An introduction to DL News
- Outcry from crypto executives over loss of bank accounts is spurring action on Capitol Hill.
- This question sheds light on the functioning of banking supervision.
- Crypto advocates say “Operation Chokepoint 2.0” is aptly named.
About an hour into a congressional hearing last week, Rep. French Hill had heard enough.
“Nobody has any patience on this, on either side of the aisle,” the Arkansas Republican said.
“Legal businesses in the United States, in this great country, should have the freedom to bank and have financial services.”
On Wednesday, Sen. Tim Scott, the ranking Republican on the Senate Banking Committee, expressed his own views on the issue during a hearing.
“No legal business should ever be unbanked,” Scott said.
Inflamed problem
In recent weeks, “debanking” has become a hot-button issue as suspicions grow that lenders, egged on by the Biden administration, are going out of their way to abandon crypto companies and their founders as customers.
Gemini CEO Tyler Winklevoss called it “illegal and evil behavior.” Last year, crypto investor Nic Carter coined a catchier term: “Operation Chokepoint 2.0.”
Many leaders in the sector claim to have been debanked and are calling for an end to this so-called practice. They want investigations. And their friends on Capitol Hill are eager to answer that call.
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“We have the documents that we’re looking at,” Hill said at last week’s hearing. “We will continue this review through the end of this Congress and into the next Congress.”
The only problem: is crypto debanking really a thing?
The short answer: it’s complicated.
Damage to reputation
Banking regulators aim not only to protect consumers, but also to protect banks from potential reputational damage. Scandals can damage a brand enough to trigger a bank run.
The problem, says Julie Hill, dean of the University of Wyoming Law School, is that regulators can go too far.
“They define reputational risk very broadly to include any risk of negative publicity, whether true or not,” she said.
“We’ve had examples in the past where regulators seem to be using this to crack down on industries they didn’t like.”
“The bank may well decide that it is not economical to research your transactions.”
— Julie Hill, University of Wyoming School of Law
Crypto executives claim to have evidence demonstrating this.
On Friday, Paul Grewal, Coinbase’s top lawyer, said he had obtained documents from the Federal Deposit Insurance Corporation proving it aimed to deny banking services to the crypto industry.
“The letters show that this was not a conspiracy theory,” Grewal told CoinDesk.
Solvency and stability
FDIC Chairman Martin Gruenberg rejected the idea Thursday, according to Capitol Account reporter Ryan Tracy.
The individuals’ bank accounts posed “no oversight concerns,” Gruenberg reportedly said. But the FDIC has put the brakes on some banks’ plans to invest directly in crypto.
“The FDIC does not ban crypto companies in terms of depositor relationships with banks,” Gruenberg said, according to Tracy.
“In relation to banks engaged in crypto asset activities, whether on or off their balance sheet, this has been the subject of prudential attention.”
A mandate
Crypto skeptics say banks’ distrust of crypto hardly constitutes a scandal.
“The FDIC has a statutory mandate to preserve the solvency and stability of banks within its jurisdiction,” said Dru Stevenson, a professor at South Texas College of Law Houston. DL News.
“Legally, this involves warning banks to avoid customers who could pose a risk to the bank’s solvency if they are caught doing something illegal, or because of bad publicity or scandal which accompanies a coercive measure.”
Additionally, banks must follow costly anti-money laundering protocols, meaning some customers are more trouble than they’re worth.
“The bank may well decide it’s not economical to do all this research on all your transactions,” Hill said.
Debanking or risk reduction?
Indeed, where crypto executives see “debanking,” lenders see “derisking.” The first term is not even used in the financial sector.
“When discussing this with a colleague, we might use words like offshoring, de-risking, closing a customer’s accounts, etc.,” said Patrick McKenzie, strategic advisor to Stripe, the payments platform, in a test this week.
“This has happened to every crypto entrepreneur over the last four years.”
— Marc Andreessen, a16z
The issue caught fire on social media last month after Marc Andreessen, the influential venture capitalist, denounced debanking on Joe Rogan’s podcast.
“This has happened to every crypto entrepreneur over the last four years,” Andreessen said.
“I can confirm this is true,” Brian Armstrong of Coinbase told X.
Sam Kazemian, the founder of Frax, said his bank account at JPMorgan was closed after a representative told him “we need to close the account of anyone we know their primary source of income/wealth is crypto “.
JPMorgan Chase did not respond to a request for comment.
Operation Chokepoint
The roots of this imbroglio go back to the Obama administration. In 2013, the Justice Department subpoenaed banks suspected of turning a blind eye to fraud.
What followed was an effort to “choke out the air” criminals need to survive: their bank accounts.
Some lawmakers lamented that the initiative swept away legitimate businesses in industries that the FDIC said had higher-than-average fraud rates, including payday lenders, gun manufacturers, tobacco retailers and pornographers.
The FDIC appeared to bow to pressure from lawmakers when it told banks in 2015 that they could not discriminate against “entire categories of customers” and must consider them on a case-by-case basis.
Rumors of a second Operation Chokepoint took place in early 2023, as the ruins of FTX smoldered and the mainstream press published story after story detailing other failures, hacks, frauds and money laundering schemes of multi-billion dollar crypto industry.
“Don’t migrate”
Scrutiny of crypto-friendly banks has intensified, and federal bank regulators and White House advisers have issued statements highlighting the sector’s risks.
It was important that crypto-related risks “do not migrate into the banking system,” a warning from regulators read at the time.
Banks, he continued, were “neither prohibited nor discouraged from providing banking services to customers of a specific class or type.”
Carter, the crypto investor, argued last year that these actions amounted to an attempt to push crypto out of the United States.
He said his suspicions were confirmed when two crypto-friendly banks – Silvergate Bank and Signature Bank – closed their doors in March 2023. (Though some critics say those banks had bigger problems).
The problem is heating up
Fast forward to the end of 2024 and the question remains: Is Operation Chokepoint 2.0 a real program?
Or is it simply the need for regulators and lenders to protect depositors and preserve the stability of the banking system?
It’s hard to say, according to Hill, the law school dean.
Banks do not have to provide justification for closing or declining a bank account. After all, they are businesses, not utilities.
Banking stigma
Additionally, the law prohibits banks and their regulators from disclosing confidential information. This is done in part to protect the reputation of bank customers from the stigma of being excluded as customers.
Again, even if their guidance is formulated as recommendations, lenders tend to take regulators seriously and take action.
“You combine secrecy with the claimed power to regulate and enforce reputational risk, and I don’t think you have to be a complete conspiracy theorist to question what regulators are doing with it. that power,” Hill said.
Many unknowns
Skeptics, meanwhile, say the industry doesn’t care about lenders’ conservative business practices. Neither banks nor banking regulators like uncertainty. And crypto is an industry full of unknowns.
Are tokens securities or commodities? Are DeFi protocols subject to banking secrecy law? And specifically, what kind of licensing requirements should be imposed on crypto platforms to protect their users?
These questions represent a real challenge, although difficult to quantify. Some say this gives banks the right to distance themselves from crypto founders and companies.
“The “debanking” stories from venture capitalists and tech executives over the past few days all sound like… “I was running a crypto startup selling unregistered securities in the middle of a bubble and banks averse at risk, with their stupid compliance departments, would do it. » “I can’t bank,” wrote Jacob Silverman, co-author of “Easy Money: Cryptocurrency, Casino Capitalism, and the Golden Age of Fraud,” on X.
Suspicious activity
Others wonder if complaints about debanking do not constitute a springboard towards another program: deregulation of the financial sector.
Last week, Andreessen appeared to suggest that the United States should abandon laws such as the 54-year-old Bank Secrecy Act, which requires banks to monitor their customers’ transactions for signs of money laundering or other illicit activities.
Carter, in response to this message, made his industry’s intentions clear.
“And for our next trick, we’re going to convince everyone that the BSA is unconstitutional,” he wrote.
Aleks Gilbert is DL News’ DeFi correspondent based in New York. You can contact him at aleks@dlnews.com.
