Understanding the Phenomenon of Debanking
Recently, the term “debanking” has gained considerable traction in Washington, becoming a focal point of discussion and concern. Debanking refers to a contentious practice where crypto companies and various businesses are denied access to essential banking services. This situation allegedly arises from pressure exerted by federal regulators. Many industry stakeholders have likened this situation to “Operation Chokepoint 2.0,” drawing parallels to an earlier initiative during the Obama administration that aimed to discourage banks from providing services to certain legal yet high-risk industries. This issue has ignited intense debate, prompting multiple congressional investigations to determine whether regulators have inappropriately coerced banks into denying services to these firms.
Personal Experience with Debanking
Today, I am testifying before Congress about our direct experience with debanking. Despite being a federally regulated bank ourselves, we faced the harsh realities of this phenomenon. It is essential to clarify the misconceptions surrounding debanking in order to combat this threat to American values.
The Mechanics of Debanking: A Shadowy Process
Rather than establishing clear and transparent regulations outlining who banks can serve, the process of debanking operates in a murky, unaccountable manner. Regulators often pressure banks to avoid certain customer categories, not based on individual risk assessments, but rather due to a general hostility or bias towards entire industries. Banks, fearing potential enforcement actions or penalties, feel compelled to comply. As a result, law-abiding individuals and businesses are cut off from basic banking services, which can have devastating consequences.
Our Troubling Experience
In June 2023, my company received an alarming call from our banking partner of two and a half years. Despite a solid, established relationship and ongoing discussions about expanding our partnership, the bank abruptly informed us that they would be closing our account in 30 days. Their reason? They expressed discomfort with transactions related to our crypto clients, even though we clarified that these transactions were client payments for custody fees, fully documented in our compliance records. Our representative refused to provide further explanation or allow us to engage with the bank’s risk management team.
The irony of the situation was striking: we are a federally chartered bank, regulated and supervised by the Office of the Comptroller of the Currency (OCC), and subject to the same stringent capital, liquidity, and risk management standards as any national bank. Throughout our partnership, our banking relationship had been sound, with no prior issues raised. Yet, without warning, we found ourselves cut off, with no explanation or recourse. Although we eventually located banks willing to partner with us, the disruption caused by this near exclusion from the banking system was significant. It ultimately contributed to the painful decision to lay off 20% of our workforce in 2023.
A Broader Impact on American Businesses
We are not alone in this struggle. Numerous legitimate businesses across the crypto industry have found themselves in similar predicaments, scrambling for basic banking services. Many have diverted time and resources away from innovation and growth, leading to major disruptions and, in some cases, driving businesses to the brink of collapse.
The De Facto Ban on Crypto Banking
Regulatory actions have effectively created a de facto ban on banking within the crypto sector. This situation is exacerbated by the seemingly arbitrary enforcement of these policies. The lack of clarity regarding why some firms retain access while others are cut off has fostered an environment of constant uncertainty. It is crucial to point out that if regulators had pursued such a significant policy change through proper channels—such as formal notice-and-comment rulemaking—it might have been more acceptable. However, no such rules were proposed, publicly debated, or subjected to legal scrutiny, nor did Congress enact legislation authorizing the exclusion of sizable portions of an industry from the federal banking system.
The Need for Lasting Reform
History teaches us that without a permanent solution, similar debanking efforts will re-emerge. Just over seven years ago, the FDIC issued an apology for the original Operation Choke Point—a concerted effort to sever banking relationships with industries disfavored by regulators—promising to retrain its examiners. Fast forward to 2023, and we are witnessing the resurgence of these debanking initiatives, this time targeting another politically disfavored industry. Without intervention, we may soon face Operation Chokepoint 3.0, leaving any industry vulnerable to similar treatment.
Proposed Solutions to Prevent Future Debanking
To prevent this pattern from repeating, robust congressional oversight, such as the hearing I will participate in today, is essential for uncovering the facts and holding regulatory agencies accountable. Congress must act to implement concrete safeguards, including:
– Legislation requiring banks to provide fair access to banking services.
– Annual certifications from regulatory agencies affirming they are not pressuring banks to discriminate against lawful businesses.
– Establishing Inspector General whistleblower hotlines at the OCC, FDIC, and Federal Reserve to report examiner misconduct.
– Requiring banks to provide written explanations for account terminations.
– Mandating clear appeals processes for affected businesses.
These measures would ensure that no federal regulator can misuse their authority to quietly disrupt law-abiding individuals, companies, and industries again. Furthermore, immediate actions that the new administration and Congress can take include rescinding the January 2023 joint banking regulators’ guidance that severely impacted many crypto businesses and revoking OCC interpretive letter 1179, which imposed arbitrary pre-clearance requirements that effectively excluded many banks from participating in crypto activities.
The Importance of Procedural Changes
These proposed changes are not merely procedural; they are vital to safeguarding American innovation and ensuring democratic accountability. When regulators are held responsible for their decisions and must defend them publicly and legally, the backroom pressure tactics will wane, allowing transparency and the rule of law to prevail. The focus should shift from scrutinizing legitimate businesses adhering to the rules to addressing implied threats from bureaucrats. Until these reforms are enacted, we all remain at risk.
