The government often does not directly enact laws to prohibit cryptocurrencies, but instead "surrounds" the industry through the financial system.
Written by: Aiying
With the rapid development of the cryptocurrency industry, the phenomenon of "debanking" in the Web3 world has increasingly drawn attention. This phenomenon showcases the confrontation between the traditional financial system and the cryptocurrency industry, as evidenced by the failure of Meta's stablecoin project Diem, the obstacles faced by Custodia Bank, and the numerous instances of crypto companies being "cut off" from banking services, all highlighting the traditional financial system's strong rejection of the crypto industry. This rejection not only reflects policy contradictions but also represents a game of competing forces. Over the years, Aiying has witnessed various obstacles faced by companies in obtaining financial services, including account closures and the lack of payment services. This article mainly explores some deeper reasons behind this.
1. The Hidden Mechanisms of Debanking
"Debanking" is not merely about banks closing individual companies' accounts; it often implies complex political and financial considerations behind the scenes. The Diem project by Meta is a typical case. According to former head David Marcus, despite Diem being fully compliant with regulatory requirements in 2021 and planning a small-scale launch, U.S. Treasury Secretary Janet Yellen bluntly told Federal Reserve Chairman Jerome Powell that approving the project would be tantamount to "political suicide." This is undoubtedly a brutal suppression of technological innovation by political forces, and this pressure directly affected the Federal Reserve and the banking system, forcing them to sever ties with the Diem project.
The Diem project was originally intended to enable faster and cheaper global payments through blockchain technology, but due to government pressure, banks withdrew their support, ultimately preventing the project from being realized. Such indirect suppression means that the cryptocurrency industry, when facing regulation, is no longer merely a matter of "compliance," but rather a matter of "survival." The closure of bank accounts and the withdrawal of service permissions have left many companies and individuals unable to access financial services normally, a phenomenon particularly evident in "Debanking 2.0."
Custodia Bank's CEO Caitlin Long also revealed that Custodia Bank has been trying to provide legitimate banking services for the cryptocurrency industry, but its bank license application has been repeatedly delayed or denied. Custodia Bank even faced pressure from the Federal Reserve to terminate its services related to cryptocurrencies. Long 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 crypto industry, forcing many companies into distress.
2. The Erosion of Freedom: The Suppression of Basic Rights in the Crypto Industry
Another challenge posed by debanking is the infringement of basic rights. The cryptocurrency world has always touted decentralization and freedom, and debanking directly undermines the foundation of this freedom. Ripple's CTO David Schwartz pointed out that this targeted debanking behavior not only harms industry development but also erodes fundamental constitutional rights, including due process, freedom of speech, and the right to be free from unreasonable searches and seizures.
Schwartz elaborated on how the government indirectly achieves the suppression of specific industries by pressuring banks and other financial institutions. He noted that the government often does not directly enact laws to prohibit cryptocurrencies but instead "surrounds" the industry through the financial system. Banks are pressured to stop cooperating with crypto companies, forcing these companies to operate normally. This behavior is essentially an interference with market freedom and represents the government's evasion of due process through third parties.
This phenomenon is not an isolated case in the entire cryptocurrency industry. Sam Kazemian, founder of Frax Finance, stated that in December 2022, his account at JPMorgan Chase was closed, with no clear reason given, but it was evidently related to his involvement in cryptocurrency business. Coinbase co-founder and CEO Brian Armstrong also sought to obtain government records related to "Operation Choke Point 2.0" through the Freedom of Information Act (FOIA), attempting to expose the true motives behind this suppression.
3. The Early "Choke Point" Operations Continue
The phenomenon of "debanking" did not arise out of nowhere; its roots can be traced back to the U.S. government's early "Operation Choke Point." According to Aiying, the government targeted financial institutions and payment processors because they were seen as "bottlenecks" or "choke points" in fraudulent activities. By applying pressure on these key nodes, the government aimed to cut off illegal merchants' access 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 numerous lawsuits and federal investigations, even drawing severe criticism in 2018 from former Oklahoma Governor Frank Keating, who described it as more of a "purge of ideological adversaries." Although in 2017, the Trump administration officially announced the termination of "Operation Choke Point," and the FDIC promised to limit its personnel's authority to terminate accounts, many believe that the government's control and intervention in banking services have not truly ended.
Today, the informal term "Operation Choke Point 2.0" is used by critics to describe the U.S. government's suppression of the cryptocurrency industry, as the crypto industry is considered high-risk and controversial. While there is no formal "Operation Choke Point 2.0" plan, coordinated actions by multiple regulatory agencies, including the Department of Justice (DOJ), the Federal Deposit Insurance Corporation (FDIC), the Office of the Comptroller of the Currency (OCC), the Financial Crimes Enforcement Network (FinCEN), and the Securities and Exchange Commission (SEC), seem to make it increasingly difficult for the cryptocurrency industry to access banking services.
For example, the collapses of Signature Bank and Silicon Valley Bank (SVB) in 2023 have been viewed as suffering from particular regulatory pressure due to their connections to the cryptocurrency industry.
For instance, the SEC sued Ripple Labs in 2020, claiming that its issued XRP tokens were unregistered securities; in 2023, the SEC sued Binance and Coinbase, accusing them of violating securities laws. The existence of these cases has led to "Operation Choke Point 2.0" being seen as a systematic suppression tactic aimed at limiting the cryptocurrency industry's financial access and curbing the development of decentralized technologies.
4. Banking Crisis and Regulatory Bias
"Debanking" has not ended with the termination of "Operation Choke Point"; rather, it 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 had been serving crypto clients since 2013, saw its stock price plummet due to its association with Meta's stablecoin project Diem, the volatility of the crypto market, and the collapse of its client FTX. Meanwhile, pressure from U.S. Senators Elizabeth Warren, Roger Marshall, and John Kennedy further exacerbated the bank's predicament, as they demanded Silvergate disclose its financial relationship with FTX, leading to greater regulatory risks for the bank.
Just two days later, the California Department of Financial Protection and Innovation took over Silicon Valley Bank (SVB), marking one of the second-largest bank failures in U.S. history. The collapse of SVB was directly related to the decline in market value of its long-held securities and large-scale withdrawals by customers. On March 12, Signature Bank was also closed by the New York State Department of Financial Services due to massive customer withdrawals and placed under FDIC receivership. Signature Bank had 30% of its deposits from the cryptocurrency industry, and its cash accounted for only 5% of total assets, far below the industry average, making it very vulnerable during the bank run triggered by SVB's issues.
Although the U.S. Treasury, the Federal Reserve, and the FDIC described the actions taken to seize SVB and Signature Bank as measures to "protect the U.S. economy and enhance public confidence in the banking system," many, including Signature Bank board member Barney Frank, believe that these actions demonstrate the government's bias against the cryptocurrency industry. Frank stated, "We became a typical case because this failure was not based on fundamental bankruptcy." Subsequently, the FDIC announced that Flagstar Bank would take over Signature Bank's cash deposits but excluded any business related to digital assets. This decision was criticized by the Wall Street Journal editorial board as a clear bias, confirming Frank's suspicions of unfair treatment against the crypto industry.
5. Trump’s Return to the White House: The Worst Period of Relations May Be Over
Despite the escalating phenomenon of debanking, Marc Andreessen revealed in a podcast that over 30 tech founders have been "cut off" by banks in the past four years, and these crypto entrepreneurs have not chosen to suffer in silence but have bravely come forward to share their stories. Custodia Bank's Caitlin Long also made it clear that her company is in litigation with the Federal Reserve and plans to hold oral arguments in January next year. This legal confrontation is undoubtedly an important step for crypto companies in their fight for legitimate space to survive.
Jered Kenna, founder of Tradehill, shared his experience of being denied service by banks. Kenna stated that he once had a lengthy list of banks that refused to provide services due to his involvement in cryptocurrency, including some internationally renowned banks such as HSBC, Bank of America, JPMorgan Chase, Citibank, and Wells Fargo. He emphasized that this "debanking" phenomenon almost covers all mainstream financial institutions.
Jesse Powell, the founder of Kraken, also revealed that Kraken faced years of being without banking services in the U.S., and the only bank willing to provide services later terminated the partnership due to government pressure. The experiences of these founders reveal how the government uses the banking system to exert systemic pressure on the cryptocurrency industry, achieving the goal of "debanking." However, all of this is in the past. Recently, after Trump was confirmed as the new president, we can see major cryptocurrency companies, as mentioned above, applying public pressure on the Federal Reserve and the entire banking system. We can also observe that many previously controversial lawsuits are now beginning to clear up. For example: The Legal Boundaries of Smart Contracts: The Tornado Cash Ruling Reshapes the Legitimacy Framework of Web3 Privacy Tools and Decentralized Protocols and Apocalypse: Court Rules Lido DAO as a Partnership: Legal Challenges and Compliance Pathways for Web3 Decentralized Governance. The entire legal boundary is moving from ambiguity to clarity, and similarly, the current situation of banks' unclear refusals to provide banking services to crypto institutions should improve in the future.
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