaching. It would be interesting to see how ChatGPT-4 responds to this tweet as if it were a 3L student’s exam, with a twist combining political and judicial economy.
Before you read on, remember this is not legal advice whatsoever, but rather a model answer provided by ChatGPT-4, with my editing, prompts, and nudges.
Featured: When Banks Fall: How ChatGPT-4 Analyzes Allegedly Unlawful Administrative Action in a Hypo
This is a mock exam question for 3L law students taking the course Crypto regulation and Judicial Economy:
Three months ago, federal banking regulators, namely the Fed, Office of the Controller of Currency (OCC), and Federal Deposit Insurance Corporation (FDIC), issued a joint statement emphasizing the "key risks associated with crypto-assets and crypto-asset sector participants." Three weeks following this joint statement, the Fed declared that banks are prohibited from engaging in crypto-asset related activities. Ten days later, the Fed released a final rule barring banks from holding crypto as a principal, despite this rulemaking not adhering to the rule-making process. However, it is unclear whether this action falls within the exceptions to the rule-making process.
Last month, the federal banking regulators published another joint statement, asserting that crypto companies "may pose heightened liquidity risks" that banks need to manage.
Around the same time, numerous US senators and crypto industry leaders expressed concerns that the banking regulators appeared to be extremely unfriendly, accusing them of colluding with, or strongly implying that banks should unbank the crypto industry due to their attitude towards crypto. Some senators demanded that the regulators provide an explanation and rationale for these risk warnings and rulemaking efforts.
A nationwide closure of crypto companies’ bank accounts took place over a brief period without any explanation from the banks. Although there is no explicit regulation or demand from the regulators to substantiate the connection between these closures and the regulators’ intentions or demands, the Crypto Association has submitted FOIA requests to the Fed, FDIC, and OCC, seeking information about the alleged unlawful debanking of crypto companies.
Questions:
What actions can the Crypto Association take if the banking regulators fail to respond?
If a crypto company’s bank account is shut down without explanation, what causes of action can it pursue against the banks and regulators?
What remedies can a federal court grant to the crypto company if it were to win the lawsuit against the regulators?
Please provide a judicial economy analysis to help crypto companies weigh the pros and cons of filing a lawsuit against the banking regulators.
Model Answers from ChatGPT-4
What actions can the Crypto Association take if the banking regulators fail to respond?
Under the Freedom of Information Act (FOIA), federal agencies are generally required to respond to a FOIA request within 20 business days. This timeframe can be extended by an additional 10 business days in certain circumstances, such as when the agency needs to consult with other departments or gather voluminous records. Thus, if the banking regulators fail to respond within the specified time, the Crypto Association can consider the following actions:
File a lawsuit: The Crypto Association may file a lawsuit against the regulators for failing to comply with FOIA, seeking a court order to compel the release of the requested information. However, the duration of the lawsuit itself is difficult to predict, as it depends on various factors, such as the complexity of the issues involved, the court’s schedule, and any potential appeals. FOIA lawsuits can take anywhere from several months to a few years to resolve, depending on these factors. Additionally, the parties may reach a settlement or engage in alternative dispute resolution methods, such as mediation, to expedite the process.
Lobby for legislative support: The Association could work with sympathetic legislators to address the regulators’ actions and propose new legislation to provide clearer guidelines and protections for the crypto industry.
Public awareness campaign: The Crypto Association can engage in a public awareness campaign to inform the public and stakeholders about the regulators’ actions and their impact on the industry. This can help to create pressure on the regulators to respond and reconsider their stance.
If a crypto company’s bank account is shut down without explanation, what causes of action can it pursue against the banks and regulators?
If a crypto company’s bank account is shut down without explanation, it can consider pursuing the following causes of action against the banks and regulators:
Against the banks:
Breach of contract: If the banks closed the accounts without providing a valid reason or without following the terms outlined in the account agreements, the crypto companies could argue that the banks breached their contractual obligations.
Tortious interference with a contract or business relationship: If the banks’ actions in closing the accounts harmed the crypto companies’ contractual or business relationships with third parties, the companies could pursue a claim for tortious interference, particularly if the banks acted with improper motive or used wrongful means.
Against the regulators:
Violation of due process rights: The crypto companies might claim that the regulators’ actions have infringed upon their constitutional due process rights under the Fifth Amendment. They could argue that the actions have resulted in a deprivation of their property or liberty interests without adequate procedural safeguards.
Arbitrary and capricious action: The crypto companies could argue that the regulators’ risk warnings, the final rule prohibiting banks from holding crypto as a principal, and the encouragement to unbank the crypto industry are arbitrary and capricious actions under the Administrative Procedure Act (APA). They might claim that these actions lack clear justification, are not supported by substantial evidence, or have been applied inconsistently.
Ultra vires action: The crypto companies could argue that the regulators acted beyond their legal authority by indirectly influencing or directing the banks to close the crypto companies’ accounts without a clear legal basis. To support this claim, the companies would need to demonstrate that the regulators' actions are not supported by the statutes governing their authority or that they violated specific procedural requirements, such as those outlined in the APA.
In pursuing these causes of action, the crypto companies would need to present evidence supporting their claims and establish a connection between the banks’ and regulators’ actions and the harm suffered by the companies.
What remedies can a federal court grant to the crypto company if it were to win the lawsuit against the regulators?
In this case, even though the regulators did not explicitly ban banks from conducting business with crypto companies, the crypto companies may argue that the regulators indirectly influenced or pressured the banks to close their accounts without a clear legal basis. If the plaintiffs were to win the case, the court might provide several remedies or relief, including:
Declaratory relief: The court may issue a declaratory judgment stating that the regulators’ actions were ultra vires or otherwise unlawful. This judgment can serve as a basis for the banks to reassess their decisions to close the accounts and potentially reopen them, as the regulators' influence would no longer be considered legitimate.
Injunctive relief: The court could issue an injunction requiring the regulators to cease any unlawful activities or practices that led to the account closures. This might include stopping the issuance of improper guidance or ceasing any coercive conduct aimed at influencing the banks to close the accounts.
Remand to the agency: The court could remand the matter back to the regulators, directing them to reconsider their actions in light of the court's findings. The regulators might then have to undertake a new rule-making process, follow proper procedures, or provide a better justification for their actions.
Monetary damages: Although less likely in this context, the court might award monetary damages to the crypto companies if they can demonstrate that they suffered quantifiable financial losses as a direct result of the regulators’ unlawful actions.
Even if the court provides a remedy, it may not guarantee that the banks will reopen the crypto companies’ accounts or that the regulators will cease their allegedly improper conduct.
Please provide a judicial economy analysis to help crypto companies weigh the pros and cons of filing a lawsuit against the banking regulators.
In deciding whether to file a lawsuit against the banking regulators, crypto companies should consider the judicial economy implications. Judicial economy refers to the efficient use of court resources and the minimization of costs and time associated with litigation. An analysis of the judicial economy can help crypto companies assess the potential benefits and drawbacks of pursuing legal action.
Factors supporting the decision to file a lawsuit:
Precedential value: If the lawsuit is successful, it could establish valuable precedent for the crypto industry and help clarify the legal landscape. This could lead to more consistent and predictable regulatory actions, benefitting the industry as a whole.
Deterrence effect: A successful lawsuit may deter banking regulators from engaging in similar actions in the future. This could result in a more stable business environment for crypto companies and potentially prevent future litigation related to regulatory overreach.
Collective action: If multiple crypto companies join together in a single lawsuit, they can pool resources and share the litigation costs. This could promote judicial economy by consolidating similar claims and reducing the overall number of cases filed.
Factors weakening the decision to file a lawsuit:
Cost and time commitment: Litigation can be expensive and time-consuming. The costs associated with filing a lawsuit may not be justified, particularly if the chances of success are uncertain. The time and resources spent on litigation could be better invested in other business activities or efforts to engage with regulators constructively.
Uncertain outcome: The outcome of a lawsuit against the banking regulators is uncertain, given the complexities of the legal issues involved and the potential deference courts may give to regulatory agencies. If the lawsuit is unsuccessful, it could lead to a waste of judicial resources and potentially reinforce the regulators’ actions.
Strained relationships: Filing a lawsuit may strain relationships between the crypto industry and banking regulators. This could potentially make it more difficult for the industry to engage in constructive dialogue and work towards mutually beneficial solutions.
Alternative dispute resolution (ADR): Pursuing alternative dispute resolution methods, such as negotiation, mediation, or arbitration, could be a more efficient and cost-effective approach to resolving disputes with the regulators. These methods may allow for more flexible and creative solutions and preserve relationships between the parties.
Admittedly, ADR may be a more cost-effective solution because even when the court grant declaratory or injunctive relief, the affected crypto companies may not be awarded a practical remedy. Nonetheless, it is also possible that such relief or lawsuits encourage the regulators to change their approach or prompt the banks to reassess their decisions to close the accounts.
In conclusion, the decision to file a lawsuit against the banking regulators must be carefully weighed, taking into account the judicial economy implications. Crypto companies should consider several factors when deciding whether to pursue legal action, including the potential benefits of establishing precedent and deterring future regulatory overreach, as well as the costs, uncertainties, and possible negative consequences of litigation. ADR methods might present a more efficient and collaborative approach to addressing regulatory concerns.
It is crucial not to overlook the potential advantages of a successful lawsuit, such as raising awareness of the issue, setting a legal precedent, or ultimately leading to changes in regulatory actions. Importantly, suing a government agency serves as a powerful symbol of the rule of law, demonstrating that citizens are willing to invest time, effort, and resources to ensure better governance and a more favorable regulatory environment for the public. By taking legal action against government agencies, individuals and organizations hold them accountable for their actions, promoting transparency, fairness, and adherence to established laws and regulations. This willingness to challenge authority reflects a commitment to maintaining a just society where the government is answerable to the people it serves, ultimately strengthening the rule of law and fostering a more equitable and responsive regulatory landscape.
A few parting words after ChatGPT-4’s model answer:
Although I found and removed some errors in its model answer, I assume there are still some errors in its answer. Overall, it provided a timely response to the point and modified its responses after I challenged its legal basis and misunderstanding. However, from a law school scoring perspective, it’s unlikely to receive a high score because the original response typically doesn’t include arguments from both sides (perhaps that should have been prompted in the first place). I also cut off some dry and dull cases that might be interesting only to a few curious legal minds: customer’s standing to sue, cases that grant plaintiff relief against regulator’s action, and cases that highlight unlawful but subtle regulatory pressure and interventions. Because I don’t have time to verify their accuracy and validity, I think removing them from its response is better to show clarity and focus. Lastly, I would’ve prompted some anti-competition issues to ChatGPT if I had more time because that is also an exciting but complex topic. But anti-competition just came to my mind at the last minute. Maybe next time.
I hope you enjoy today’s Brief. I’ll see you next Friday.
One Question this Week:
Do you consider the the second largest bank failure a banker’s failure or a government failure?
Stay safe and sharp,
Jason Lai
Disclaimer: Not legal advice. You can see the full disclaimer & disclosure here.
Credit: Based on a real-world event, this Brief was reviewed and edited by ChatGPT; most quoted texts are provided by ChatGPT-4 with my editing, prompts, and nudges.