Source: AiYing Compliance
With the rapid development of the cryptocurrency industry, the phenomenon of "debanking" in the Web3 world has increasingly attracted attention. This phenomenon reflects the confrontation between the traditional financial system and the cryptocurrency industry, such as the failure of Meta's stablecoin project Diem, the obstacles faced by Custodia Bank, and the phenomenon of many cryptocurrency companies being "cut off" from payment services, all of which highlight the strong rejection of the cryptocurrency industry by the traditional financial system. This rejection not only reflects policy contradictions, but is also a game of competing forces. In the process of serving customers over the years, Aiying has also witnessed the various obstacles that enterprises face in obtaining financial services, such as the closure of bank accounts and the lack of payment services. This article mainly explores some of the deeper reasons behind this.
I. The Covert Mechanism of Debanking
"Debanking" is not just about banks closing the accounts of individual companies, but often involves complex political and financial considerations behind the scenes. Meta's Diem project is a typical case. According to former head David Marcus, although Diem fully met regulatory requirements in 2021 and planned a small-scale launch, U.S. Treasury Secretary Yellen told Federal Reserve Chairman Powell that approving the project would be "political suicide." This was undoubtedly a ruthless suppression of technological innovation by political forces, and this pressure was directly exerted on the Federal Reserve and the banking system, forcing them to cut off their cooperation with the Diem project.
The Diem project was originally intended to achieve faster and cheaper global payments through blockchain-based technology, but due to government pressure, banks withdrew their support, leading to the project's failure to be implemented. These indirect suppression tactics have made the cryptocurrency industry face not only the issue of "compliance" when facing regulation, but also the issue of "survival."The closure of accounts and revocation of service permissions by banks have led to a large number of companies and individuals being unable to obtain normal financial services, and this phenomenon is particularly evident in "debanking 2.0."
Custodia Bank's CEO Caitlin Longing also revealed that Custodia Bank has been trying to provide legal banking services to the cryptocurrency industry, but its bank charter applications have been repeatedly delayed or rejected. Custodia Bank even faced pressure from the Federal Reserve System to terminate its cooperation with cryptocurrency-related services. Longing further pointed out that this targeted suppression not only affected Custodia Bank's business development, but also led other banks to follow suit, refusing to provide services to the cryptocurrency industry, forcing many companies into difficulties.
II. The Erosion of Freedom: Debanking's Suppression of the Cryptocurrency Industry's Basic Rights
Another challenge posed by debanking is the infringement of basic rights. The cryptocurrency world has always advocated decentralization and freedom, but debanking has directly undermined the foundation of this freedom. Ripple's CTO David Schwartz pointed out that this targeted debanking behavior not only damages the industry's development, but also erodes fundamental constitutional rights, including due process, freedom of speech, and protection against unlawful search and seizure.
Schwartz further elaborated on how the government indirectly suppresses specific industries by exerting pressure on banks and other financial institutions. He pointed out that the government often does not directly enact laws to prohibit cryptocurrencies, but instead "encircles" the industry through the financial system. Banks are pressured to stop cooperating with cryptocurrency companies, forcing them to be unable to operate normally. This behavior is essentially an interference with market freedom, and a manifestation of the government's use of third parties to circumvent due process.
This phenomenon is not an isolated case in the entire cryptocurrency industry. Frax Finance founder Sam Kazemian stated that in December 2022, his account at JPMorgan Chase was closed, and the reason was not clearly stated, but it was obviously related to his involvement in the cryptocurrency business. Coinbase co-founder and CEO Brian Armstrong also used the Freedom of Information Act (FOIA) to obtain government records related to "Operation Choke Point 2.0," in an attempt to reveal the real motives behind this suppression.
III. The "Choke Point" Operation Continues from the Early Years
The "debanking" phenomenon did not appear out of thin air, but can be traced back to the U.S. government's "Operation Choke Point" in the early years. According to Aiying's understanding, the government targeted financial institutions and payment processors because they were seen as "bottlenecks" or "chokepoints" in fraudulent activities. By exerting pressure on these key nodes, the government hoped to cut off the access of illegal merchants to the banking system. However, this widespread exclusion of financial services has affected many industries, including legitimate businesses such as ammunition sales, payday loans, and tobacco sales.
"Operation Choke Point" not only led to the closure of accounts for many legitimate businesses, but also resulted in multiple lawsuits and federal investigations, and even received harsh criticism in 2018 from former Oklahoma Governor Frank Keating, who called it more like a "purge of ideological adversaries." Although the Trump administration officially terminated "Operation Choke Point" in 2017, and the FDIC promised to limit its personnel's account termination powers, many believe that the government's control and intervention in banking services has not truly ended.
Today, the term "Operation Choke Point 2.0" is used by critics to describe the U.S. government's suppression of the cryptocurrency industry, as the cryptocurrency industry is seen as high-risk and controversial. Although there is no formal "Operation Choke Point 2.0" plan, the coordinated actions of various regulatory agencies, including the Department of Justice (DOJ), Federal Deposit Insurance Corporation (FDIC), Office of the Comptroller of the Currency (OCC), Financial Crimes Enforcement Network (FinCEN), and Securities and Exchange Commission (SEC), seem to have made it increasingly difficult for the cryptocurrency industry to access banking services.
For example, the collapse of Signature Bank and Silicon Valley Bank (SVB) in 2023 was seen by some as being subjected to special regulatory pressure due to their connections with the cryptocurrency industry.
For example, the SEC sued Ripple Labs in 2020, claiming that its issued XRP token was an unregistered security; in 2023, the SEC sued Binance and Coinbase, alleging violations of securities laws. The existence of these cases has led to the belief that "Operation Choke Point 2.0" is a systematic suppression tactic, aimed at limiting the cryptocurrency industry's financial access and curbing the development of decentralized technology.
IV. Banking Crisis and Regulatory Bias
"Debanking" has not ended with the termination of "Operation Choke Point," but has resurfaced in the development of the cryptocurrency industry. On March 8, 2023, the cryptocurrency-focused institution Silvergate Bank announced voluntary liquidation. This bank, which has focused on providing services to cryptocurrency clients since 2013, saw its stock price plummet due to its association with Meta's stablecoin project Diem and the turmoil in the cryptocurrency market, as well as the collapse of client FTX. At the same time, pressure from U.S. Senators Elizabeth Warren, Roger Marshall, and John Kennedy further exacerbated the bank's predicament, as they demanded that Silvergate disclose its financial relationship with FTX, exposing the bank to greater regulatory risks.
Just two days later, the California Department of Financial Protection and Innovation took over Silicon Valley Bank (SVB), marking one of the largest bank failures in U.S. history. SVB's collapse was directly related to the decline in market value of its long-term securities holdings and the massive withdrawal of client deposits. On March 12, Signature Bank was also closed by the New York State Department of Financial Services and placed under FDIC receivership due to a large number of customer withdrawals. Signature Bank had 30% of its deposits from the cryptocurrency industry, and its cash holdings were only 5% of its total assets, far below the industry average, making it very vulnerable in the bank run triggered by the SVB issue.
Although the U.S. Treasury Department, the Federal Reserve, and the FDIC described the actions to take over SVB and Signature Bank as "to protect the U.S. economy and strengthen public confidence in the banking system," many, including Signature Bank board member Barney Frank, believe that these actions show the government's bias against the cryptocurrency industry. Frank stated: "We have become a classic case, because this failure was not based on fundamental bankruptcy." Subsequently, the FDIC announced that Flagstar Bank will take over Signature Bank's cash deposits, but exclude the business related to digital assets. This decision was criticized by the editorial board of The Wall Street Journal as an obvious bias, confirming Frank's suspicion that the cryptocurrency industry is being unfairly treated.
