'De-banking' refers to the loss of relationships with banks by lawful individuals or entities without due process or notice, resulting in a failure to obtain relief, raising concerns about regulatory abuse of power and unfair suppression of legitimate industries.
Author: a16z
Translation: Vernacular Blockchain
'De-banking' has been occurring behind the scenes for years and has now resurfaced as a topic of public discussion, with many individuals, policymakers, companies, especially entrepreneurs critical to U.S. innovation, beginning to speak out on this issue. As the crypto industry and certain specific institutions are frequently mentioned in this discussion, the following is a brief explanation of this phenomenon aimed at helping everyone distinguish truth from noise.
1. What is 'de-banking'?
In simple terms, 'de-banking' refers to law-abiding individuals or entities unexpectedly losing their relationship with banks, and may even be kicked out of the banking system.
'De-banking' is different from losing banking services due to suspected or confirmed involvement in fraud, money laundering, or other illegal activities. Such situations typically undergo some form of investigation or procedure.
'De-banking' can occur without any obvious investigation, detailed explanations, or prior notice, and does not give relevant entities enough time to transfer funds. More importantly, this process lacks due process, appeal mechanisms, or other remedies.
1) Why is this important?
We already have fair banking rules aimed at ensuring that people are not discriminated against based on age, gender, marital status, nationality, race, religion, and other factors. However, there are currently no relevant rules restricting banks (or their regulators) from arbitrarily depriving or canceling someone's right to access banking services.
Therefore, 'de-banking' may be used as a tool or weapon by certain specific political actors or institutions to systematically target private individuals or industries without due process. Imagine if the government decides who can use electricity and who cannot solely based on political stances or arbitrary reasons, without explanation, investigation, notice, or providing relief—that is the real picture of the 'de-banking' issue.
2) Why is there 'de-banking'?
Not all account closures fall under 'de-banking.' It is reasonable for banks to close customer accounts for various reasons, such as suspicions of the customer engaging in suspicious activities. Additionally, banks may proactively choose to reduce regulatory compliance costs and burdens, thereby limiting their exposure to certain individuals, industries, or business models.
However, proper behavior is not the reason for the concern surrounding 'de-banking.' Many people are worried because reports indicate that regulators may be illegally abusing their power to exert undue pressure on banks to stop providing services to certain industry clients or terminate relationships with clients that have specific political connections or positions. This allows these regulators to influence the industry, even though Congress has not granted them such power.
Banks often succumb to this pressure because they do not want to confront regulators. Many banks are also reluctant to deal with the compliance troubles or additional scrutiny that may arise from non-cooperation.
3. What is the origin of the 'Choke Point' operation?
In 2013, the U.S. Department of Justice launched an investigation targeting certain businesses suspected of fraud and money laundering as part of the President's Financial Fraud Enforcement Task Force policy initiative. This marked a shift in government strategy: no longer targeting individual companies for suspected illegal behavior but issuing subpoenas to banks and payment companies for information related to high-risk or politically unpopular (but legal) clients.
In other words, the government improperly uses regulatory power to 'cut off' certain businesses' access to financial services by closing accounts to stifle industries not supported by administrative agencies (as noted by the then-president of the American Bankers Association). In 2014, Frank Keating, former president and CEO of the American Bankers Association and former governor of Oklahoma, wrote in a commentary published in The Wall Street Journal:
'When you become a banker, no one gives you a badge or tailors a robe for you. So why does the DOJ require bankers to act like police and judges? The DOJ's new investigation, known as 'Choke Point,' requires banks to identify customers who may be engaging in illegal activities or merely customers that government officials do not like.'
The program was halted the following year due to strong opposition from legal, congressional, and relevant agencies.
Today, the term 'Operation Choke Point 2.0' is sometimes used to refer to the government targeting 'political enemies and unpopular tech startups' through de-banking methods. Or, as others describe it, the term refers to banks cutting off ties with certain clients perceived as 'politically incorrect, extreme, dangerous, or noncompliant.' Regardless of how defined, this issue affects entities across the political spectrum as well as all those impacted.
2. Which agencies are involved?
'The specific operational mechanism of 'Operation Choke Point' and any related or subsequent systemic de-banking initiatives were previously unclear to the outside world, as relevant investigations (if any) were conducted in secret, and Freedom of Information Act (FOIA) requests are still pending. However, a letter from the Federal Deposit Insurance Corporation (FDIC) dated March 11, 2022 (as evidence in court records) indicated that the agency instructed a certain bank: “Currently, the FDIC has not decided whether banks engaging in such activities need to submit any regulatory documents. Therefore, we urge you to suspend all activities related to crypto assets.” Several similar FDIC letters were submitted as evidence in this case.
Additionally, we know that the financial fraud enforcement task force that executed 'Operation Choke Point 1.0' in 2013 included agencies such as the FDIC, the Department of Justice (DOJ), and others. The Office of the Comptroller of the Currency (OCC), an independent agency under the U.S. Treasury, and the Federal Reserve (FRB) were also involved. The Consumer Financial Protection Bureau (CFPB) has also been mentioned.
It should be noted that the U.S. is not the only country implementing de-banking. Other countries (such as Canada) have also used this tactic; the UK has also investigated government-led complaints about de-banking.
3. Why is the government taking this action? What impacts will it have?
Reasons for de-banking include combating payment processing fraud and preventing high-risk businesses from operating, as these businesses may be seen as more related to money laundering activities. However, these measures are often labeled as 'de-risking,' meaning 'financial institutions indiscriminately terminate or limit business relationships with certain categories of clients rather than analyzing and managing client risks in a targeted manner.'
In broader applications, de-risking and de-banking can be used as a 'partisan tool' to target legitimate businesses purely for political reasons. Another possible reason is that certain government agencies want greater discretion and power to decide 'where and under what circumstances consumers can obtain loans, financial products, and other banking services.'
It is important to clarify that the issue is not whether a particular government agency is diligent, but rather the excessive interference (or abuse of power) by the government in legitimate businesses, actions that often lack due process, effective restrictions, and mostly take place behind the scenes. Especially when existing laws and legitimate means are already sufficient to regulate corporate behavior, such as protecting consumers, preventing money laundering, and combating other criminal activities.
Using de-banking as a tactic can lead to many unintended consequences. Even if the goal is to protect consumers and the banking system, the results may be counterproductive, such as limiting consumer choices or creating a chilling effect on overall business activities. Additionally, this practice can undermine the U.S. government's own policy objectives. According to the U.S. Treasury's 2023 report on de-risking, this is manifested as follows:
1) Expelling financial activities from the regulated financial system;
2) Impeding remittances or delaying the free transfer of international development funds and humanitarian/disaster relief;
3) Impeding efficient access to the financial system for low-income and middle-income groups and other underserved communities;
4) Undermining the core status of the U.S. financial system.
Ultimately, the tactic of de-banking can serve to disproportionately punish legitimate businesses and individuals due to their associations. For example, a case where an individual lost a previously approved mortgage because they worked for a crypto industry open-source foundation.
For all the above reasons, many believe that de-banking behavior 'contradicts the American spirit,' especially when it indiscriminately targets emerging technologies, as it hinders innovation.
4. What are the implications of the issue?
While we cannot speak on behalf of the entire industry or specific interest groups, as a venture capital firm in the crypto industry, we have witnessed at least 30 de-banking events related to our portfolio companies and founders over the past four years. Coinbase has also publicly stated that they found at least '20 cases where the Federal Deposit Insurance Corporation (FDIC) required banks to 'suspend' or 'avoid providing' or 'not continue' to provide banking services for crypto.'
There are likely more similar cases. Many entrepreneurs and small businesses have not publicly reported these events out of fear of further retaliation or a lack of resources to address the issues.
For our portfolio companies, many de-banking events have occurred with companies that have not yet become profitable and have not issued tokens. These companies have received venture capital funding (from institutions such as pension funds, university endowments, etc.) and are using this funding to pay employee salaries and cover daily business expenses—just like other tech startups.
So why are these companies told to close their accounts? The reasons listed range from 'we do not do crypto business' to the more common 'your account has been closed due to compliance issues, please transfer all funds immediately.' These companies are often told this news without specific mention of the 'compliance' issues and are not given opportunities to resolve the problems. Finally, other reports we received from these companies include:
Being told 'the business compliance backend team closed the account and prohibited us from opening other accounts. No other reasons were given, nor was there an appeal process';
The reason for the rejection is the 'loss of trust in all operators of crypto companies';
Receiving unfounded inquiry letters and notices has brought unnecessary costs and pressures to startups—these companies tend to operate in a more streamlined manner compared to large enterprises.
5. What can you do?
Please continue to share your stories publicly, and we will keep following these events. You can also reach out to relevant partners around you for more resources and support.
At the same time, we want to thank those diligent banking partners (as well as legal advisors, etc.) who have taken the time to establish rigorous underwriting processes and deeply understand the business models and risks behind each company. We know who you are, and we sincerely thank you.
Article link: https://www.hellobtc.com/kp/du/12/5579.html
Source: https://a16zcrypto.com/posts/article/debanking-explained/