The long and short of the debanking debate
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Did a group of Democratic politicians, principal among them Elizabeth Warren, deliberately cripple the crypto industry by forcing banks to "debank" those companies and their executives? There's a short answer and a long answer to that question.
The short answer: No.
The long answer: Banking and payments expert Patrick McKenzie on Monday published a definitive essay on debanking — its history, its raison d'être, and whether the claims of the crypto crowd stand up to scrutiny.
- Specifically, his essay, which is 23,770 words long, serves to debunk relatively vague claims made by Andreessen Horowitz's a16z crypto fund last week.
- Those claims follow Marc Andreessen's controversial appearance on Joe Rogan's podcast last month, where he claimed at least 30 crypto founders had been quietly debanked in a targeted Biden administration effort. Elon Musk amplified the claim at length.
The big picture: Debanking — when bank accounts get closed by the bank rather than the customer — happens when banks either can't or won't do the kind of enhanced due diligence necessary to get comfortable with their customer.
- Until 2023, one bank in particular — Silvergate — specialized in banking crypto companies, which present many idiosyncratic risks around knowing your customer, money laundering, commingling of funds, and more.
- Silvergate had egregious compliance failures and ultimately shut itself down during the crypto winter surrounding the collapse of FTX.
Between the lines: Other banks reduced their crypto exposure at the same time, to ensure that less than 15% of their business was crypto. That reduction was driven by regulators, but for entirely rational technocratic reasons.
- There's no evidence that any politicians were involved in setting the 15% limit in 2023, although some politicians were involved in pressuring banks to get out of Facebook's Libra crypto project in 2019.
Where it stands: The crypto industry seems to want to make the Consumer Financial Protection Bureau the main villain in this story. Musk even posted "Delete CFPB."
- This is despite the fact that the CFPB is more opposed to debanking than any other regulator, and its director says that he's fighting banks who want to hold onto their "right to debank."
What's next: Expect a rapid resuscitation of the proposed rule requiring that debanking decisions be made on a case-by-case basis rather than being based on membership of a category or class of customers.
- That rule was finalized by the Office of the Comptroller of the Currency at the tail end of the last Trump administration, but never went into effect.
- It was designed to support businesses in the firearms and fossil-fuel industries, but would equally apply to crypto.
- It was opposed not only by banks who would see their costs spiral as a result, but also by Democrats including Maxine Waters, who was then chair of the House Committee on Financial Services.
The bottom line: Scandalous episodes of debanking have occurred in the past, notably in the "Operation Choke Point" debacle of 2012.
- The latest allegations surrounding debanking in the crypto industry aren't close to that level — but they're likely to have significant political clout all the same.
