Author: a16z
Translation: Plain Language Blockchain
The "de-banking" phenomenon has been happening behind the scenes for years, and has now become a topic of public discussion, with many individuals, policymakers, and companies, especially entrepreneurs critical to American innovation, starting to speak up about it. As the crypto industry and certain specific institutions are frequently mentioned in this discussion, the following is a brief explanation of this phenomenon, aiming to help 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 situations where individuals or entities lose banking services due to suspected or confirmed involvement in fraud, money laundering, or other illegal activities, which usually involve some form of investigation or due process.
De-banking may occur without any obvious investigation, detailed explanation, or prior notice, and without giving the relevant entities enough time to move their funds. More importantly, this process lacks due process, appeal mechanisms, or other remedies.
1) Why is this important?
We have fair banking rules in place to ensure that people are not discriminated against based on factors such as age, gender, marital status, nationality, race, or religion. However, there are currently no rules that restrict 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 political actors or institutions to systematically target private individuals or industries, without the need to follow due process. Imagine if the government could decide who can and cannot use electricity, solely based on political stance or some arbitrary reason, without explanation, investigation, notification, or recourse - this is the true nature of the "de-banking" problem.
2) Why does "de-banking" occur?
Not all bank account closures constitute "de-banking". Banks closing customer accounts for various reasons, such as suspecting the customer of engaging in suspicious activities, is reasonable. Additionally, banks may proactively choose to reduce regulatory compliance costs and burdens, thereby limiting their engagement with certain individuals, industries, or business models.
However, legitimate behavior is not the reason why "de-banking" has drawn attention. The concern is that there are reports of regulatory authorities potentially abusing their power, exerting improper pressure on banks to stop serving certain industry clients or terminate relationships with clients with specific political affiliations or views. This allows these regulatory authorities to exert influence over industries, even if Congress has not granted them such power.
Banks typically succumb to this pressure, as they do not want to confront the regulators. Many banks are also unwilling to deal with the compliance hassle or additional scrutiny that may come from non-cooperation.
3. What is the origin of the "Choke Point" initiative?
In 2013, the U.S. Department of Justice, as part of the President's Financial Fraud Enforcement Task Force policy initiative, launched investigations into certain businesses suspected of fraud and money laundering. This marked a shift in the government's strategy: instead of just taking action against individual companies for alleged illegal activities, the government began issuing subpoenas to banks and payment companies, demanding information related to high-risk or politically unpopular (but legal) clients.
In other words, the government used its regulatory power to improperly "choke off" certain businesses' access to financial services by shutting down their accounts, in order to suppress industries that the administrative branch did not support (as pointed out by the former president of the American Bankers Association). In 2014, Frank Keating, the former president and CEO of the American Bankers Association and former governor of Oklahoma, wrote in an op-ed in The Wall Street Journal:
"When you become a banker, no one gives you a badge, and no one tailors a robe for you. So why is the Justice Department asking bankers to act like police officers and judges? The Justice Department's new initiative, known as 'Operation Choke Point,' demands that banks identify customers who may be breaking the law or who simply displease government officials."
The program was shut down the following year due to strong opposition from the law, Congress, and relevant agencies.
Today, the term "Choke Point 2.0" is sometimes used to refer to the government's use of "de-banking" tactics to target "political enemies and disfavored tech startups". Or as others have described, the term refers to banks cutting ties with certain clients perceived as "politically incorrect, extreme, dangerous, or non-compliant". Regardless of how it is defined, this issue impacts entities across the political spectrum, as well as all those affected.
2. Which institutions are involved?
The specific mechanisms of the "Choke Point" initiative, as well as any related or subsequent systematic de-banking efforts, were previously unclear to the public, as the 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 (submitted as evidence in a court case) shows that the FDIC had instructed a bank: "At this time, the FDIC has not determined that banks engaging in this activity need to submit any regulatory filings. Therefore, we are requesting that you pause all crypto-asset related activities." Multiple similar FDIC letters were submitted as evidence in this case.
Additionally, it is known that the Financial Fraud Enforcement Task Force that executed "Choke Point 1.0" in 2013 included agencies such as the FDIC and the Department of Justice (DOJ). The Office of the Comptroller of the Currency (OCC) under the U.S. Department of the Treasury, as well as the Federal Reserve Board (FRB), were also involved. The Consumer Financial Protection Bureau (CFPB) has also been mentioned.
It is worth noting that the U.S. is not the only country that has implemented de-banking tactics. Other countries, such as Canada, have also used these measures; the UK has also launched an investigation into government-led de-banking complaints.
3. Why is the government taking these actions, and what are the impacts?
The rationales for de-banking include combating payment processing fraud and preventing high-risk businesses from operating, as these businesses may be perceived as more associated with money laundering activities. However, these measures are often cloaked under the guise of "de-risking", which is "the practice of financial institutions terminating or restricting business relationships with entire categories of clients, without regard to the level of individual risk posed by the client".
In a broader application, de-risking and de-banking can be used as a "partisan tool" to target legitimate businesses solely for political reasons. Another possible reason is that certain government agencies may seek to gain greater discretionary power and authority to decide "where and under what circumstances consumers can access loans, financial products, and other banking services".
The issue is not whether a government agency is diligent, but rather the government's excessive intervention (or abuse of power) against legitimate businesses, often lacking due process and effective constraints, and largely conducted behind the scenes. Especially when existing laws and legitimate means are already sufficient to regulate business behavior, such as protecting consumers, preventing money laundering, and combating other criminal activities.
Using de-banking as a tactic may have many unintended consequences. Even if the goal is to protect consumers and the banking system, the results may backfire, such as limiting consumer choice or creating a chilling effect on overall business activity. Furthermore, this approach may also undermine the government's own policy objectives. According to a 2023 U.S. Treasury Department report on de-risking, the specific impacts include:
1) Driving financial activities out of the regulated financial system;
2) Impeding remittances or delaying the free flow of international development funds and humanitarian/disaster relief;
3) Hindering efficient access to the financial system for low-income, middle-income, and other underserved communities;
4) Weakening the core position of the U.S. financial system.
Ultimately, de-banking tactics may only punish legitimate businesses and individuals due to their association. For example, a case where a person's previously approved mortgage was revoked solely because they worked at an open-source crypto foundation.
Many believe that the "de-banking" behavior is "contrary to the American spirit", especially when it indiscriminately targets emerging technologies, which hinders innovation.
4. What is the impact of the problem?
As a venture capital firm in the crypto industry, we have witnessed at least 30 de-banking incidents related to our portfolio companies and founders over the past four years. Coinbase has also publicly stated that they have found at least "20 cases where the Federal Deposit Insurance Corporation (FDIC) has instructed banks to 'pause' or 'avoid providing' or 'not continue' to provide crypto banking services".
There are likely even more similar cases. Many entrepreneurs and small businesses have not publicly reported these incidents due to fear of further retaliation or lack of resources to address the issue.
For our portfolio companies, many de-banking incidents have occurred on companies that are not yet profitable and have not yet issued Tokens. These companies have received venture capital funding (from sources such as pension funds and university endowment funds) and used this funding to pay employee salaries and cover daily business expenses, just like other tech startups.
So why were these companies told to close their accounts? The reasons given ranged from "we don't do crypto business" to the more common "your account has been closed due to compliance issues, please immediately transfer all funds". These companies were typically not given specific "compliance" issues, nor were they given an opportunity to address the problems. Other reports we have received from these companies include:
Being told "the compliance back-office team has closed the account and prohibited us from opening other accounts. No other reasons were given, and there is no appeals process";
Being rejected due to "a lack of trust in anyone operating crypto companies";
Receiving unfounded inquiries and notifications, which have brought unnecessary costs and stress to these startups, whose operations are typically leaner compared to larger enterprises.
5. What can you do?
Please continue to publicly share your stories, and we will follow up on these incidents. You can also reach out to your relevant partners for more resources and support.
At the same time, we want to thank the diligent banking partners (as well as legal advisors, etc.) who have taken the time to establish rigorous onboarding processes and deeply understand the business models and risks behind each company.
Source: https://a16zcrypto.com/posts/article/debanking-explained/
