Crypto firm's debanking story reaches the Senate
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Anchorage Digital, a crypto-bank that got debanked, testified before a Senate committee Wednesday on behalf of its industry, one that claims it has had an unfairly hard time holding onto financial services in recent years.
Why it matters: Perceived widespread debanking — the term for when a bank denies or closes specific customer accounts for any number of often unexplained risks — has spurred accusations from the crypto world of a targeted government crackdown on the industry since early in 2023.
Friction point: "Under the Biden administration, we've seen the rise of what many are calling Operation Chokepoint 2.0, where federal regulators exploited their power, pressuring banks to cut off services to individuals and businesses," Senate Banking Committee chairman Tim Scott (R.-SC) said in the hearing's opening remarks.
- The hearing by the banking committee, titled "Investigating the Real Impacts of Debanking in America," covered more than crypto, though the industry's complaints were front and center.
Debanked bank
Nathan McCauley, the CEO of Anchorage Digital, a crypto-bank chartered with the OCC since 2021, testified to the committee on his company's experience with debanking.
- For 2.5 years, he said, they enjoyed a positive relationship with their bank. "We were a highly-regulated, well-capitalized, well-run business — in many ways the ideal bank client," he said in his testimony.
- Then on one day in June 2023, they were told their account would be closed in thirty days because the bank was "not comfortable with our crypto clients' transactions."
- "They refused to engage in further discussions, provide any additional explanation, or offer any chance to appeal the decision," McCauley said.
Subsequently, Anchorage sought services from roughly 40 other banks and were refused by all of them, McCauley said. Some of them told Anchorage that they had a no-crypto client policy.
- McCauley pinned this sudden mood shift on regulators. "In my view, the nail in the coffin was the joint statement from the Fed, FDIC and the OCC in January 2023," he said.
Zoom out: That statement, which was made publicly by the three major regulators, detailed "key risks" tied to digital assets that banks should be aware of.
- And though it said banking organizations "are neither prohibited nor discouraged from providing banking services to customers of any specific class or type," it made clear that it would "closely monitor" and carefully review any banks with "crypto-asset-related exposures."
- Meanwhile, The FDIC released hundreds of pages of new documents in advance of the hearing relating to an order it sent in 2022, telling supervised banks to send information on any plans to offer crypto-related services.
- Across hundreds of pages, it's hard to find a consistent message from the FDIC staff to banks, other than continually needing to see more information and to consider issues for longer.
McCauley doesn't believe the source of the pushback Anchorage received was coming from banks.
- "Many of the big banks were actually in active conversation with Anchorage," he said during the Q&A "Which makes it so clear that this was not something that they wanted to do."
The intrigue: Democrats focused their hearing time on individuals losing access to accounts over things like overdrafts, but mainly they wanted to talk about DOGE looking into the Treasury.
- During her questions to the witnesses, however, Sen. Elizabeth Warren (D-MA) told McCauley that she didn't believe Anchorage should have been denied services.
"Reputational risk"
Reputational risk is a concept that emerged in banking supervision in the '90s, testified Stephen Gannon, an attorney at Davis Wright Tremaine who has previously served at several major banks.
- In 1996, he told the committee, it was added to the system bank examiners use to rate the soundness of banks, but had the unintended consequence of giving examiners a lot of subjective latitude.
"The concept of reputational risk is not consistently clear or based on objective indicia," Gannon said Wednesday. "In short, regulators can find reputational risk almost wherever they choose to look. It was ripe for use in a program of debanking."
- "The need to consider reputational risk is real and it is important," testified Aaron Klein, a senior fellow from the Brookings Institution. "It is possible that it is abused, and you need to have guardrails on it."
Meanwhile, Sen. Andy Kim (D.-NJ) connected the issues of reputational risk, copious and expensive suspicious activity reports and the CheX Systems that are often used to deny banking to consumers.
- "That sense of transparency is missing as well as that lack of ability to appeal. It just seems like something systematically I think this committee can hopefully dive in deeper on," he said, before yielding his time.
What's next: The House Financial Services committee was holding its own hearing on this same topic later Wednesday.
Editor's note: This article was updated with additional information on testimony from Aaron Klein, a senior fellow from the Brookings Institution.
