Original Title: 《Debanking (and Debunking?)》

Original Author: Patrick McKenzie, Stripe Advisor

Original Translation: Ismay, BlockBeats

Recently, renowned venture capitalist Marc Andreessen sparked discussions about "debanking" during a podcast he co-hosted with co-founder Ben Horowitz, as well as during his appearance on the Joe Rogan podcast. Their venture capital firm a16z also released a briefing specifically exploring this topic.

Related Reading: 《In-depth Dialogue with a16z Co-founder: The Dark Side of U.S. Financial Regulation and the Truth About Debanking》

The core argument of the briefing is: "Debanking can thus be used as a tool or weapon, systematically employed by specific political actors/institutions to target private individuals or industries without due process. Imagine if the government decided who could or could not use electricity solely based on someone's political stance or some arbitrary reason—without explanation, notification, or the opportunity to appeal. This is what is happening with debanking."

If this is your first time reading this column, I would like to introduce that it primarily discusses compliance issues at the intersection of the financial system and technology companies. This is one of the core topics I focus on, and I have some unique personal insights on it.

"If someone is really targeting you, it's not a conspiracy theory." This statement partially reflects my view, but only partially. I believe there is some confusion currently: one is what private actors are doing, the second is what state actors are factually or legally requiring them to do, and the third is which specific countries and political actors are manipulating behind the scenes. These factors together form a complex system that is not entirely isolated from one another.

Some disclaimers:

I previously worked at Stripe and am currently an advisor to the company. Stripe is not a bank, but many regulated financial institutions face similar considerations. I do not speak on behalf of Stripe here, and Stripe may not necessarily agree with the views I express in my personal space.

Recent discussions about "debanking" have focused (even overly focused, as detailed below) on cryptocurrency. I am known to be skeptical of cryptocurrency. However, opinion does not equate to being a warrior; facts are facts. In this discussion, sometimes the facts support cryptocurrency advocates, in which case I will broadly cite sources. And when the facts do not support, I will also actively cite numerous sources.

The discussion about "debanking" originates from a project that evidently has political motives. Additionally, in democratic societies, public policy issues are often closely related to politics, and the ballot box is the ultimate safeguard against government abuse of power. While I do not have a specific stance on this issue and strive to remain neutral in my professional field, to alleviate the concerns of cryptocurrency supporters: I am absolutely not a hidden Warrenite.

Closing Bank Accounts

"Debanking" describes a series of actions.

The most notable action is the involuntary closure of customers' bank accounts, often accounts that have been established for many years, sometimes without any reason given. Since "debanking" is a term with advocacy connotations, this concept is often confused with the refusal to open accounts for someone or some business.

The impact of these two situations on individuals or businesses and our moral intuitions is entirely different, akin to the difference between divorce and being rejected for a date.

Advocates typically approach from the user's perspective, emphasizing the impact of debanking on individuals or businesses. They then confuse this with regulatory decisions regarding bank regulation, which are ostensibly unrelated to the direct impact on users, a topic we will discuss later regarding bank regulation.

The industry does not refer to it as "debanking," partly due to the common euphemisms used in business, and partly because the industry does not always agree with the assumptions advocates have about how the world should operate, and they worry that the term "debanking" may imply these assumptions.

Therefore, when discussing this issue with colleagues, terms such as "offboarding," "derisking," or "closing customer accounts" may be used.

Decisions regarding debanking typically imply—but the actual situation is rare—that this is not a unilateral decision by a single financial institution. Highly correlated "independent" decisions among some financial institutions may deprive a business or individual of access to banking services. We will explore some exaggerated collaborative mechanisms and some related mechanisms that have not been fully understood.

Why We Hear About "Debanking"

We hear discussions about "debanking" because it sometimes affects socially prominent wealthy entrepreneurs and their companies. Those affected typically have dense social networks and are associated with some excellent communicators who have platforms (to use contemporary terminology). It is important to clarify that this is not a typical characteristic of "debanking" victims.

The vast majority of people whose accounts are forcibly closed by banks are usually due to credit risk or operational cost reasons. For example, if you repeatedly overdraft your account and appear unable to pay the corresponding fees, you are likely to lose that account, and all other accounts at that institution may also be affected.

Do you know any elderly relatives? They may feel overwhelmed due to issues related to aging, may have been scammed a few times, or may occasionally lose their temper with customer service representatives? The impact of "debanking" on them may be much greater than they currently realize.

Decisions to debank individuals often ripple through the entities they control, and vice versa. This impact may also quickly extend to accounts within the same household, regardless of whether the account holders are nominally the same (to non-professionals, this can be understood as "the name registered on the account"; but in banking, this is not entirely accurate). Banks typically consider accounts within the same household to likely be under common control, regardless of how documentation, account holders, or politically influential subcultures define it. In this regard, the moral perspective of the banking industry is closer to traditional middle-class values rather than those of coastal elite groups.

However, sometimes accounts are closed because certain activities exceed the bank's risk tolerance or contradict its compliance stance. I have personally been "debanked" twice, both times for this reason.

Two Stories About Being "Debanked" by Banks

Once, I had a checking account in the U.S. One day, the bank called me and asked why my account received an average of two ACH transfers daily. I explained that I operated a sole proprietorship selling software online. These ACH transfers came from my two payment service providers, who would pay me my sales revenue every business day after deducting fees. The bank listened to my explanation and said that the business sounded legitimate. However, they then informed me that I had 30 days to move the business-related funds to another bank, or they would close all my accounts.

"Why would the bank 'debunk' customers like this?" Generally speaking, ordinary consumers' checking accounts are among the lowest risk types of services provided by banks and would not typically be a focus for bank examiners. Since these accounts involve issues of accessibility to basic financial services, they are prioritized for support by both banks and regulators. Therefore, the monitoring investment by banks in consumer checking accounts is usually low, based on their risk analysis conclusions. And regulators typically do not raise objections after reviewing these analyses and decisions.

However, at that time, the personal banking division of that bank did not offer services for small businesses. Many banks have such services, but this bank did not. Therefore, it lacked the policies and procedures necessary to support small business banking. When they discovered that I was using their services as a sole proprietorship, although they deemed my actions harmless, they still felt unable to support such a business. The reason was not that they disliked my business, but because they had not established the necessary infrastructure to support any form of business account.

Next, we will delve into a more complex small business case than you might imagine to further illustrate this issue.

At another institution, I once logged into my U.S. individual retirement account from a Japanese IP address. I had done this multiple times before, but the last time it raised an issue. The bank's affiliated institution made a brief call to confirm that I indeed lived in Japan, then notified me that the account would be immediately restricted and subsequently closed. I needed to arrange a request to transfer the stocks in the account to a new (U.S.) brokerage account or authorize them to sell the stocks and send me a check.

"Why would the bank 'debunk' customers like this?" This was likely due to the implementation of a procedure to ensure that the affiliated securities company of the institution did not operate beyond the scope of its broker-dealer license. The institution was well aware that they had not obtained any permission from Japanese regulators.

When these things happen, it is indeed frustrating. At the time, I did not understand the reasons for these situations. Dealing with these issues forced me to take time away from my daily life, work, and business to make more phone calls, learn more about the financial industry, and ultimately open new accounts.

This is also the typical ending of a "debunked by the bank" story—"In the end, I opened a new account."

Banking Experiences of Immigrant Communities and Small Software Businesses

Immigrant communities often compile lists of which banks are more willing to work with them, and the same goes for those engaged in online small software businesses. Therefore, although immigrants and small software businesses face far more friction in banking than ordinary Americans working for Google or universities, they actually have a high likelihood of being "banked."

Now, consider those cryptocurrency entrepreneurs who have received millions of dollars in investments. It is possible to hold both views: (a) the life experiences within this group are diverse; (b) but on average, they still belong to the advantaged class across most common social dimensions. Despite having these significant social advantages, there is ample evidence that these businesses and their founders frequently encounter bank "debunking."

I have a deep understanding of this, largely because they touch on a risk factor: compared to other legitimate businesses of similar scale and professionalism, they are more pronounced in this regard. At certain times and places, this issue has even led to cryptocurrency companies being nearly unable to obtain banking services—provided that the banks know what they are dealing with. This situation also directly affects the banks' decisions regarding cryptocurrency founders and employees.

Closing Bank Accounts Due to Anti-Money Laundering Risks

I have extensively written about KYC (Know Your Customer) and AML (Anti-Money Laundering), so I will not elaborate further here. Banks have a series of obligations under regulation, one of which is to establish anti-money laundering policies, including policies for identifying high-risk activities. Banks must strictly adhere to these policies. Overcommitting is acceptable, but underperforming is not; once a bank commits to a regulatory agency to take a certain action (such as X), failing to implement that action may lead to fines and other penalties, even if the regulatory agency did not explicitly require the implementation of that specific measure.

Before discussing cryptocurrency, let’s first look at anti-money laundering risks and their impact on Money Services Businesses (MSB).

Operating a Money Services Business (MSB) is considered a high-risk activity in the internal anti-money laundering (AML) policies of almost all banks. To explain the reasons in detail, we need to trace the entire history and purpose of anti-money laundering. For now, please accept the fact that all banks have a similar list of high-risk activities, and MSBs are always on these lists.

Some banks have established what is known as "Enhanced Due Diligence" (EDD) programs to provide services to MSBs. Others do not; if a bank's customer indicates that they are an MSB, or if transaction monitoring reveals that a customer may be such a business (for example, if there are bank transfers from Western Union amounting to tens of thousands of dollars, this may alert analysts that the customer is a Western Union agent and that the transaction amount exceeds the minimum threshold), the bank typically sends a notification letter to that customer.

Whether they successfully execute the decision announced in the notification letter, and whether the decision itself can be implemented, may vary, but in intent, they hope to arrive at a consistent decision in similar situations.

Such notification letters are unlikely to candidly explain what has happened and why. The letter may not mention that the customer is an MSB, nor will it explain why the bank believes the customer falls into that category. The letter will not reference the bank's internal AML policies, which list MSBs as high-risk activities, but may vaguely mention risks with a few templated phrases. Similarly, the letter will not explain that the bank has decided not to invest in establishing a compliant EDD program for strategic reasons, thus making it unable to serve MSB customers.

The letter will simply state that the bank will close the customer's account.

It may describe this as a "business decision" by the bank, using those two words. Such a decision is often framed as a final decision. However, this may not actually be a true final decision, but rather an initial negotiating position akin to "we don't discuss salary." If the customer does not contest this, the bank achieves its goal. The core implication of this phrasing is: "We probabilistically believe that engaging in dialogue with the typical recipient of such notification letters is a negative expected return."

So, why are banks reluctant to discuss related matters with the typical recipient of the notification letter? Because typical MSB customers are often small grocery stores that also provide alternative financial services.

You might think it absurd that the government cares about MSBs that are clearly just side businesses for local grocery stores. I won't comment on whether this prioritization is absurd, but I suggest you browse the enforcement action records of the Financial Crimes Enforcement Network (FINCEN) against unregistered MSBs. These cases are just a small sample of actual enforcement actions, and these samples are chosen by FINCEN. A discerning person would understand that FINCEN's purpose in selecting these samples is not to embarrass itself or the entire AML system, as these systems ensure that FINCEN employees still have jobs tomorrow.

To give you a sense of the reality, I will fictionalize some names to describe real cases that have been both prosecuted and publicized by FINCEN as a warning: for example, "Bob Smith, operating 'Bob's Quick Stop'," "Taro Snack Shop Ltd.," "Affordable Mobile Store Ltd.," "Ben Goldberg, operating 'Jewish Foods.'"

FINCEN has published the full text of each settlement agreement, usually including statements of the alleged violations. In these documents (not all, but many), if you fully believe FINCEN's narrative, you might conclude: yes, this is indeed just a grocery store. The Financial Crimes Enforcement Network held the owner accountable because they did not have written AML or Know Your Customer (KYC) policies, and the temporary employees in the store had not received AML training while the owner was abroad. After winning the case, FINCEN fined them $10,000. Thus, a fair reader might assume that this grocery store is not a front for a Colombian drug cartel, Hamas, or some foreign intelligence agency.

Through these concrete facts, we can understand FINCEN's almost absurd enforcement interest in "criminal behavior that sells both money orders and laundry detergent and delicious sandwiches." Therefore, when banks take FINCEN's requirements in this regard seriously, their actions may seem almost insane to many. Banks hire specialized teams to ensure they can filter out "illegal grocery stores" from ordinary grocery stores, to avoid FINCEN questioning: "Why are you transferring funds for an illegal grocery store?! How many times have we told you! Beware of illegal grocery stores!"

The costs of running EDD processes and ongoing monitoring are very high. However, the profits from providing banking services to a grocery store are very low. Therefore, most banks will not provide services to grocery stores that also operate MSBs, even though they harbor no malice toward the grocery store or its owner. This situation will not change due to the grocery store owner's protests, even if he claims to be a legitimate operator, believes that this cessation of service violates the "American spirit," or feels that the bank is discriminating against him because he is an immigrant. This dialogue has already been had by banks with thousands of grocery store owners, and they do not want to go through it again.

Some MSBs are fintech companies. These companies have a group of professionals who are extremely sensitive to financial regulation. They deliberately choose banks that can provide services to certain MSBs and engage in a cumbersome and customized dialogue with the banks to reach agreements on risk tolerance and mutually agreed compliance procedures.

In recent years, many fintech companies have been "debanked" by banks, but they are usually not hearing this news for the first time through a paper letter. Their internal teams responsible for banking affairs may have heard about this situation long ago from the fintech teams they interface with. Even if they ultimately receive this letter, they usually have a rough understanding of why they received it and do not take the surface wording of the letter at face value.

"Class" is an interconnected system composed of culture, established behavior patterns, and the associated advantages and disadvantages. As part of the culture of the American Professional Managerial Class (PMC), its members' attitudes toward "truth" can sometimes confuse outsiders. Especially those PMC members who work professionally in banking tend to view "termination of service letters" as a ritualistic item rather than something to be taken literally and seriously.

Ordinary people often feel confused and anxious when they receive a "termination of service letter." Most people who receive such letters lack sufficient expertise in the financial system to understand what has happened. Many feel (perhaps reasonably) angry at the bank's apparent unwillingness to provide clear answers. If they finally manage to extract some answers from the bank, those answers may sound like nonsense, or even be contradictory and changeable.

In such cases, supporters often believe that banks lack basic humanity, care for customers, or simple business competence. I would tell them that these views are not the crux of the problem. As described in "Seeing like a Bank," these phenomena are more driven by systemic issues rather than mere malice, indifference, or incompetence.

However, account terminations driven by AML have more specific characteristics than general "debanking," and this situation is always a confusing and unpleasant experience for most customers.

Some customers receive this letter because their account was flagged as suspicious due to a transaction, and the bank reviewed it. This is usually because an automated system triggered an alert for that transaction. The so-called "alert" is mostly a false positive, but banks must establish and adhere to a set of procedures to filter these alerts. This procedure typically is: "Simplify the alert content into a tweet-length summary and send it to an analyst for review." Each bank needs at least one person responsible for alert screening, while the largest banks may require thousands of employees to be involved.

So, what if an analyst, based on their training, experience, data provided by the alert system, and accessible account history, determines that a transaction indeed has certain anomalies? At this point, they need to write a specially formatted memorandum.

This memorandum is called a Suspicious Activity Report (SAR). The bank submits it through an analyst's operation from one computer to another computer at the U.S. Department of the Treasury's Financial Crimes Enforcement Network (FINCEN). After submission, the analyst continues to process new alerts.

For FINCEN, handling violations by small shops is just a side job; receiving SARs is its main responsibility.

An SAR is not a criminal conviction, nor is it even a criminal accusation. It is merely an internal memorandum documenting unusual circumstances, typically two to three pages long. Each year, banks submit about 4 million SARs (some non-bank entities are also required to submit, but since no one is currently complaining about casinos being cleared, this can be overlooked. Banks remain the primary submitters of SARs). For example, about 10% of SARs fall into the category of "transactions lacking apparent economic, business, or legal purpose." FINCEN has about 300 employees, so it is impossible for them to read the vast majority of these memoranda. They are primarily responsible for maintaining a system that stores these memoranda in a database searchable by multiple law enforcement agencies. The vast majority of SARs are effectively in a "written but not read" state.

Banks are very aware that most SARs have low signal value, and even good customers may inadvertently be recorded. However, within the set thresholds and risk tolerance levels, SARs can sometimes lead banks to "mechanically" decide that they may not want to continue retaining this "hot potato." Such actions may carry certain risks and will certainly incur high costs. In many institutions, for individual accounts, if a customer's account is submitted for SAR a second time, the institution will have serious doubts about whether to continue working with that customer, but typically will not invest too much time in deeply considering the answer.

So, can banks directly explain to customers that preparing a Suspicious Activity Report (SAR) requires a significant amount of employee time, and that continuing to serve a customer who ultimately proves to be a money launderer could lead to fines in the billions of dollars? No, they cannot.

Typically, individuals mentioned in SARs often have lower social experiences and cannot engage in meaningful communication with compliance officers because they are likely to be socially marginalized. Have you ever particularly focused on a certain disadvantage? Immigrants, lack of financial background, limited English proficiency, small business owners, socioeconomic status, etc.? Any of these factors could increase the likelihood of being submitted for an SAR due to unintentional actions. Moreover, many individuals submitted for SARs are simultaneously disadvantaged in multiple aspects.

Banks cannot explain why an SAR leads to account closures because disclosing the existence of an SAR is illegal (U.S. Federal Regulation 12 CFR 21.11(k)). Yes, under U.S. law, a non-judicial entity that holds a memorandum written by a non-intelligence analyst cannot only not describe the "non-accusation" made by that memorandum, but cannot even confirm or deny the existence of that memorandum. This is not a James Bond movie, nor an absurd comedy about security agencies, nor a right-wing conspiracy theory. This is the real state of the law.

If you work at a regulated financial institution in the United States or any allied country, within a few days of starting your job, you will be required to understand SARs (Suspicious Activity Reports) and the broader AML (Anti-Money Laundering) confidentiality requirements, and you will be explicitly instructed to comply strictly. Failure to comply may result in penalties for your employer, and you personally may face private sanctions from your employer (including termination) and even potential criminal prosecution. If your trainer has a British accent, they may refer to such violations as "tipping off."

Not only is it illegal to disclose SARs to customers, but compliance departments also strongly oppose the formation of any information flow within the bank that would allow most employees who interact directly with customers (such as call center representatives or branch customer managers) to know about the existence of SARs. This is to prevent them from potentially providing targeted answers when faced with customer questions, such as "Why is my account being closed?" Therefore, this is one of the situations where institutions intentionally choose to "blind themselves" from the bank's perspective. Shortly after the decision to close an account is made, the bank typically cannot specifically know why your account was closed.

Many people find this practice reminiscent of a Kafkaesque scenario (I do too!). However, this has been a long-standing banking practice in the United States and its allies. This practice stems from laws passed by elected representatives, not from a political tool developed arbitrarily in recent years. (We will discuss the latter later.)

Venture capital in the cryptocurrency investment space is not operated by low-level operators like corner convenience stores. They are very aware that in many institutions, cryptocurrencies are classified as high-risk categories. They hope this is not the case.

Their views on high-risk lists (such as those related to fintech companies in their portfolios) are complex and nuanced. For example, they would (accurately) point out that a high-risk list compiled by a company closely related to their social network did not appear out of thin air. Certain entries were imposed on them by financial partners. Their financial partners may occasionally express a sense of helplessness in casual conversations at bars. Similarly perplexing is that their regulators often express similar sentiments.

Of course, this is limited to certain entries. We will explore these mechanisms in detail later.

Closure of Founders' Personal Accounts, Not Company Accounts

Some founders in the cryptocurrency space may not have a deep understanding of the financial industry in the early stages. This is not a judgment of their character. No one is born knowing everything, and most people rarely engage seriously with this topic, even in school, work, or through extensive reading, unless it is closely related to their profession at some point.

Perhaps a founder might ask a friend, "I run a legitimate cryptocurrency business, but suddenly my personal account has been closed. Why is that? I haven't done anything wrong."

From a probabilistic analysis: the bank believes there is an unacceptable risk that you might be using your personal account to launder money for the company (or its clients, etc.). The bank's controls are insufficient for them to have enough confidence that you are not doing so. They do not want to verify this at a painful cost, so they suggest you seek another bank.

Why would they think you might be laundering money on behalf of the company?

Part of the reason is that there are numerous historical cases of cryptocurrency companies laundering money through founders' and employees' accounts, and the banking industry generally believes that businesses and their owners often mix funds. This view is based on substantial evidence.

Tether has maintained contact with the banking system in various ways, including allowing executives to open accounts in their personal names, depositing funds under lawyers' names, and using non-executive employees as "money movers." SBF (Sam Bankman-Fried) is indeed talented, and one of his main "specialties" is money laundering. One of his core methods is to provide loans to employees (mostly customer assets, and many are fake loans) and then falsely claim to banks and other institutions that these employees are engaged in independent transactions unrelated to FTX, Alameda, etc.

If someone is interested in cryptocurrency companies but knows nothing about this history, they are either a complete novice or lack curiosity. However, banks are not newly established; a dismissive attitude toward certain "interests" is extremely unwelcome.

Assumption of Presumption of Innocence by Business Entities

However, the criticism from supporters does have some merit: the fifteen years of chaos in the cryptocurrency space should not lead institutions to stereotype this impression onto an innocent cryptocurrency project founder. Supporters argue that banks should only take action to terminate services after investigating and finding the following: a) there is concrete evidence of a problem; b) there is a clear and describable risk; c) that risk is something society genuinely cares about.

This partly stems from a philosophical notion: they believe they deserve individualized attention and treatment of "presumption of innocence." This assumption is deeply rooted in our legal system.

But this assumption has not taken root in our banking system.

If applied to credit accounts, this idea seems almost absurd: "I have never defaulted on your loans, so you must trust me and approve this loan." No one would seriously expect a bank to do this. The operational logic of banks is not based on presumption of innocence but on constructing probabilistic models based on observed factors to predict who is more likely to repay a loan. Of course, certain legally prohibited factors will be excluded. If we believe your likelihood of repaying a loan is insufficient, even if that likelihood is still relatively high, we will not approve the loan. In the financial system, standards are not like high school, where a 92% no longer equates to an "A-." Banks do not need to wait for you to default, have specific suspicions about you, or conduct time-consuming factual investigations.

Discrimination based on race and other factors in lending is prohibited. Why? Because there is a strong consensus among the American public that they want this to be a reality, and thus their representatives have passed a series of related laws. These laws are quite mature and uncontroversial. At the same time, young data scientists will quickly learn that even if a customer's postal code is somewhat relevant, it cannot be used as an assessment factor. This is because postal codes are likely to become effective proxy variables for race, leading to indirect discrimination. (As a side note: this is also why California chooses to use postal codes when hoping to prioritize certain racial patients for critical medical resources, mainly for political reasons.)

However, using someone's occupation or business ownership as a loan assessment criterion is not prohibited. This information is highly relevant, and there are regulations that explicitly require banks to obtain this information. (Anti-money laundering regulations require banks to inquire about the source of funds when opening accounts with transaction capabilities for customers, usually including wages and/or business income, and then banks need to further understand "… what job the wages come from?")

So, is there a well-established appeals mechanism or higher authority that can handle cases of being denied banking services? Does our moral intuition demand that such a mechanism exists?

Many titles that include "capitalist" will tell you that if a capital allocator rejects your proposal, there is indeed a higher authority to "appeal" to, and that is Mr. Market. This capital allocator has competitors, and you can pitch your project to others. Are there certain projects that no capital allocator is willing to fund? Certainly. This is also one of the important reasons we hire capital allocators: they help us avoid wasting resources that society expects to support things like teacher pensions on ineffective uses.

Therefore, capital allocators will tell you: if you cannot find any capital allocator willing to support you, even though you believe you have a good business plan that requires capital support to implement, it indicates that your business plan is not good enough, and you should change direction and do something else.

I have yet to meet a venture capitalist who believes that the decision to reject a project requires scrutiny from some "higher authority" above their partners. Many will not even routinely tell entrepreneurs why they rejected a proposal because doing so offers no benefit. A rejection is not an opportunity for the founder to exercise persuasion. The meeting itself is the opportunity for persuasion, and the meeting has already concluded.

However, banks are clearly not venture capital firms. In some ways, the nature of banks is not entirely different from that of infrastructure providers, and utility companies are often used as a comparison. For example, why do we build a society that requires electric companies to make investment decisions to supply electricity on their own? (Those who are surprised by this may be even more surprised when they delve into negotiations for power purchase agreements.)

In addition to providing infrastructure, banks are also deeply involved in capital allocation. Some departments of banks may resemble the public's impression of electric companies, while others may be closer to the public's perception of venture capital firms. Some departments may be a mix of both intuitions, leading to confusion.

You might be surprised that a seemingly ordinary deposit account is both an infrastructure and a capital allocation decision.

First, a typical deposit account in the United States is actually a credit product. This characteristic is its inherent nature and cannot be eliminated; otherwise, it would not achieve its purpose.

Second:

Providing banking services to legitimate, reputable cryptocurrency businesses is a high-risk job

For banks, the sources of credit risk extend far beyond the simple scenario of loan defaults. Financial institutions may face credit losses when providing banking services to a business, even without establishing the "credit relationship" that most non-professionals believe is necessary. This is particularly common when providing services to financial service providers.

Here is a specific example:

Suppose a cryptocurrency trading platform suddenly collapses, an extreme event that has about a 20% probability of occurring during the operational years of all trading platforms. Then, the last financial institution that provided banking services to it may "take the blame."

Take Voyager Digital as an example. This is a regulated, publicly traded institution with an experienced leadership team, a compliance department, a certain degree of written risk management processes, and backing from legitimate supporters, including well-known venture capital firms.

However, Voyager still collapsed because the above conditions were not sufficient to prevent a business from failing.

When they went bust, their bank (Metropolitan Commercial Bank) received a series of ACH payment reversal requests. Customers (generally speaking, this is entirely reasonable) felt that they had sent money to purchase cryptocurrency but had not received the cryptocurrency, which looked very much like fraud, so they complained to their bank (the customers' bank).

However, Metropolitan Commercial Bank described these complaints as fraudulent behavior. Indeed, there were certain customers who profited by falsely accusing the cryptocurrency trading platform of fraud, for example, by claiming they had not received cryptocurrency after paying for it and then applying for a refund while keeping the cryptocurrency. However, the customers that Metropolitan Commercial Bank attempted to refuse payment to actually felt that they had neither money nor cryptocurrency. These customers were simply exchanging money for claims in a bankruptcy asset liquidation.

It is said that cryptocurrency is a product widely adopted across various socioeconomic classes. Do you think a random passerby would confidently and quickly answer the question, "Explain what a claim in a bankruptcy asset liquidation is?" I think they might be more confident in answering another question, such as, "Have you ever tried to purchase a claim in a bankruptcy asset liquidation?"

If someone calls their bank and says, "I opened an app on my phone to try to buy something, but I didn't get it. Those bastards took my money," what happens? Typically, the bank's customer service representative will quickly record some brief notes in a web application and then press a button. At this point, the customer service representative will try to appear very helpful—but their performance levels vary widely. Their hourly wage is about $15, and the training they receive is far less than that of a local court judge. They will not conduct a real investigation or carefully weigh the facts and circumstances. They are likely completely unaware of the notorious bankruptcies in the crypto industry, as these events make up a minuscule portion of all the complaints that enter their call queue. A customer didn't receive something from an online merchant? Press the button, read the script to the customer, then hang up and immediately take the next call.

After a few steps, this button will mechanically cause Metropolitan Bank to refund some money to the now dissatisfied customers of Voyager. However (the key point is), this money is not actually to be distributed by Voyager, as it is in bankruptcy. So from whose balance sheet is this money deducted? The answer is: Metropolitan Bank's. Its shareholders fulfill the "sacred duty" of equity—bearing credit losses to protect depositors.

If you provide banking services to a rapidly growing financial services company that has a large volume of funds flowing daily and charges a small fee per transaction and/or earns net interest from deposits, then at a certain point in time T, the total amount of risk capital (within the window for refunds or transaction reversals) may far exceed all service revenue collected from time point 0 to T. A rough estimation formula is: (number of relevant refunds/dispute window days) × (average daily transaction volume) × (dispute rate). (This dispute rate can range from low to high, often between a few percentage points to several dozen percentage points, depending on many factors, including the maturity of the customer base and whether guidelines on banking consumer rights are widely disseminated among customers.)

Therefore, banks are very cautious in choosing which financial services companies to serve. Because if just one goes bust, it could drag down the entire related business line.

Ultimately, Voyager and Metropolitan Bank petitioned the court to modify the rules of the ACH agreement in their favor. Subsequently, bank technology experts told the court that the ACH agreement is maintained as decentralized computer code and thus is not under the jurisdiction of any court. Wait, that sentence came from my unpublished cyberpunk novel and accidentally slipped into this article; please ignore it. No serious person would say that a court cannot intervene in software or its developers. The court ordered an upgrade to the agreement. This court order, like many court orders, was quickly executed by professionals from several companies.

Metropolitan Bank was, of course, sued due to the chaos surrounding Voyager. A major focus of the lawsuit was that Voyager implied to customers that their funds were protected by the Federal Deposit Insurance Corporation (FDIC), thus making deposits safe. Voyager's CEO claimed this was a sales strategy suggestion made by Metropolitan Bank's management. Meanwhile, Voyager's marketing department issued blatantly false statements about FDIC insurance, claiming: "[FDIC insurance] means that in the rare event of a loss of funds at the company or our banking partner, your dollar funds will be fully compensated (up to $250,000)."

Marketing departments often misunderstand these nuances, which is why in well-functioning fintech companies, the legal department would never allow the marketing department to write anything about FDIC insurance without review. The two most fatal words in the above statement are "the company": FDIC insurance does not and has never guaranteed the debts of uninsured customers in the banking system. It only provides protection for the debts of insured financial institutions. (If Metropolitan Bank were to fail, Voyager's customers might seek compensation from FDIC insurance, but the problem is that Metropolitan Bank has not failed.)

Therefore, the FDIC has never paid a single penny to Voyager's customers and will never do so. The FDIC has neither the obligation nor the legal authority to do so.

The FDIC is institutionally opposed to inducing customers to transact through false claims of FDIC insurance. As one of the banking regulators, one of the FDIC's main responsibilities is to manage the deposit insurance fund. We will discuss the FDIC's responsibilities in detail later. However, it is first necessary to clarify that the FDIC is responsible for the deposit insurance fund. The historical pattern of false promises made by the cryptocurrency industry that FDIC would cover customer losses due to its own failures is one of the reasons the FDIC maintains a cautious stance toward the cryptocurrency industry.

Subsequently, Metropolitan Bank ceased its cryptocurrency banking operations. Around the same time, several banks with significant or nascent cryptocurrency businesses also exited the cryptocurrency banking space.

So, does Metropolitan Bank have the right to do this? Absolutely, without a doubt.

Do they also have the ability to choose not to exit the cryptocurrency banking business? There are indeed some external factors exerting pressure, which Metropolitan Bank acknowledges, although these factors may not have played a decisive role in their decision-making. In fact, the cryptocurrency business they initially ventured into ultimately brought them significant problems, and the outcome may have been inevitable, even without these external pressures; internally, someone would likely be held accountable.

Metropolitan Bank described its decision to exit as influenced by commercial and regulatory considerations, but this decision was not sudden; it had been brewing for a long time. Their statement reads:

"Today we announce our exit from the cryptocurrency-related asset space, marking the final completion of a transformation process that began in 2017. At that time, we decided to pivot to other businesses and no longer expand our cryptocurrency-related operations."

Suppose you are a cryptocurrency advocate within a mid-sized American bank. When you submit a related proposal to management, the regulatory environment will undoubtedly make the reception of the proposal seem lukewarm. Another important reason is that management can read the news—other banks that accepted and approved similar proposals have experienced massive losses, months of negative news coverage, and will be under close scrutiny from regulators for at least the next year. All of this occurs while the related business has generated almost no revenue. Why would management agree to say, "As long as the customers are high-quality cryptocurrency companies, and as long as you can be meticulous in the details, this looks like a low-risk business. Let's get some Shiba Inu coins, bro!"

In any case, when cryptocurrency entrepreneurs in 2011 couldn't find banks, it could still be attributed to the inherent conservatism and lower technological understanding of the banking industry. However, cryptocurrency has now had 15 years of development, and the industry's performance has enough historical record to be evaluated. Today, cryptocurrency is being scrutinized and judged based on that record.

Some supporters argue that such evaluations are unfair. They would say that indeed, there were some "cowboy" behaviors in the early days, but that was just the cost of innovation. Those mavericks and geeks are always at the forefront of technology, and perhaps they don't always heed lawyers' advice. But the early stage is basically over. What we bring now is something new. We are compliance-first responsible professionals, fully committed to working with partners in finance and government to eliminate all doubts. We have impeccable backgrounds, speak appropriately, and maintain a professional tone. We can also hire lobbyists, make political donations, and devise carefully designed media strategies!

Some chill comes from the shadow of SBF

There has been extensive reporting on Sam Bankman-Fried (SBF) and his accomplices and supporters, yet the significance of this story has not been fully understood or comprehensively revealed.

SBF and others orchestrated a gradual privilege escalation attack on the American system through profound insights into how power operates in the U.S. They used trusted institutions as a springboard, transferring the weight of each domino to the next target; the complete narrative of this political strategy could fill a book. Just the confiscation allegations alone fill 26 pages of printed paper, with each targeted politician described in just one or two lines, and the U.S. even accused him of attempting to "buy" the entire Bahamas.

SBF and most of his accomplices primarily focused on the Democratic sphere, while his agent Ryan Salame was responsible for delivering benefits to the Republican camp. Salame's lawyer employed a unique legal strategy in his sentencing memorandum (page 11), explicitly denying any good faith purpose: "Regardless of the topics discussed at meetings, Ryan's ultimate goal was always to influence cryptocurrency policy, including meeting with government officials such as Senator Mitch McConnell and then-Representative Kevin McCarthy, and focusing on pandemic response issues."

Due to treaty commitments with the Bahamas, SBF was not charged with some bribery offenses. See Article 3 of the extradition treaty. (I fully believe this is a complex factor, but I do not think it is an insurmountable hard constraint.) This part is mentioned in the plea agreements of several accomplices, most of whom received lighter sentences for cooperating with the government. Salame, however, refused to cooperate and was sentenced to 90 months in prison. SBF's parents seem unlikely to face charges, despite their active involvement in criminal activities and their knowledge of the illegal nature of those activities. They not only provided extensive professional advice, but that advice was directly related to their fields of expertise. For example, SBF's mother—a Stanford law professor and Democratic fundraiser—suggested he use colleagues as "straw donors" to circumvent the potential damage to image from mandatory disclosure laws. While I am not a Stanford law professor, it is clear that this behavior is illegal.

SBF was once considered the successor to George Soros, becoming a new generation of Democratic standard-bearers in Washington with substantial financial backing. Since 2022, the cryptocurrency industry has felt the so-called "performative outrage" from the Democrats, one significant reason being their attempt to show that cryptocurrencies have not successfully "bought" them.

Whether in Washington or in the cryptocurrency industry, many seem to have selective memory—selectively forgetting the meetings they attended in 2020 and 2021, the deals they signed, the calls they made, and the catered food they enjoyed.

But before criticizing others, one should examine their own issues: SBF gives me the impression of being extremely intelligent, highly cynical, yet candid in his motivations. I believe he may be one of the most capable operators in the cryptocurrency industry. (Please do not take this as high praise.) Additionally, at the time, I also thought he was Tether's "errand boy" and privately told people, "Don't get too close; he has a 5% chance of going to prison."

In hindsight, I overestimated his capabilities in several key areas, completely overlooking the fact of his large-scale fraud, largely stemming from a strong sense of kinship. For those who remind us of ourselves or our close friends, we can develop a Jupiter-sized blind spot, which seems to be human nature.

Regardless, Tether's most important "errand boy" at the moment is Howard Lutnik, though he may step back from this role as he currently leads Trump's transition team, setting his sights on bigger targets. In contrast, MicroStrategy's high implied volatility is hardly worth mentioning. If there is a "century deal," it might be Lutnik's convertible bond arbitrage.

Some cryptocurrency supporters believe it is unfair to tarnish the entire industry with SBF's scandal, whether for internal industry reasons ("He is centralized finance, not true DeFi, and he tried to force us to follow his lead! Let him go!") or political reasons ("This is not our camp's issue! Salame? Never heard of him!").

We face a contradiction once again: on one hand, democratic systems should be prudently judged based on individual performance, rejecting collective punishment; on the other hand, the political system should not be as forgetful as a squirrel.

"Choke Point Action"

Once, there was a series of breathtakingly unethical decisions. This was not an isolated incident completed in a smoke-filled back room, but rather something that started small, gradually spread, was then covered up, and ultimately the truth surfaced, receiving severe and justified condemnation.

Some extremely disreputable industries frequently and intensively utilize the banking system while also generating a large number of customer complaints. The debt collection industry is one of them.

To be frank, I have spent years advocating for consumers who encounter problems in debt collection (and banking) on a pro bono basis. I have described the debt collection industry as "one of the most despicable cesspools in America." Additionally, I categorize some of the underlying predators in the consumer credit space as "debt collection," otherwise the list would be endless, including payday loan companies, so-called "credit repair" agencies, and telemarketing companies related to debt.

When banking regulators receive customer complaints (some savvy customers, such as those who follow the advice of advocates like me, will complain through regulatory agencies, as this route is often more effective than directly contacting customer service), they warn banks that debt collection agencies exhibit a very high risk ratio in unauthorized ACH transfer claims. Of course, customers claiming these transfers are unauthorized are not always completely honest. However, debt collection agencies do often deliberately exploit people's common understanding of how the banking system operates to achieve their goals. For more on this, refer to previous articles for in-depth understanding.

Now, banks serving debt collection agencies can calculate how many of the ACH payments they process have been complained about. One might think that these banks may lack awareness of the unusually high complaint structure in the debt collection industry, which is one reason for the "banking perspective on the world." Furthermore, it can be reasonably argued that regulators have the right to inform banks of information they may not be aware of. This sounds reasonable and falls within the reasonable scope of public service personnel's duties.

Banks willing to open accounts for debt collection agencies (note that not all banks will do this!) are accepting of such business. Although the debt collection industry is not noble, it is legal and regulated in the U.S. And banks are not comprehensive monitoring institutions for their clients' compliance with various legal obligations.

But why not just let banks enforce it, given that resolving issues through legislatures and courts is slow and expensive? We have long allowed them to operate similarly to private intelligence agencies! What’s wrong with them taking on some responsibilities of a private consumer protection bureau?

The Obama administration also disliked debt collection agencies, for reasons very similar to mine. Therefore, they expanded the scope of criticism: compared to the (known, acceptable, controllable, and certainly not life-threatening) risks of ACH reversals, the risks posed by providing banking services to bad actors are broader. These customer complaints could damage the bank's reputation in the community, leading to, for example, a loss of customer deposits. This could put the bank in a precarious position, which is a perfectly normal reason. If a certain risk could jeopardize the bank, then naturally the Federal Deposit Insurance Corporation (FDIC) should weigh in.

To eliminate this danger, debt collection agencies must be kicked out.

But to get the FDIC to accept this view, a very talented group of people needs to lobby and persuade.

The Department of Justice has a very proud legal theory. The Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) of 1989 gives the DOJ the power to pursue any fraud affecting federally insured financial institutions (and many other crimes). FIRREA was passed after the savings and loan crisis to protect small financial institutions from risk, thereby preventing a similar crisis from occurring again.

Your common sense might lead you to think, "Oh, Congress probably wants to crack down on fraud against banks, like fraud large enough to threaten a small community financial institution? I can understand that a massive fraudulent bank loan could put a small bank in crisis. If you check the historical record, there were indeed some serious fraudulent bank loans during the savings and loan crisis. Okay, so we are federalizing the prosecution of fraudulent banks? Sounds reasonable."

If you have such an intuition, then clearly you are not creative enough to become a lawyer in the Obama administration's DOJ. Their idea is that if you provide a "channel" that facilitates fraudulent behavior, such as opening a bank account for a fraudster, then you have impacted a financial institution (yourself). Therefore, the DOJ can hold you accountable for "self-harm." Note that this does not require you to actually lose money; oh no, the DOJ can also hold you accountable for making your regulatory agency rate you lower. When you settle with the DOJ, it will require you to sign a legally binding commitment to stop your "self-harming" behavior and cease providing banking services to specific industries, such as payday loan companies.

I know this sounds unlikely. Here is a direct quote from a report by the DOJ Office of Professional Responsibility (expanded abbreviation), which elaborates on their conclusions regarding the immunity of DOJ lawyers' conduct on page 16:

"As detailed below, the [Consumer Protection Division] relied on the 'self-impact' theory and other liability theories in three cases arising from the 'Choke Point Action' initiative."

When the DOJ or the FDIC instructs a bank to do something or strongly recommends that a bank take a certain action, things usually do not end there. You can certainly negotiate and even resist to some extent.

This is a long-term, iterative game, with both sides having limited resources and extremely complex preferences. Both sides are constantly picking their battles, with compromises and concessions. When your opponent is satisfied with you, your emails get quicker responses, your requests are more easily approved, and you can report everything is going smoothly to your superiors. Ultimately, both banks and regulators are made up of people who have emotions, career paths to plan, and annual performance evaluations to complete.

In reality, banks do not make much money from serving debt collection agencies. The banking culture typically views the debt collection culture as unrefined, undignified, and low-status. Therefore, banks often choose to comply. In the termination letters sent to debt collection agencies, many banks appear particularly candid compared to typical letters of this kind: "This is not your fault, and we sincerely apologize, but due to regulatory guidance we have received regarding your industry, we no longer wish to continue providing services to this industry."

It turns out that the Obama administration had diverse policy preferences.

For example, the government does not particularly support firearms.

Gun sellers do not use banking services in the same way debt collection agencies do. They do not regularly facilitate "gun-for-cash" transactions through deceptive means. They do not have a strong demand for the Automated Clearing House (ACH) withdrawal function (with 99% confidence based on industry knowledge), nor do they have a particularly high transaction dispute rate (with 95% confidence based on the same industry knowledge).

However, regulators found that simply mentioning "reputational risk" can label any unpopular industry as high risk, and this goes largely unchallenged. They believe that providing banking services to gun sellers poses high risks: haven't you seen the news? School shootings. Do you want any association with that? Accepting business from gun sellers could jeopardize your reputation, thereby affecting the stability of your deposit base, which in turn threatens the safety of your bank and insurance fund.

At a congressional hearing, the FDIC stated that they did not require any banks to stop providing services to certain unpopular industries.

"What we do is publish guidance as clearly as possible, stating openly that as long as banks have appropriate risk mitigation measures, we will not prohibit or prevent them from doing business with any parties they wish to work with."

Surprisingly, some may think they are indeed stating facts here. Because "explain to me why payday loan companies are not on the high-risk list," "have you established a robust Enhanced Due Diligence (EDD) plan for the deposit risks posed by payday loan companies?" and "are you sure you should accept this kind of business?"—these phrases, whether viewed individually or as a set of talking points, can align with such statements. (These are not direct quotes but rather a summary of the dialogue phase, and I believe this fairly reflects the real conversations that are heavily documented.)

The FDIC Office of Inspector General attempted to shift the entire responsibility for the "Choke Point Action" onto the DOJ.

The report states: "We found no evidence that the FDIC used a high-risk list to target financial institutions. However, certain types of merchants mentioned in the summer 2011 edition of the FDIC Supervisory Insights magazine and related regulatory guidance did lead some bank executives we interviewed to feel that the FDIC was discouraging institutions from doing business with these merchants. This feeling was particularly strong when it involved payday loan companies."

When regulators issue position papers indicating they hope you will take certain actions and reiterate this in individual regulatory guidance, the authors typically do not believe that these policy directions are randomly generated and posted online by a group of monkeys banging on keyboards.

As is often the case, those regulatory officials instructing banks to stop providing services to target industries ignored Stringer Bell's advice—do not leave a paper trail in a criminal conspiracy. However, emails sent internally within the FDIC and DOJ are routinely archived, and banks (of course) will retain correspondence from regulators. The content of these emails is unavoidable, and it is highly damaging.

For example, the U.S. Department of Justice wrote in its internal document "Six-Month Status Report on the 'Choke Point Action'" (excerpted in a congressional report):

"Due to significant questions regarding the legitimacy of the internet payday loan business model and its reliance on consumer bank account lending, many banks have decided to stop processing transactions supporting internet payday loan companies. We view this as an important achievement and a positive change for consumers… While we recognize that this may lead banks to decide to stop working with legitimate lending institutions, we do not believe this decision should alter our investigative plans."

Not once, not twice, not a few times, and certainly not by some rogue inspectors acting independently. Three regional directors from the six regional offices of the Federal Deposit Insurance Corporation (FDIC) indicated to the Office of Inspector General (OIG) that they understood Washington's intent to suppress the payday loan business, with two explicitly stating that they expected, as the OIG described, institutions supporting payday loans to "develop exit strategies."

Does this require a top-down direct order? In fact, even without a top-down directive, similar actions from local offices can drive a nationwide agenda. The homogeneity of culture, combined with grassroots employees' alignment with a policy direction, is often sufficient to bring about such results. We have rich experience in this in the technology and finance sectors, which we will discuss later.

There is a beautiful term in Japanese, "忖度" (sontaku), used to describe the diligent subordinate's attitude and actions taken to align with their superior's intentions without explicit instructions. Sontaku is a core skill in the American professional class. Those who possess this ability are sometimes described as "proactive," "highly autonomous," "bold," "initiating," "acting like the boss," and so on. If you work in compliance and are not constantly "sontaku-ing" for regulators, you are a terrible compliance professional. If you are a regional director at the FDIC and are not constantly "sontaku-ing" for Washington, you are equally incompetent.

But the "Choke Point Action" itself is indeed official policy. If it were not, then a complex entity like the United States could never be described as having had even a single official policy.

As the former chairman of the FDIC wrote in a Wall Street Journal editorial:

"The internal documents from the Department of Justice released by the House Oversight and Government Reform Committee clearly show that the DOJ preferred to use the 'Choke Point Action' to force banks to abandon certain clients rather than directly prosecute illegal or fraudulent enterprises, as it is simpler, quicker, and requires fewer resources."

The "Choke Point Action" targets not only debt collection agencies, gun sellers, and payday loan companies. The FDIC's enumerated list contains 30 items, ranging from those that are obviously harmful and illegal (such as fraud) to "constructing a narrative that providing banking services to this industry is challenging" (such as the pornography industry) to "various things we don't like" (such as racism and… fireworks? Really?).

When the "Choke Point Action" was exposed, the media and Congress were in an uproar because its actions were both arbitrary and lawless. (Here, I use "lawless" in the sense understood by ordinary Americans, not the professional definition of DOJ lawyers—who might be displeased to be called "lawless" because they have three court cases and a 25-year-old regulation that clearly explains their support for everything they do in the memos.)

The designers of the "Choke Point Action" have always insisted that the initiative was not intended to achieve its obvious goals and denied that it produced obvious consequences.

These agencies were subsequently directly accused of lacking candor with Congress. If you tell a member of Congress that his interpretation of the Wall Street Journal is incorrect, while in reality your superiors are celebrating among themselves because the Wall Street Journal accurately reported their important work, Congress will obviously not be pleased. They will then show you copies of your superiors' emails, which they can obtain through subpoenas because they are Congress. (Refer to the "House Oversight Committee Report," ibid., page 10)

Some academic literature expresses sympathy for the regulators' perspective. (However, more literature does not.)

If you wish to understand this from a "steelman" perspective, this is probably the best version you can find. This viewpoint acknowledges the DOJ's efforts to combat fraud by creatively interpreting the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) and targeting third-party payment processors and banks, while accusing the financial industry of sensationalizing the issue for commercial interests and attempting to mitigate controversy through limited disclosures of the "high-risk list." Additionally, this argument claims that the gun industry merely exploited this media frenzy for political purposes, despite the lack of specific enforcement actions against it.

My perspective? I would look at the emails. The content of the emails is what it is, even if acknowledging this might cost a civil servant their job. I have also read post-event analyses (including analyses from years ago; this kind of thing is my hobby, which later became my work). I believe these analyses are largely written to save face by civil servants who feel ashamed that their colleagues might lose their jobs and pensions due to the execution of government policy preferences.

Sometimes, people in politics do lie. Sometimes, justice is not served. I know this may shock you; please try to digest this impact.

The "Choke Point Action" has almost been forgotten, except by those obsessed with banking affairs.

Until…

The so-called "Choke Point 2.0"

Nic Carter is a cryptocurrency venture capitalist and podcast host who occasionally shares some influential insights. Recently, he has been firmly attempting to label a series of cryptocurrency-related regulatory activities as "Choke Point 2.0." This branding effort aims to link these activities to politically motivated illegal actions, thereby undermining their legitimacy. This claim has gradually gained popularity among cryptocurrency supporters.

Unlike the original "Choke Point Action" (which was actually a centrally directed initiative with written project plans, status meetings, ongoing progress reports, and a code name determined by participants—looking back, they should have communicated with their PR department to choose a less off-putting name to describe their initiative), "Choke Point 2.0" stretches like taffy, attempting to encompass all recent regulatory activities that cryptocurrency supporters are dissatisfied with. Therefore, we need to review a complex and diverse history to fairly understand these supporters' perspectives.

Carter has produced a wealth of related content on this topic, one of which is "Did the Government Trigger a Global Financial Crisis to Destroy Cryptocurrency?"

As for the question in the title, the answer is: no. We triggered a financial crisis, which has so far fortunately remained contained within a smaller scope, and this crisis is primarily an unintended side effect of interest rate hikes to curb inflation.

Silvergate: A Bank for Cryptocurrency That Once Was, Now Is Not, Nostalgia for Better Times

Cryptocurrency supporters have specific and widespread concerns about a small subset of banking regulations closely related to their interests. They link these concerns to the narrative of "debanking."

Although they lack attention and in-depth understanding of the procedural history of the specific cases mentioned, some supporters have attempted original reporting. This is commendable.

As we have discussed, almost all banks view cryptocurrency-related business as high risk and choose to steer clear. However, a small number of banks have actively engaged in cryptocurrency business. These banks claimed to the public and regulators that they had the enhanced due diligence (EDD) necessary to handle these businesses compliantly. This is extremely important for the cryptocurrency industry for two reasons: one is obvious (almost every business needs a bank account), and the other is less apparent.

Cryptocurrency often touts the superiority of decentralization, but centralized systems are actually more efficient than decentralized ones. When using bank payment networks, transferring funds outside of regular banking hours is very difficult (the normal operating time of bank payment systems is about "five nines"). This increases the risk for businesses and becomes a continuous cost of capital.

The cryptocurrency market trades 24/7, and cryptocurrency companies want to settle transactions at any time, especially those involving stablecoins and the dollars backing them. The solution in the crypto industry is to centralize business with the same bank—that's Silvergate. I once described it as "the first national bank of cryptocurrency" during its IPO, which surprised me.

Silvergate's once-key product SEN: A nostalgic key infrastructure for the cryptocurrency industry

Silvergate offered a special product called the Silvergate Exchange Network (SEN). SEN can be seen as both a dull but critical infrastructure and extremely important for the cryptocurrency industry. Today, crypto companies have a deep nostalgia for SEN.

In short, SEN allows Silvergate customers to conduct nearly round-the-clock book transfers, quickly moving dollar balances from one account to another. This enables them to continuously settle the dollar portions of cryptocurrency transactions with each other.

This is particularly important for stablecoin issuers, such as Circle, which issues USDC. Circle's USDC custodian bank is primarily SVB (Silicon Valley Bank). Circle wants to be able to issue hundreds of millions of USDC to market makers like DRW and Alameda Research at any time or convert USDC into cash in a similar manner—this process typically takes no more than a few minutes.

In the fintech sector, a common but not excessive phenomenon is that fintech companies collaborate with multiple banks and delineate clear functional divisions. For example, one bank may agree to handle a fintech company's customer-facing high-frequency low-balance transaction activities, while another bank may be responsible for managing low-frequency high-balance deposit activities. These two types of business represent entirely different business models for banks! They involve different risks, different comparative advantages, and different revenue opportunities.

If your business meets both of the following criteria: a) high daily inflow and outflow of funds, b) a desire to keep billions of dollars within the regulated banking system, then you very much need to find a partner that is acceptable on both fronts.

As a fintech company, the argument you present to the bank responsible for deposit business is: the other partner bank is also a qualified financial institution regulated by the U.S., with good compliance controls such as anti-money laundering (AML) and know your customer (KYC). Therefore, when your business ends each day, the net transaction amount settled with that bank's master account via wire transfer may involve hundreds of thousands of customer transactions, with total amounts reaching hundreds of millions of dollars. Even if the deposit bank knows little about the specific transaction details of the day, it should feel reassured.

The patterns of these transactions are likely not much different from those of yesterday and tomorrow, and the bank's compliance department can rest easy because the partner institution they trust has implemented appropriate controls. Therefore, the bank managing this large sum of money would never be seen as assisting or enabling money laundering. It can rely on the monitoring and control mechanisms of the second bank, along with the compliance department of the crypto company. Additionally, both parties would establish a trust relationship through many formal contractual commitments and informal verbal or written assurances. This model does work, and serious professionals would accept such arrangements, but the integrity and operational compliance of the high-frequency trading bank are key pillars of the entire system.

Silvergate was not a well-managed institution

In reality, SEN did not have a sound risk control environment. On the contrary (as mentioned in paragraph 70), it had almost no transaction monitoring capabilities. Silvergate did purchase many standard automated monitoring software packages commonly used by banks, but due to configuration issues, this system was completely ineffective for SEN transactions.

Carter described the situation as: "The transaction monitoring system for SEN malfunctioned and went down after the upgrade."

Silvergate recognized this "downtime" at the institutional level but was powerless to resolve the issue.

I have an engineering degree, founded five software companies, and worked in the tech industry for many years. In my career, I have never referred to a problem that remained unresolved for fifteen months as a "downtime." A day's downtime can be understood, a week without a fix indicates a human capability issue, but a year without resolution reflects a strategic failure.

During this time, SEN processed over one trillion dollars in transactions. Silvergate was not unaware that the usage of SEN was on a continuous upward trend (congratulations to them!), but they turned a blind eye to the daily flow of billions of dollars, even though these transactions were completed under their banking license. We know this because of Silvergate's contemporaneous internal communications, the actual state of the technology tools they purchased and implemented, and the sworn statements submitted in litigation and to regulators. This no longer requires any rational debate.

So what does this count as? Just a harmless clerical oversight? I'm glad you asked that question.

Historically, the anti-money laundering risk of internal bank book transfers is low because such operations are difficult to achieve the purpose of "layering": the same compliance department can see the complete path of fund flows. Moreover, most such transactions typically occur between entities under the same controlling entity. The purpose of "layering" is to sever the monitoring chain of fund flows, and clearly, moving funds from the left pocket to the right pocket in front of compliance officers does not achieve this purpose. This low-risk assumption has evidently been deeply embedded in Silvergate employees' understanding of the newly upgraded monitoring suite ATMS-B.

However, while SEN transactions are implemented as internal bank book transfers, they are actually high-risk. SEN is designed to allow counterparties not under the same control to settle parts of transactions at extremely high speeds. The other part of the transaction typically occurs on the blockchain, which the bank cannot monitor. If you cannot see that part on the blockchain and cannot see this part on the bank's books, it sounds like exchanging bank deposits equivalent to cash in daily fund flows amounting to billions of dollars, without any effective anti-money laundering monitoring measures.

This is not just my opinion. Silvergate's Chief Risk Officer Kathleen Fischer once stated internally regarding the lack of SEN monitoring: "We are aware of this issue; either we have established other controls to compensate for it, or we haven't. If we haven't, we can only accept the consequences."

The fact is, Silvergate did not establish any other control measures.

Carter claims that all of the bank's clients underwent rigorous KYC (Know Your Customer) and onboarding processes. While Silvergate may have consistently executed KYC and onboarding processes, it is not unreasonable for skeptics to view this as a formalistic practice.

Silvergate provided services to multiple entities associated with Binance, which is an acknowledged criminal conspiracy heavily involved in money laundering activities. Binance and its management resemble the villains in a movie, having trampled on the law for years, evading financial regulation through jurisdictional games. Through Silvergate, Binance and its related entities completed $22 billion in transactions.

Mandatory compliance training is always tedious, and sometimes we like to make it lively with fun little games. Let's play a game of "Spot the Risk Signals."

We just received an account opening application from a company registered in Seychelles. This company is beneficially owned by a globally renowned billionaire who claims to have no fixed address. He frequently appears in negative news reports. He and his company have received multiple cease-and-desist orders from various countries, with detailed records accusing them of providing unlicensed financial services, money laundering, willful non-compliance with regulations, and lying to regulators. The company has no actual operations or employees; it is merely a shell company. Its planned funding flow model includes receiving wire funds (including international wires) from third-party counterparties that the bank has almost no direct knowledge of. The company plans to immediately transfer these deposits to third-party financial institutions so that these counterparties can purchase anonymous bearer instruments, specifically tools equivalent to cash. The company expects its transaction volume to reach billions of dollars, with individual transaction amounts potentially reaching eight figures.

Silvergate gladly opened an account for Key Vision Development Limited (mentioned on page 4), the aforementioned shell company, and allowed it to deposit and withdraw over $11 billion. Of course, it is worth mentioning that Silvergate terminated banking services for Key Vision Development Limited in 2021. The records do not specify the exact reason, but astute readers may be able to guess. However, the main entities of Binance continued to enjoy Silvergate's "thoughtful service," or more accurately, the "satisfactory neglect" of the service, until the bank's bankruptcy.

However, the main minefield that Silvergate repeatedly "stepped on" was its relationship with FTX/Alameda and its executives. They were the bank's largest clients, accounting for a significant percentage of deposits. As acknowledged by the bank and its executives, Silvergate's monitoring of these clients was almost severely negligent.

Carter quoted an unnamed Silvergate executive, whose comments were roughly consistent with the bank's previous statements to the media and regulators:

"When dealing with FTX/Alameda clients, we indeed did not exercise enough rigor. This was partly due to the bank's rapid growth… Perhaps we could have discovered that FTX was using Alameda as a deposit intermediary. In hindsight, I believe we could have pieced together these clues and identified the issues. But this is not a legal failure, and we are not obligated to discover all problems. Our compliance procedures meet legal requirements. This is indeed an area where we could have done better. But this is not intentional misconduct, nor is there collusion with bad actors."

This is consistent with their previous statements but does not warrant unlimited trust.

Ryan Salame, an expert in laundering cryptocurrency through the banking system (his lawyer describes this "skill" on page 7 and subsequent sections), tweeted that it is hard to believe Silvergate was unaware that Alameda Research and North Dimension were actually receiving the flow of customer funds from FTX. Salame has repeatedly stated that Silvergate intentionally collaborated with him to coordinate these fund flows. Even if it was not intentional, Salame's point still stands: even if FTX was entirely internally designed, and even if Salame himself controlled all operations, Silvergate could not be completely unaware of it.

But suppose you neither believe Salame nor think I understand how banks operate, or you choose to unconditionally trust the denials of bank executives, perhaps because you believe bank executives would never lie. Then, the most favorable explanation for Silvergate is that, in its years of focusing on growth while neglecting its legal responsibilities, it has repeatedly fallen below the minimum compliance capability requirements expected of a regulated financial institution in the U.S.

After the collapse of FTX, Silvergate chose to voluntarily liquidate. Here, we can give them a little credit: they largely completed the liquidation in a relatively orderly manner, rather than blowing up like Signature did. Signature had a much smaller exposure to cryptocurrency but still encountered problems. (Signature also had a similar account transfer API product called Signet, but this is a smaller part of its story.)

Carter raised several complaints regarding regulatory activities related to Silvergate Bank. One of them is that he claims the Office of the Comptroller of the Currency did not allow Silvergate to sell its SEN (Silvergate Exchange Network). I find this accusation very credible, even without conclusive evidence to support it. Silvergate operated a "money laundering machine" worth trillions of dollars, which has long raised urgent demands for corrective action, but the bank did not take proactive corrective actions, leading directly to significant consumer harm and leaving many policymakers extremely embarrassed. When the bank's Chief Risk Officer predicted "upcoming problems," these were precisely the challenges she referred to.

Carter further claims (I think this is quite original reporting and deserves praise) that the Federal Deposit Insurance Corporation (FDIC) and other banking regulators provided verbal guidance requiring banks to reduce their cryptocurrency deposit ratio to below 15% to be considered "safe and sound." If banking regulators used this language, it is not a suggestion. Carter complained that there is no legal basis supporting this arbitrary number, and this threshold effectively makes it impossible for banks to engage in cryptocurrency business and was specifically designed to target certain banks.

Some regulatory agencies are information disclosure regulators, such as the Securities and Exchange Commission (SEC). Others are prudential regulators. Prudential regulators typically translate broad legal guidance into specific requirements through rule-making processes or more informal guidance (even the FDIC refers to it as "moral suasion"). This process produces both explicit requirements and more ambiguous ranges that require ongoing negotiation between regulators and the regulated entities.

Does the FDIC have the statutory authority to set "magic numbers"? The answer is yes. In the U.S. political system, the FDIC does have such authority and can provide lengthy justifications based on relevant legal provisions. For example, the Federal Aviation Administration (FAA) has the statutory authority to set "magic numbers" for bolt torque, and the Food and Drug Administration (FDA) has the statutory authority to set "magic numbers" for the allowable flow rate of ketchup.

So, did the regulators overstep their bounds here? Clearly not! Look at the previous description of "Operation Choke Point" and the regulatory authority theory behind it. To link the banking business supporting payday loan institutions with reputational risk, bank runs, and threats to the deposit insurance fund does indeed require some "magical thinking." But viewing cryptocurrency deposits as unstable, highly correlated, and potentially triggering bank runs does not require such "magical thinking"! We have actually experienced bank runs triggered by cryptocurrency.

A reasonable viewpoint is that the issue with regulators is not the abuse of discretion, but rather a need to overcorrect in response to significant consumer harm due to past regulatory failures and/or missed opportunities. It is shocking that regulators failed to notice that Silvergate's business model had undergone a substantial change—one that was the basis of its IPO and was completely different from its past as a real estate bank with only two branches! This reasonable viewpoint has even been mentioned by the Federal Reserve. See page 2 of the "Discovery Report."

Does the 15% threshold make it nearly impossible for banks to engage in cryptocurrency business? From experience, not necessarily. Other banks have a cryptocurrency business ratio far below this threshold, which may also be the basis for choosing this number. For example, Metropolitan Bank had a peak cryptocurrency deposit ratio of about 25%, which then dropped to 6%. It convincingly demonstrated to stakeholders that its risk management was well done. It is also worth mentioning that Metropolitan Bank still exists. Therefore, regulators could reasonably state: "Okay! 6% is a 'green light,' 14% is a 'yellow light,' we don't want you to rise back to 25%, and 96% is a 'deep red alert,' don't even think about it."

You can make similar observations about many banks engaged in cryptocurrency business. Coinbase does not stuff customer money under the mattress. The cryptocurrency risk exposure of their main partner banks is… Jamie Dimon snatched the keyboard> "an indestructible balance sheet" / Dimon did not actually snatch the keyboard>.

Carter further accuses or implies (sometimes not very clearly what he specifically wants to express) that Senator Warren and/or regulators colluded with short sellers to deliberately stifle Silvergate by triggering a liquidity crisis.

He specifically mentioned a letter signed by Warren and others, which included the statement: "If additional liquidity is needed, your bank can obtain taxpayer funds through the Federal Reserve Bank of San Francisco and the Federal Home Loan Bank of San Francisco."

Carter believes this sentence was intentionally included to pressure the Federal Home Loan Bank of San Francisco to recall the prepayments. This would force Silvergate to seek liquidity under extremely difficult circumstances. After this letter was sent, Silvergate did indeed repay these prepayments and stated in its securities filings that this forced them to accelerate the sale of securities, leading to industry rumors that this was one of the reasons for their eventual decision to shut down. The Federal Home Loan Bank of San Francisco firmly denied ever pressuring them to accelerate repayment.

There is no doubt that short sellers made a fortune from Silvergate's collapse. I fully believe that short sellers did communicate with Senator Warren and regulators, and it can be further speculated that they strategically used this communication to apply pressure on the bank. Evidence supporting this claim is that they themselves claimed so and boasted about it, as if they had pinned Silvergate to the wall.

However, the main reason short sellers earned billions of dollars by shorting Silvergate is that their judgment was correct and forward-looking.

Notable short seller Marc Cohodes (who shorted Silvergate deeply) and cryptocurrency investor Ram Ahluwalia, who has a deep understanding of bank regulation, had a debate about Silvergate's situation before its collapse. I won't go through this debate word for word, but after listening to it when it was released, my impression was: "Cohodes was far ahead in this debate, although Ahluwalia had a more accurate judgment on the question of whether providing banking services to a single money launderer would jeopardize compliance procedures in the eyes of regulators." (At that time, I was actually restricted from trading bank stocks, but after listening to that podcast, I took actions that significantly impacted my career development.)

I believe some criticisms can be made against Cohodes or short sellers as a whole, but the assertion that "their logic for shorting Silvergate is fundamentally flawed and requires government intervention to profit" clearly ignores a wealth of facts. You can review what Cohodes said in that speech and assess its accuracy with the benefit of hindsight.

One judgment method I have long used, stemming from my past experience in debate competitions, is: if one side's grasp of details is impressive, and the randomly selected details stand up to scrutiny, while the other side fails to provide specific details and only pounds the table vigorously, then bet on the former.

Or, if you prefer, you can bet on their former executives. Silvergate's former Chief Technology Officer (who also served as Chief Operating Officer) is the son of the current CEO, and he has a Twitter account where he shares his views. For a bank executive, he was extremely casual in describing the content of communications with regulators.

For example, he wrote: "On the Sunday after Thanksgiving 2022, regulators took action against five banks simultaneously. Prior to this, regulators had not opposed, and Silvergate had been cooperating with them, but everything suddenly changed."

In fact, as early as April 2022, Silvergate received a "Matters Requiring Immediate Attention" (MRIA) from the Federal Reserve regarding the adequacy of its Bank Secrecy Act (BSA)/Anti-Money Laundering (AML) monitoring program. They received a similar MRIA again in November, but by then the situation was already irreparable. See paragraph 80 of the SEC's complaint document, which substantively confirms the MRIA mentioned in the testimony of "Former Employee No. 5" (a compliance officer) in this case. These MRIAs clearly state that MRIA is different from "Matters Requiring Attention" (MRA, which is different from MRIA; MRA is a formal regulatory directive requiring the regulated entity to pay close attention in its daily operations), and that MRIA is an order to "drop everything and correct immediately."

The Federal Reserve has fixed wording when issuing "Matters Requiring Immediate Attention" (MRIA) to banks (see page 3). The Federal Reserve supervises banks of various sizes and complexities, including community banks in small towns, whose board members are often local real estate developers. To ensure that these bank executives or board members lacking expertise do not overlook that MRIA is both an order and a warning and can correctly understand its significance, the fixed wording is: "The board of directors (or the executive committee of the board) must immediately…"

The SEC subsequently charged Silvergate's executives with making false statements to investors about the severity of its liquidity issues after the collapse of FTX.

Assuming we temporarily believe the Silvergate management's defense that they were still prepared to operate normally despite their largest client collapsing and deposits dropping by about 70%.

In such a situation, would a requirement from regulators stating something like "We support providing banking services to legitimate industries, but only if there is a sufficient control environment. However, you must reduce the concentration of cryptocurrency deposits to below 15%" be compatible with Silvergate's continued existence after early November 2022?

On this point, I agree with Carter and cryptocurrency supporters: any meaningful concentration limit on cryptocurrency would be incompatible with Silvergate's continued existence after early November 2022. Even a 50% concentration limit would be difficult to achieve, let alone 15%, which would be adding insult to injury.

Simple mathematical logic: for every dollar of deposit loss (in fact, after a run, you can hardly reduce the loss any further), you need to find someone willing to deposit about $5. Even if your sales pitch is deeply moving, it is nearly impossible to accomplish such a task. Silvergate had no way to quickly raise billions of dollars in deposits from non-cryptocurrency customers.

The way Silvergate attracted its existing deposits, at best, was by giving great attention to the demand from the cryptocurrency industry. It had no advantages in providing banking services to other individuals or industries, but rather many disadvantages. Due to the disclosure of relevant facts about its behavior over the past few years, Silvergate's reputation has been tarnished. From a business operation perspective, it is clearly on shaky ground.

Most deposits are attracted through the provision of conventional banking services (in this regard, Silvergate is not competitive with non-cryptocurrency customers). In the industry, this is referred to as "deposit franchises." Banks have an immediately available option when they urgently need deposits, without spending years sponsoring little league teams, participating in annual community festivals, or discussing their vacation plans over coffee. They can skip these "sweat and smiles" tasks and directly attract funds from professional financiers by offering high interest rates, who will deposit money in the bank offering the highest bid. This method is known as "deposit brokerage."

No matter what interest rates Silvergate pays to attract deposits, there will always be regional banks that can match or even exceed it. The reason is that, unlike Silvergate, many regional banks have substantial first-party loan books (and ongoing loan issuance mechanisms), and they have every reason to believe that these businesses can continue to exist, with deposits being the source of funding for these loan books (and mechanisms).

When deposit brokers conduct analysis, they will reasonably view this hypothetical alternative bank as a higher priority candidate for unconventional support (if such support becomes necessary). If a deposit broker attempts to place, for example, $200 million in a time deposit for a bank, while nearly all deposits are uninsured (thus directly exposed to bank credit risk unless unconventional government support is obtained), this will significantly affect their credit analysis of alternative banks.

It is worth noting that many cryptocurrency advocates are not interested in banking in non-cryptocurrency areas and seem unable to understand why regional banks in non-cryptocurrency sectors were heavily shorted at the end of 2022 and the beginning of 2023. I believe that for many cryptocurrency advocates, including some well-educated financial services professionals and even some professionals whose portfolios contain many financial services companies, they are not deliberately choosing to ignore background information that is unfavorable to their narrative, but rather because they genuinely do not understand how a sudden rise in interest rates would affect a bank's balance sheet. Just as many software engineers do not understand how a sudden rise in interest rates would affect their stock values. I am also willing to acknowledge that some cryptocurrency advocates may indeed understand the impact of interest rate changes on bank balance sheets but choose not to publicly disagree with industry opinion leaders.

I do not fully believe that deposit concentration limits were the direct cause of Silvergate's collapse, although I am willing to accept the persuasive nature of this viewpoint.

My basic view is that even if all government employees were forced to take leave on Thanksgiving, Silvergate might still close its doors. Its regulators had indeed completely lost confidence in it, but its customers had also lost confidence in it, largely because: a) they were well aware that they had transferred funds to Silvergate; b) they were well aware that these funds could no longer be retrieved. This is undoubtedly a very bad fact for maintaining long-term good banking customer relationships.

Furthermore, I believe that even if advocates for Silvergate may not want to admit it, a Silvergate that has survived by luck after an investigation will not be able to continue providing its customers with the products they truly want. It was once the "Shearing Point" (i.e., a natural coordination point) for the entire cryptocurrency industry, which is precisely why the Silvergate Exchange Network (SEN) was successful. However, under any possible circumstances, a Silvergate scrutinized under the regulatory microscope could not continue to retain Binance as a client. A cryptocurrency "Shearing Point" that Binance cannot access is no longer a true cryptocurrency "Shearing Point." After losing this "Shearing Point," if Silvergate is merely a bank that allows you to store $3 million in seed funding and pay salaries while developing Solidity code… such a Silvergate has no business to speak of. And at the end of 2022 and the beginning of 2023, in a situation where it held a large amount of mortgage-backed securities (MBS), such a Silvergate was destined not to be a viable business.

But let’s assume we take a step back and argue: if the government indeed intended to create conditions unfavorable for Silvergate to continue operating, and this was the direct cause of its collapse, then what?

Does this count as a violation of industry norms? Should we allow the government to shut down banks?

If you have ever worked in the financial industry, you must have participated in mandatory compliance training. Attendance is required, and there is usually a refresher course once a year. During the training, people often approach it with a bit of mockery and jokes, while your trainer will very seriously say, "Pay attention, this is important. If we mess up, regulators can do anything to us, most likely impose hefty fines, but the worst-case scenario could be the direct closure of this company. You personally could even end up in jail."

Most people in the financial industry will remember this lesson. Every year, there are a few who ignore it, and then they will experience firsthand why this training is mandatory.

Should we allow the government to shut down banks? The answer is: yes.

But reasonable people can have differing opinions on the threshold required to take such extreme measures and the procedural forms that should be followed.

If we were still in a debate team, you might ask me to concede: "The government needs to explicitly acknowledge that Silvergate was intentionally shut down." And I would counter: "That can be, but in exchange, the opposition needs to acknowledge that Silvergate, including its executives, clearly knew that Alameda and North Dimension were intentionally receiving funds from FTX customers." About fifteen minutes later, I think both sides would be somewhat dissatisfied but would have learned something beneficial from the exchange. Ultimately, both sides might reach a consensus: either Silvergate must exit the market, or without unconventional government support, Silvergate is doomed to collapse after the FTX incident.

Questions Regarding Signature Bank's Avoidance of Receivership

Carter believes that Signature Bank also faced similar targeted treatment. Part of his basis comes from the statements of the bank's board member, Barney Frank. This director insisted in media interviews during and after the bank's collapse that Signature Bank was still solvent that weekend, which experienced a bank run, and had sufficient liquidity.

Perhaps some have forgotten the context of that week. On March 8 (Wednesday), Silvergate announced its closure. On March 10 (Friday), Silicon Valley Bank (SVB) was taken over after experiencing the most severe bank run in history. And on the same day, March 10, Signature Bank experienced a $18.6 billion deposit run in just a few hours.

In this context, let’s review how Signature assessed its business situation over the weekend of March 11 and 12.

Signature struggled to provide a credible and numerically consistent story that weekend (see page 35 of the report). Quoting the post-event investigation report:

Signature needed to provide reliable and realistic data, particularly regarding immediately available liquidity and ongoing deposit withdrawal situations, to support regulators and banks in analyzing its liquidity status. However, once Signature began to provide relevant data on these critical issues, regulators found that the data was inconsistent and showed substantial changes.

Signature's executives and other relevant personnel held continuous conference calls with regulators throughout the weekend. These meetings began with regulators expressing concern over the bank run and candidly pointed out that the bank was on the brink of survival. However, from the regulators' perspective, Signature's discussions about liquidity sources, asset composition and quality, and current pending withdrawal requests were either deliberately fabricated or exhibited extremely untimely technical incompetence. At this critical moment, regulators believed Signature's performance was dangerously out of touch with reality; for example, one executive described that weekend as "nothing particularly eventful so far" (this is a direct quote).

Accusing Signature of fabricating facts is a serious allegation. Bank regulators are typically (in most cases) meticulous and serious individuals.

Again quoting the post-event investigation report:

For instance, by Sunday afternoon, Signature informed regulators that its commercial real estate portfolio would "very likely" provide nearly $6 billion in liquidity on Monday. However, regulators were well aware that the Federal Reserve Bank of New York would need weeks to complete its review and valuation of that portfolio.

Did Signature know that its commercial real estate portfolio could not become effective collateral on Monday? Clearly, they did.

To help readers unfamiliar with commercial real estate (CRE) banking understand, here is a brief explanation:

Signature's plan was to use part of its commercial real estate loan portfolio as collateral, submitting it to the New York Federal Reserve Bank on the Monday following that critical weekend. They believed the Fed would grant them a line of credit based on the portfolio's value minus a certain discount. Signature planned to immediately transfer the obtained credit line to customers requesting withdrawals, simple as that.

However, commercial real estate loans are not interchangeable and easily analyzable assets like government bonds or even mortgage-backed securities. They are complex and tailored legal agreements at best. And 2023 was by no means a "best-case scenario" for the New York commercial real estate market, as anyone who reads the news knows. Therefore, the valuation of these loans was far from a simple matter of copying the outstanding balance into Excel and doing some math. You had to read these agreements carefully, build models (if you were a direct stakeholder, you would almost certainly re-review these loans because the New York commercial real estate market was in terrible shape), derive impaired valuations, and then apply discounts.

Although Signature Bank was involved in cryptocurrency business, its lifeblood was the New York commercial real estate market. It is a bank that relies on New York real estate for its survival. The idea that they could consider their loan portfolio "very likely" to become high-quality collateral in just a few hours is simply unbelievable.

Do you know what this reminds me of? It reminds me of Sam Bankman-Fried. When he found himself in a liquidity crisis that he thought he could weather, he began frantically scribbling some indicative numbers on napkins or Google Sheets. SBF still doesn't understand why no one believes him. Just look at those napkins!

Signature, we are under no obligation to believe your "napkins," especially when the content is clearly untrue, or when these "napkins" contradict each other and change continuously within the same meeting.

For Signature's liquidity situation, the most critical question was: "How much will customers withdraw on Monday?" This is actually very simple banking business, and regulators spent the entire weekend urging them to do the following:

a) Count the amount of money customers would request to withdraw on Monday, covering the current hundreds of pending withdrawal requests;

b) Predict how this number would change in the worst-case scenario, i.e., how many new withdrawal requests might come in before Monday morning.

Here is the time series of repeatedly asking these two questions over the 48 hours (excerpted from the relevant report, page 40). Note that every few hours, Signature's latest "worst-case" prediction was already surpassed by the actual known withdrawal request amounts.

Subsequently, Signature presented a new "worst-case" prediction, and coincidentally, the gap between this prediction and the known withdrawal request amounts was almost the same as the gap in their previous "worst-case" prediction—it's as if they kept making mistakes without learning from them.

This situation repeated itself multiple times.

Signature believed it clearly understood the situation that weekend, while the above facts almost certainly prove that they did not truly understand. They also thought that the weekend's experience indicated that the worst was over.

Quoting the post-event analysis report (page 6):

During the weekend, Signature's estimates of pending deposit withdrawals continuously increased, from an estimated $2 billion on Saturday night to $4 billion on Sunday morning, and then to $7.4 billion to $7.9 billion by Sunday night. These numbers represented known deposit withdrawal amounts. Despite the run on March 10 (Friday) and negative news over the weekend, Signature still insisted that additional withdrawals on Monday would be minimal. Regulators deemed this prediction unrealistic and believed the bank needed to prepare for another significant deposit run. (Emphasis added in the original text)

Signature was convinced that it could weather the storm and emerge victorious on Monday. They even predicted that liquidity would suddenly and miraculously become abundant on the following Tuesday, Wednesday, Thursday, and Friday. Only then would the real challenge begin: they planned to double down on serving the remaining customers, start looking for buyers for their valuable assets in the coming months, and somehow turn the situation around. Because they believed they were solvent!

Signature faced severe liquidity issues, had no viable solutions, and lost the trust of regulators amid a worsening bank run. In this situation, entering receivership was almost inevitable, requiring no conspiracy theories to explain what happened.

The remainder of the post-event analysis report is equally worth reading, filled with professionalism and appeal for banking enthusiasts. Where else can you find a fascinating discussion about which capital call loans can be accepted as collateral at the Federal Reserve's emergency window?

The Cryptocurrency Industry's Strong Interest in New "Cryptified" Banking Products

In 2022, the Federal Deposit Insurance Corporation (FDIC) sent a series of letters to several banks. The process of obtaining these letters was quite convoluted, with parties such as Coinbase going to great lengths and engaging in a battle of wits to acquire some of the documents. Even the letters that have been made public are mostly heavily redacted.

A brief comment on transparency: Democratic governance requires both sufficient transparency and the allowance for the government to engage in private discussions. However, the guise of confidentiality is often used as an excuse to cover up abuses of power. For example, one might claim, "That protest was manipulated by foreign forces! But for national security reasons, I cannot disclose the basis! Therefore, you should suppress this protest for me!" (Spoiler alert: we will return to this topic later.)

In the culture of bank regulation, there is often a strong advocacy for confidentiality privileges in routine communications with banks. This is because regulatory agencies are institutionally very cautious, fearing that releasing certain signals to the market or depositors might lead them to believe that the bank has lost the trust of regulators, thereby triggering potential risks. Bank regulators are extremely fearful of "self-fulfilling prophecies."

To have candid conversations with regulated entities, much like colleagues need to communicate openly, privacy plays a facilitating role in this process. Even when these conversations involve third parties, and even if the third party is very eager to "eavesdrop," privacy still enhances the level of frankness in communication.

Therefore, I believe it is indeed necessary to find a reasonable balance in this regard. But I also sympathize with supporters of the cryptocurrency industry, whose viewpoint can be summarized as: "This is a behind-the-scenes operation aimed at doing things we don't like. You don't even admit what you're doing! And when you are finally forced to acknowledge what you've done, you might brazenly claim it's a good thing! Just like they did after Operation Choke Point!"

Conversely, when the government can issue detailed position papers or heavily annotated indictments, it should instill more confidence in the legality and non-arbitrariness of its actions. Of course, this confidence is not limitless, but at least it serves as favorable evidence.

Carter speculates that these redacted regulatory letters may relate to a new product proposed by NYDIG. This product would allow banks and credit unions to offer customers direct access to Bitcoin. You can liken it to a feature in Cash App: users can buy Bitcoin but cannot transfer it; only this feature would appear in your banking app.

I believe Carter's judgment regarding the subjects of these letters is very likely correct (90%+). Many of the letters were dated just before the FDIC issued public guidance on banks directly offering cryptocurrency products. NYDIG is the company that has made the most significant progress in this regard (source: industry consensus), which aligns with what we can read in the letters.

So, is this a shocking subversion of our democratic norms? No. Bank regulators have the authority to comment on proposed bank products, which is at the core of their work. In such cases, regulators typically say something similar to what is commonly found in the letters: "We will give this careful consideration and provide feedback, but in the meantime, please do not broadly launch this product." (Ultimately, they did conduct an assessment, and the results have been made public. Many cryptocurrency supporters are dissatisfied with these results and thus claim there are procedural irregularities.)

Does this substantively prohibit the cryptocurrency industry from providing financial services to retail users? No. Users can purchase Bitcoin exposure on numerous platforms, including Cash App, Venmo, Robinhood, Coinbase, Fidelity, Interactive Brokers, and any brokerage account that supports trading U.S. ETFs. Additionally, there are many other channels. Cryptocurrency supporters are eager to issue press releases touting how many new ways are launched each week to help users purchase tokens at very reasonable prices, preparing for the future "moonshot."

Is there a superficially reasonable justification for attempting to implement consistent policies within regulated banks that did not exist in Operation Choke Point? The answer is yes. One of the core concerns of the FDIC is to prevent customers lacking expertise from mistakenly believing that their risk assets are covered by FDIC insurance. Customers naturally assume that the offerings provided by their banking app are all FDIC protected. For those banking apps that include non-FDIC insured products (such as insurance products or associated brokerage accounts), their disclosures are typically customized and quite detailed.

Some cryptocurrency supporters may wish to occupy screen space in community banking apps. I dare say FanDuel has the same idea. But their disappointment does not equate to a so-called "threat to democracy."

Some Politicians Exerted Extra-Procedural Influence

Some readers may remember Libra, which was an (almost) global economic network that Facebook attempted to create, with its token described as a dollar stablecoin or some sort of currency basket. Libra was a joint project, with Facebook as the de facto leader and multiple industry partners involved. (Stripe—my former employer—was once a member of that alliance. I reiterate that the above statements represent my personal views and do not reflect Stripe's position.)

However, Libra never came to fruition. Shortly thereafter, Facebook abandoned the project and sold the related technology. The eventual buyer was Silvergate, which at the time believed that despite rapid growth in its core business, the management still had the bandwidth to engage in mergers and acquisitions. After all, could bank management have more important things to fill their time?

David Marcus, who was responsible for the Libra project, recently wrote that Libra was stifled due to extra-procedural influence against the alliance members. He explicitly stated that U.S. Treasury Secretary Janet Yellen had instructed Federal Reserve Chairman Jerome Powell to terminate the project. He then claimed that the Federal Reserve promptly organized conference calls with all participating banks, during which its general counsel read a pre-prepared statement at each meeting, stating: "We cannot stop you from advancing and launching this project, but we are not comfortable with it." And just like that, the project was declared over.

I have never worked in a bank, so I have never had the opportunity to quietly listen to conversations from the Federal Reserve's general counsel. However, I read. I have read many letters written by high-ranking individuals with serious attitudes throughout my life. On one occasion, I happened to read a poorly written and bluntly threatening letter directed at the recipients.

That letter was sent to all members of the Libra alliance. The main target of the letter was not Libra itself, but Facebook. Here is one representative excerpt:

"Facebook is currently struggling to deal with a series of serious issues, such as privacy violations, misinformation, election interference, discrimination, and fraud, and has yet to demonstrate the ability to control these failures. What you should be concerned about is that any weaknesses in Facebook's risk management system will become weaknesses in your system and could pose risks that you cannot effectively mitigate."

This letter was written after the "Cambridge Analytica" incident, when security agencies and New York media reinforced the view that with a copy of a social network and an advertising budget of about $180,000, it was possible to steal the victory in the U.S. presidential election. They seemed convinced that Russia had completed this concept validation.

Of course, after 2020, we learned that only the enemies of democracy would baselessly accuse the U.S. election of fraud. The rapid changes in the rules in Washington sometimes make it difficult for this poor technologist to keep up.

This letter was written in 2019, when democracy was still precariously hanging in the balance (apologies to younger readers: your associations with the word "chad" may be entirely different from those of older millennials). Therefore, the authors of the letter, Senators Brian Schatz and Sherrod Brown (the latter being a member of the Financial Services Committee), pointed out that the recipients were running a great business, and if something went wrong, it would be regrettable. And if they continued to push forward with the Libra plan, problems would clearly arise.

I realize this sounds like paranoid speculation. So, please look at this key original text:

"If you continue to advance this plan, regulators will not only conduct heightened scrutiny of Libra-related payment activities but will also conduct a comprehensive review of all your payment activities."

I do not have the right to disclose a specific payment company's interpretation of this statement, but as your friendly "neighborhood financial infrastructure commentator," I predict that any CEO in the financial industry would feel appropriately shocked and alert upon receiving such threats from two senators.

Threatening core businesses under the guise of Libra puts pressure on partners to face "reverse operational leverage." This is a concept that should be better understood in the startup and financial sectors. The "innovator's dilemma" exists not only because of innovation itself, nor solely because traditional companies become complacent and enjoy existing profits without wanting to self-erode. The real reason is that innovation may require taking risks, and once it fails, it not only destroys that small, marginalized innovation but also jeopardizes the large existing business that incubated it.

Google invented the Transformer technology—this is more remarkable than anything they have done since their search engine. But you are using ChatGPT and Claude because no Google executive was willing to risk using this group of geeks' new toy to disrupt their own search or AdWords business. This is the biggest missed opportunity in the history of capitalism, and it is entirely Google's own doing. Part of the reason is their fear of Washington's reaction, but I suspect that even the most pessimistic government relations team could not have foreseen that "two U.S. senators would explicitly threaten us to dismantle our business piece by piece before the project even entered the alpha stage."

Some say the dictionary definition of "shameless" is "to request clemency from a judge after killing one's parents because one has become an orphan." And the best "runner-up" for this definition is: threatening alliance members to leave the alliance, and then using the reduction in alliance members to threaten the entire alliance.

Quoting a congressional aide's perspective, who believes (with an attempt at fair paraphrasing) that Facebook was simply completely unprepared for the realities of politics at that time, with no wrongdoing involved:

[The extreme cold reception faced by Libra] may be due to its association with Facebook, or it may be due to the ongoing loss of alliance members (each time a member exits, it triggers coverage in the New York Times or Wall Street Journal, and every member of Congress reads those reports).

So yes, this is what naked power operation looks like. And it indeed happened. As for whether the Federal Reserve really made those calls, I do not have a strong opinion, but this claim seems to align with the content of that letter, doesn't it?

I want to say a good word for the senators who wrote this letter: they were proud enough of their work to issue a press release containing the full text of the letter at the time. Transparency cannot serve as definitive evidence of virtue, but that kind of extra-procedural threat is clearly reflected in the letter. However, in a democratic system, we should be more inclined toward transparency, more inclined to have elected officials make political decisions rather than having those who can still retain their positions, pensions, and power even in the face of serious dereliction of duty make secret decisions.

Consumer Financial Protection Bureau (CFPB)

Andreessen mentioned in an interview with Rogan that Senator Warren created the Consumer Financial Protection Bureau and claimed that the agency's authority is to execute "anything she wants to do."

…Well, I basically share the same view.

I agree with some of their substantive positions and disagree with others. But it seems more like an organization composed of a group of young, ambitious followers who deeply understand the founder's vision and are eager to implement it. I have been active in Silicon Valley circles for a long time and am familiar with this type of organization. However, I did not expect to find a similar presence in an official agency in Washington. My understanding of politics is insufficient to point out another agency in Washington that so clearly embodies the influence of its founder.

As for the intersection of the CFPB with the issue of "debanking"? It is almost negligible.

The CFPB wrote a position paper opposing "debanking." I expect that those who have a favorable view of the CFPB will use this position paper as a political or public relations shield against those who are sounding the alarm on the issue of "debanking."

However, the actual effect of this position paper can only be described in one sentence: "Add $5, enough for you to buy a cup of coffee at Starbucks." Because the content regarding "debanking" is buried beneath the issues that the CFPB truly cares about, such as taking a hard stance against large tech companies. Have you ever considered what harm Apple Pay might cause to consumers? If you care about this issue, you will be pleased to know that they have begun to address it.

Politically Motivated "Debanking" Directives Targeting Specific Individuals

There are accusations that high-level officials made decisions to "debank" individuals based on political views. There is substantial evidence that such actions have systematically occurred under formal directives from national political authorities in certain countries… such as Canada.

To briefly recap, there were several disruptive political protests in 2020 and 2021. One of them was primarily against pandemic lockdown measures, initiated by truck drivers in Canada. This protest was unusually efficient, partly because the so-called "Freedom Convoy" physically blocked roads in the capital, Ottawa, and at least one border crossing to the United States.

Blocking roads is a common protest tactic, typically used by various (mostly leftist) activists. Although this tactic is highly disruptive, its effectiveness is often questioned and can sometimes lead to penalties. In democratic countries, penalties are usually imposed through the normal operation of judicial processes. In classic legal procedures, penalties require formal specific charges, trials, and convictions, and only after these steps are completed are penalties imposed.

However, roadblocks sometimes do not face actual sanctions, as even annoying and ineffective leftist protesters have the right to express themselves. Sometimes, prosecutors prioritize protecting the rights of protesters over the rights of other members of society to free passage and economic activity.

Thus, the above describes two typical scenarios: legal penalties or no penalties. However, this situation was entirely different.

Prime Minister Trudeau's response to the protest was as if it were an urgent national crisis or state-sponsored terrorism (this notion was subtly expressed through official personnel's rhetoric at the time). He invoked the Emergencies Act, granting the government temporary and special executive powers. Subsequently, the government instructed banks and non-bank financial platforms to immediately freeze the financial accounts of anyone associated with the protest, which these platforms were deemed to have funded. Additionally, some ancillary actions were taken, such as instructing the insurance companies of truck drivers to suspend their driving insurance.

Canadian officials claimed that their actions were limited to targeting the core leaders or organizers of the protest and did not intend to punish anyone for protected political speech. However, these claims are lies.

In reality, these directives were not drafted narrowly.

An assistant deputy minister admitted in an investigation that the government was aware at the time that some account holders named for freezing had not participated in the protests but chose to ignore this to expedite execution. She further stated, quoting verbatim, "We did not intend to target these families." When a democratic government starts a sentence like this, it means that something has gone seriously out of control. Canada claimed to have frozen over 200 accounts, and this "selective operation" clearly exceeded the so-called "core leaders" or "organizers" of the protest. (To my understanding, the number of so-called core leaders in Canada is only a few hundred.)

The actual number of frozen accounts is almost certainly underestimated. If one cannot understand this mechanism, then one is not qualified to work in or regulate the financial industry.

Next is a small quiz to see if you have been paying attention during compliance training: Abel transfers $25 to Bob, ostensibly for charitable or political purposes. Later that week, Bob is explicitly identified by the government as a terrorist, and his charitable fundraising system is flagged for concern, prompting the government to instruct you to comprehensively block all of Bob's financial activities with the utmost urgency, regardless of the form. At this point, the government has not mentioned Abel's name. The question is:

a) This has no impact on your relationship with Abel;

b) This should immediately have a profound impact on your relationship with Abel;

c) I don't know.

When asked whether there were individuals affected who were not explicitly named by the government, the government's response (paraphrased) was: "I don't know." I do not know if any donors were affected. I certainly do not think anyone would understand that we intended to apply the text of the order to someone who donated $25. I do not know if anyone was actually affected by this.

I do not know if shooting someone will harm them. It might miss. But I know that compared to those who were not shot, my estimate of the severely injured status of the shot person on that day significantly increases. This is probably the reason for choosing to shoot them.

Citing a national state of emergency is merely an excuse. In a parliamentary investigation, the deputy minister stated that these protests were a "top-tier issue," quoting verbatim, because they… threatened the negotiations between the U.S. and Canada regarding electric vehicle subsidies.

Therefore, when someone says that even in democratic countries, politically motivated "debanking" targeting specific individuals can be used to impose arbitrary and capricious penalties on individuals who are unpopular due to political speech, operating through the banking system without substantial procedural remedies, I agree with their viewpoint that this is indeed a risk.

We have just witnessed it happen.

Politically Motivated "Debanking" Implemented by Companies Against Individuals

Some claim that politically motivated "debanking" is not only a risk but a routine operation in the United States.

This is not the case.

Some claim that political conservatives are routinely subjected to "debanking" in the U.S., preventing them from purchasing food and even blocking their child support payments (as occurred in Canada).

This situation has not become the norm in the United States. Some firmly believe that unarmed Black men are often shot by police. This assertion is untrue—regardless of how strongly one believes it, how important this narrative is in certain political movements, or whether people support the broader goals of these political movements. It is important to clarify that this does not mean such things have never happened.

Michael Jordan once had a brilliant quote explaining his politically neutral stance: "Republicans buy sneakers, too." Imagine living in a country where Republicans face the actual and serious risk of being "debanked" due to their political views.

Republicans are notoriously known for buying sneakers only with cash. At fundraising dinners, there are usually several large burlap bags on the elegant tablecloths. And you yourself might have had an awkward conversation at some point with at least one conservative friend, such as suggesting splitting the dinner bill via Venmo or trying to exchange investment advice, only to realize that this is a big taboo because it is well-known that conservatives are often shut out of the financial system.

But this is not the world you live in. You can easily dismiss such claims by trusting your own eyes and common sense.

There are indeed some individual abuses driven by political motives within private institutions, and some private institutions have, due to their corporate policies (sometimes unintentionally, sometimes due to preferences of internal or influential groups), structurally disadvantaged certain relatively narrow segments of the political spectrum.

In such a more limited context, people can collect some data points to construct a narrative about a larger issue. However, it is crucial to understand what the real facts are, as we hope to collectively work to prevent abuses, which requires us to understand how these abuses actually occur.

Politically Exposed Persons (PEPs)

Andreessen said in an interview with Joe Rogan:

"There is something very interesting. Under the current banking system, regardless, after all the reforms in the past 20 years, there is now a classification called 'Politically Exposed Persons' (PEP). If you are a PEP, financial regulators will require banks to kick you out, to require you to leave the bank. Banks are not allowed to provide services to you…"

Rogan interjected:

"What if you are a leftist politician?"

Andreessen replied:

"Oh, that's fine. There won't be a problem because they are not considered politically exposed persons."

I have encountered some confusions in my life, one of which is that sometimes I cannot tell whether someone is describing a situation in our reality or just chatting with friends. These confusions have led me to awkward situations multiple times over the years. Clearly, you do not want to interrupt someone who is just chatting by saying, "That's not true!" because the point of chatting is not the facts. And if someone is trying to describe reality, you also do not want to casually say, "Then a monkey flew out of my butt!" because that would not elicit laughter, only embarrassment.

Therefore, I choose not to comment on the above conversation because I have no clue. But I decided to take this opportunity to educate the internet about PEPs.

Politically Exposed Persons (PEP) is a term in the compliance field that originates from the reporting requirements of the Bank Secrecy Act (BSA). This term refers to senior officials of national governments, typically in the U.S. usage, specifically referring to officials associated with foreign governments. Quoting a passage: "Agencies do not interpret the term 'politically exposed persons' to include U.S. public officials." (Similar to many financial regulations, the U.S. intentionally extends its focus on PEPs to align with countries that share its perspective. In these countries, financial institutions are typically required to consider senior political officials, etc., as PEPs.)

The PEP status also applies to immediate family members and close associates of PEPs. What is a "close associate"? Please write down your understanding of this concept, confirm it with the regulatory agency, and adjust the affairs based on the written understanding. This approach is widely applicable in bank regulation: through careful, repeated internal policy formulation and periodic bank examinations to randomly check the implementation of these policies.

PEPs are considered to have a higher risk of money laundering. Some of them directly control national resources, while others may face risks such as bribery.

Currently, there is no official list of PEP positions recognized by regulatory agencies. Banks need to clearly define these positions in their procedures and then submit them for regulatory review. Regulators may respond, "Sounds good! Be sure to conduct enhanced due diligence (EDD) on these PEPs!" or say, "I'm not sure; this might be a bit cumbersome, but you may need to broaden the scope for PEPs."

A typical list of politically exposed persons (PEPs) might include: the president of a country, heads of state, members of national legislatures, cabinet officials, judges of the highest judicial bodies, central bank governors, and ministers at the cabinet level.

Banks can provide services to PEPs, just as they can to high-risk businesses. However, you need to conduct enhanced due diligence (EDD) on them. Certain banks, especially large monetary center banks with global operations, will dedicate specialized work to handle these issues. This is because (and this is in no way implying any wrongdoing!) private banking benefits from providing thoughtful services to wealthy and powerful individuals, which allows them to recommend you to other wealthy and powerful friends.

However, some private bankers may be tempted to offer treatment that goes beyond "thoughtful service." Regulators are very averse to this, which is why there are PEP identities and PEP screening tools.

What is a PEP screening tool? I'm glad you asked. Every day, many people open accounts. If your policies and regulators allow, you can ask every new customer, "Are you the president of a foreign country? Please answer quickly, as I have 15 similar questions to ask." However, the vast majority of new customers would think you are very foolish. Yet, banks cannot be completely ignorant. It is very likely that you do not expect a randomly selected 22-year-old employee to fully understand the details of the spouses of current members of the Polish Supreme Court (Sąd Najwyższy).

As software gradually changes the world, you can purchase relevant products from many companies that solve these problems through software. You input an identity, and the software replies, "Elected to the Japanese House of Councillors in 2022, possibly a PEP" or "Probably not a PEP."

This will help you reduce customer and employee friction across many product lines, and when bank examiners inquire about your PEP program, you can provide quick answers. Other parts of your PEP program may be very tedious. For example, you need to establish a set of procedures that stipulate when news reports or facts obtained by the bank indicate that an existing customer has become a new PEP (or that a previously overlooked PEP identity has been discovered), the account relationship needs to be reviewed, and the relevant process documented. Subsequently, you need to incorporate it into the PEP enhanced due diligence (EDD) process.

EDD for PEPs (the conclusion here) typically requires someone to write a memorandum every quarter, such as: "No anomalies this quarter. The $1.2 million incoming wire transfer came from the sale of a private residence. We commissioned an appraisal (see attachment), and based on the prices of similar properties, it seems reasonable. Ownership of the property was confirmed through a title search (see attachment), and the ownership predates the most recent election date. No other matters to note."

That’s all you need to know about PEPs.

Relative to everyone or companies, PEPs are actually quite rare globally. The only time I encountered this concept professionally was when a bank claimed that a mayor of a small European city was classified as a PEP because he was a political figure, thus requiring enhanced due diligence (EDD) to open an account. I objected on behalf of this user, but the compliance department was impatient with my attempt to "explain PEPs" to them.

The Reemergence of Politically Motivated Account Cancellations

As we mentioned earlier, when a system has a single culture and explicit or implicit policy direction, even without direct orders, it can prompt some ambitious individuals or those trying to please their superiors to take action, which indeed poses a risk.

If you are concerned about account cancellations, you should focus more on the impact of this mechanism rather than the nitty-gritty details regarding "politically exposed persons" (PEPs).

Let me shift slightly from the topic of banking to the significant impact of internet companies on our modern world.

Most people familiar with the tech industry understand that the "Trust and Safety" teams have been at the core of micro-political activities for years, some of which originate from unrelated Twitter users, while others come from within the company.

What is the mainstream political culture of the "Trust and Safety" team? To be honest, imagine gathering a group of twenty-somethings from San Francisco with college degrees, then filtering out those who can find high-paying engineering jobs or have the ability to secure funding, and finally selecting from the remaining individuals those willing to stay in a position responsible for regulating all electronically transmitted human speech for years. This is the background of the group that dominates this culture.

I believe that regardless of political leanings, a fair and rational person would understand that among the population filtered through these criteria, the proportion of those who jokingly refer to "free speech" as "freeze peach" is far higher than that of the general American population.

Members of the "Trust and Safety" team, and sometimes even the entire team structure, may engage in some small actions at different times and places. This is not the core argument regarding the relevance of account cancellations, but it is indeed a fact, and I would feel remiss not to mention it.

Without strict oversight—and senior management at companies like AppAmaGooFaceSoft (referring to large tech companies) typically does not closely monitor the decisions of low-paid operational staff unless those decisions trigger significant public relations or government relations issues—the "Trust and Safety" team often cancels accounts of individuals they politically dislike for relatively mild reasons while enthusiastically defending those they politically favor.

This is a repeated game where people gradually realize that you only need to request the "Trust and Safety" team to cancel someone's account. The product teams even developed some processes to expedite this. You can use these automated tools for "mass reporting" (for example, coordinating with friends to report a social media post en masse), create public opinion on Twitter (waiting for the company to feel brand risk), or even directly approach a member of the "Trust and Safety" team at a party with a request.

Thus, various "small actions" emerge one after another.

The situation worsens because government officials realize that by having the "Trust and Safety" team meet monthly with some "prominent figures," they can make them feel very important. Gradually, during these meetings, attendees begin to make subtle requests to the "Trust and Safety" team, such as "Isn't there someone who can solve this troublesome pastor for me?" After some time, we ultimately slid into a situation where a White House official viewed his job as "the illegal order czar." He not only entangled himself with posts on Facebook, Twitter, and other platforms but also exerted significant pressure on the overall policy level of these platforms. Although I have never met this official, I can imagine he might think of himself as a good person and very competent in his job.

We have had many government officials who believe that achieving policy intentions through "proxy killing" is more effective than through the normal operations of government. Notably, one of them was in the White House. He explicitly mentioned in writing that he pressured YouTube on behalf of the president himself to strengthen its review processes. (See page 19 for details.)

As a member of the Facebook board, Andreessen discussed various mechanisms of "tumultuous times" and the transition process of government attempts to exert explicit pressure. Interested readers can refer to his comments elsewhere, as I still want to return to the topic of banking regulation.

I have learned relevant information solely from court documents, rumors, and a very few firsthand observations. This information is sufficient for me to agree with Justice Alito's viewpoint: "If the lower courts' assessment of the extensive records is correct, this will be one of the most important free speech cases submitted to the [Supreme Court] in recent years."

The phenomenon of "Trust and Safety" being weaponized by the "disinformation" industrial/academic/non-governmental organization complex and government collaborators is a scandal. Are tech companies complicit in this? I think that description is fair. We indeed conspired for several years. Later, we found our stance again and expressed a degree of regret for some decisions made at that time in response to external demands.

A notable example of this shift is Mark Zuckerberg's statement in a letter to Congress: "I believe that pressure from the government is wrong, and I regret that we did not more vocally oppose it at the time. I also believe that we made some choices that, in hindsight and with new information, we would not make today."

So, what is the connection between the decisions of the "Trust and Safety" team in handling issues like disinformation or hate speech and account cancellations? Unfortunately, the connection between the two is much greater than people imagine.

Compliance is also a domain of single culture.

The good news is that the compliance teams in the banking and related companies are far more politically diverse than the "Trust and Safety" teams in San Francisco. Compliance decisions are also much more directly tied to business significance than "Trust and Safety" decisions. Compliance requires sacrificing a paying customer, while "Trust and Safety" only needs to sacrifice advertising inventory. Acquiring customers is very difficult, while increasing advertising inventory is relatively simple: you just need to adjust product decisions like ad loading.

The bad news is that compliance is essentially designed for a single culture. If you work in compliance, the primary requirement is to be good at being a "good employee" who conforms to the rules. Here, "conform" is not a pejorative but a description of a behavioral characteristic. You must demonstrate compliance behavior to work in this field. If you do not possess this trait, have rebellious tendencies, or try to "go head-to-head" in meetings with regulators, you will soon be replaced by someone more suited for the role—namely, those who can fulfill their responsibilities.

Especially at higher levels of compliance personnel (who decide policies, not just click alerts), they are core members of the American professional-managerial class (PMC). This PMC culture has some unique characteristics.

The "Current Thing" Has Passed; The New "Current Thing" Endures

The American professional-managerial class (PMC) periodically falls into a… fervent moral obsession. Andreessen has referred to this phenomenon as the "Current Thing." Academia sometimes uses the term "moral panic," but it is usually used to describe the behavior of the general public. I prefer Andreessen's phrasing because it accurately captures the characteristics of how the PMC—his class, my class, and (most likely) your class—expresses itself uniquely. (After all, you are willing to voluntarily read thousands of words about banking regulation.)

If you are concerned about unusual account cancellations, rather than worrying about formal guidelines, it is better to focus on the "Current Thing." Because compliance departments can capture the "Current Thing" without needing emails from regulators or reading position papers. This morning's New York Times is already talking about it, its shadow is everywhere on Twitter, and it even permeates the air we breathe. Who would be so dull as to not understand the "Current Thing"? Qualified professionals in the compliance departments of banks or fintech companies certainly would not.

Our understanding of conspiracy usually assumes there is a central controller behind it. But the "Current Thing" has no central controller. When it is no longer the "Current Thing" and reason regains dominance, we will look for evidence to try to prove that this is the result of the CIA, Russia, the Soros network, the Koch brothers, or "disinformation," or any of the thousands of other excuses to absolve ourselves. We might even pull out a scanning tunneling microscope to closely examine the audit logs.

We will find that, at worst, there was a trivial and perfunctory attempt to promote collaboration, but this does not explain the storm—its speed of eruption, its coordinated pace, even surpassing what we could achieve at our best, with all our efforts.

Goodness, just imagine what our companies could achieve if we could casually declare a "Current Thing"! How efficient would government execution be? How much money could be made?

There have been "Current Things."

The United States has gone through a difficult period in recent years, marked by destructive and sometimes deadly political protests. And the "Current Thing" requires you to make very fine distinctions regarding these protests.

For example: sometimes, fervent political expressions surrounding issues that are clearly of national significance evolve into destructive political protests, sometimes resulting in fatalities. So, is it permissible to fund the legal fees of the protesters or to speak out for them? What if you are a national-level politician in the U.S.? What does the specific decision-making flowchart look like here?

Some might think, "Will the compliance department strip your bank account for this? Of course not. This is mainstream political speech; we won't cancel someone's account for mainstream political speech. Moreover, this is a national-level U.S. politician?! Goodness, can you imagine the public relations risk that such an operation would bring? Can you imagine the risk to government relations?"

While others might think, "A U.S. politician is actually endorsing political violence?! This is an astonishing violation of social norms, and all just people must oppose it! Yes, doing so will definitely face public relations risks, after all, our country is deeply divided, but we must swiftly withdraw all financial services! And technical services, social media services, if they use laundry services to clean their underwear, cancel those too!"

These two models have vastly different expectations for corporate behavior.

So, which one will yield the correct result? The answer is: neither. It turns out that behavior is highly dependent on the specific context.

Sometimes, fundraising for those arrested during riots is uncontroversially permitted. Sometimes, even if such behavior may feel uncomfortable, if you participated in or funded the occupation of the Capitol, society will ultimately accept your return to respectable circles. And sometimes, even after destructive political protests that result in fatalities (including police deaths), tech companies will still donate to the organizers because this political project clearly has ongoing significance, and evidently, no one wants fatalities to occur during political protests.

But sometimes, after those destructive political protests that lead to fatalities, the "Current Thing" will develop in the opposite direction. This situation prompts authorities in society and compliance officers to immediately leverage all the power they have.

The "Current Thing" does not require top-down command. The White House does not need to issue directives. By the time a senator's letter arrives, it is usually too late.

Some still passionately believe in the "Current Thing" from four years ago. But it seems that in many career-related fields, the consensus that once automatically formed is quietly changing.

What is the current consensus in Washington? I consider myself quite knowledgeable in interpreting Japanese tea leaf divination, but I have limited understanding of "Washington speak." My current understanding of the new consensus is: "Of course, it is always regrettable when someone dies, and political protests probably shouldn't be destructive. Of course, the political leadership in the U.S. is accepted in respectable circles, and of course, supporting a coup is an extremely irresponsible act because every president in the U.S. is legally elected, and of course, there has never been any attempt at a coup in the U.S., and of course, if someone has said otherwise, it is just because political speech can sometimes become heated, of course."

The "Current Thing" does not always lean towards the political left. For example, "Russian sympathizers have infiltrated the highest levels of the U.S. government! We must…" The political inclination of this statement can be completely opposite depending on the tone.

The "Current Thing" cannot even always be conveniently described along a left-right axis, although sometimes it is forcibly categorized. Before it became the "Current Thing," no one on the American political spectrum cared about the straw issue. And now, ostentatiously using plastic straws may be considered a right-wing symbol in certain circles. Think carefully about that phrase—"ostentatiously using plastic straws."

Sometimes, during the formation of a new "Current Thing," the positions of both parties can shift rapidly. The existence of this phenomenon is one of the significant contributions of the concept of the "Current Thing."

One of the few benefits of middle age is having experienced many "Current Things." Upon reflection, even if a person has quite strong and stable beliefs, even if they remember that the position they passionately supported was completely aligned with a certain "Current Thing," there will still be some clear and vivid memories. They remember that the people around them were utterly convinced of something, passionately supporting a viewpoint, and now they hold completely opposite views, also with great passion. And they seem to completely forget their past viewpoints, yet do not appear insane.

For any work-related issue that is not a "Current Thing," you can easily form your own opinion. They can also demonstrate a cognitive ability of "object permanence" (i.e., remembering past viewpoints) in other discussions.

I will leave the debate about specific examples to those who make a living writing political articles or those who derive a similar thrill from team sports.

As for the phenomenon of the "Current Thing," I generally do not know how to handle it. I just want to return to writing about banking wire transfer compliance. But if the next "Current Thing" happens to be… squirrels, then the compliance department will likely take a great interest in it. And for the fifteen years following that day, the compliance department may take time each year to review whether the "squirrel interception policy" needs updating.

Strategies for Responding to "Decoupling from Banks"

Some readers may be very concerned about the issue of "decoupling from banks" and filled with sincere worry.

Let me offer you some tactical advice to promote your values: invest your energy in designing countermeasures to address the rapid and arbitrary actions of compliance departments against (mainly) existing accounts triggered by the "Current Thing." You may not be able to abolish the compliance department as an institutional entity, nor can you persuade banks to bear the enormous losses that would come from having to open accounts for all customers. However, you can slow down the compliance department's account closure speed by increasing paperwork and delays. You can tell friends (or opponents), "This is as serious as evicting a tenant, so every step of the process should be meticulously documented, just like how a reasonable city (like Chicago or New York) handles tenant evictions."

If you take this approach, there will be trade-offs. The direct consequence is that banks will be less willing to open accounts for marginal customers; the indirect consequence is that the phenomenon of unbanked or underbanked individuals in the groups you care about may worsen. But this move can effectively reduce the specific disruptions caused by account closure notifications.

Of course, some may think there is a "free lunch": as long as you uphold moral righteousness and stand firm, it will be fine. I somewhat agree with this view; some virtues are indeed free, and we hope to see more of such virtues.

But these virtues are empirically insufficient to guarantee behavioral change. The "Current Thing" has immense power, and it may even align with your inclinations. Looking back at history—whether it is the long history of humanity, the modern history of a country or industry, or your own social media records—consider how many times those who held firm to their morals and positions ultimately said, "…this is not the battlefield I want to fight for" when faced with the "Current Thing."

How the Crypto Industry Uses "Decoupling from Banks" Accusations to Push Policy Agendas

Sometimes, wealthy and powerful individuals just casually tweet. (I resonate with this; I often tweet casually myself.)

But sometimes, there is an agenda behind it. In politics, "You have an agenda!" is sometimes used as a cynical attack, but democratic governance essentially requires at least some people to have a clear agenda.

Agendas are often public and far more common than secret exchanges in back rooms. Telling others your demands is a necessary step to achieve your goals. And discussing agendas is also very useful for coordinating support.

The crypto industry, like any industry, has many people with diverse viewpoints. But it is impossible to perfectly describe it without being part of the industry; some damaging information models still have their uses.

To help readers who may not be very familiar with these topics, I have deliberately written a condensed version of the "crypto industry demands." If you are concerned that I may not be fair and prefer to hear their original words directly, you can refer to this tweet. Alternatively, you can read the works of the advocates already mentioned or spend a few days studying the policy papers released by their lobbyists.

The crypto industry wants all banks to be required to serve "all legitimate businesses," which they primarily refer to as crypto companies and crypto founders. First, they want banks to no longer have the discretion to choose when providing "basic" deposit products to customers. They will claim this should be universally applicable, but there will be exceptions, such as Hamas. Their goal is for businesses to be able to open corporate accounts, for all businesses to be able to open corporate accounts, and for everyone to be able to open corporate accounts.

After breakthroughs in basic low-risk products, they will seek less resistance, such as allowing financial service companies to facilitate the flow of funds more efficiently, as long as these companies express a willingness to "cooperate with the rules," even if these companies are crypto-native. They are currently most concerned about trading platforms but also hope banks will reduce resistance to new products and use cases.

The crypto industry wants their banks back. They do not care what name is written on the bank's door, but they hope there is a bank that can support instant ledger transfers and accept almost all customers. Of course, not including Hamas, but if a bank refuses to accept entities controlled by CZ, Justin Sun, or someone considered a recent ally of Tether, then it clearly does not understand the needs of the crypto industry.

They want banks to only ask the minimum questions necessary to meet U.S. compliance requirements while being able to efficiently handle large-scale business. Secondly, they hope banks can cover as broad a market as possible without jeopardizing U.S. operations. Because the U.S. is the core of funding, they are very aware of this.

Nominally, the crypto industry would be satisfied with reforms to the U.S. financial system, such as allowing other banks to piece together a product similar to SEN (Silvergate Exchange Network). But they believe that ultimately, a dedicated bank is still needed, and if this bank is merely a rapidly growing startup within a large bank, it is unlikely to be the bank they want. What they need is a bank that has almost 100% of its deposits concentrated in the crypto industry, which will focus on meeting their needs and advocate for them at critical moments.

For Russia, the crypto industry is willing to compromise (which can also be understood as giving up the opportunity to do business directly with Russian companies or individuals) and will not raise obvious objections. But when it comes to China… it is well known that under the previous policy environment, many financial innovations were forced to move to East Asian countries, including some of our most sincere allies. It would be regrettable if the competitiveness and national security of the United States were sacrificed due to a refusal to allow these funds to return to the regulatory purview of the U.S.

The crypto industry will strongly support U.S. national interests in its relationship with China, and some crypto investors have proposed various suggestions on how to narrow the technological capability gap through "National Security Technology" (NatSecTech), such as in the manufacturing of drone components. They already have some portfolio companies that can be recommended to Washington and plan to introduce more soon.

If you are a regulator and do not want the crypto industry to have a bank, they hope you will be "promoted" to an ordinary citizen as soon as possible. At the same time, they want to clearly convey to junior staff: if you overstep, the same fate awaits you.

If you engage with the crypto industry in Washington and demonstrate an understanding of relevant matters, such as saying, "The innovations you just mentioned that left the U.S. due to the previous administration's policies are now all hosted by Cantor Fitzgerald in New York, right?" the crypto industry will respond, "Yes, we are glad you mentioned that. Stablecoins are one of the largest users of U.S. Treasury securities globally. We have a position paper on this. It is crucial to maintain U.S. leadership in the stablecoin space. We believe stablecoins should be hosted within the U.S., and we have viable solutions that can allow these businesses to operate within a regulated framework."

As for the "elephant in the room" that everyone is concerned about?

"Is this a Republican joke?!"

The crypto industry wants to completely and unreservedly overturn all guidance documents that imply cryptocurrencies are high-risk. Suspension letters, position papers, informal guidance, regulatory issues—they want everything swept away. They do not particularly care about the specific actions of bank regulators afterward, but if advice is needed, it would be to inquire about banks' crypto strategies, listen carefully, and then apply moral pressure when banks lack a strategy. If banks point out obstacles to adopting blockchain technology, crypto advocates hope regulators will respond as swiftly as they would to an emergency.

The crypto industry wants banks to be able to custody crypto assets. This involves a very technical accounting standard (which you may not care much about) that specifies the capital support ratio required when banks custody assets. Under current rules, banks need to hold $1 of equity capital to custody $1 of digital assets. This makes it nearly impossible to operate crypto custody businesses within the regulatory framework of banks.

Currently, the crypto industry has custody products, but these services are mainly provided by companies like Coinbase, rather than traditional banks like State Street. The crypto industry hopes that custody services can be included within the bank regulatory framework because they believe this is crucial for promoting institutional adoption. Their minimum demand is that the custody of crypto assets should enjoy the same treatment as traditional risk assets (like stocks). If this goal is achieved, they will further demand some form of policy tilt. In fact, the crypto industry is not wrong; capital requirements do indeed have policy tilts in favor of certain politically favored assets (such as mortgage-backed securities, MBS).

The crypto industry wants to rewrite the official history of the 2023 banking crisis. Several regulatory reports have already proposed related narratives, some of which are linked above. They hope these reports will be replaced and overturned. The new reports will claim that the bank failures were directly caused by political actions explicitly directed by the previous administration. The new narrative will emphasize that such regulatory actions are contrary to U.S. policy. Relevant officials need to look directly into the camera and solemnly state: any bank that violates this directive will face a strong response from the federal government.

As for the cases of Silicon Valley Bank (SVB) or First Republic Bank, the crypto industry does not particularly care.

The crypto industry hopes that state-chartered crypto-native financial service companies can obtain master accounts from the Federal Reserve. This requires clarity; they hope to be automatically approved like community banks: we show our business license, and you approve directly.

The crypto industry hopes the SEC can provide a repeatable and predictable path for issuers to reasonably sell tokens to ordinary Americans as early as possible in the project lifecycle. The current registration and exemption system followed by non-crypto startups is already very familiar to crypto/tech investors. They do not want to achieve "equal treatment" with the current system; rather, they seek more targeted support.

They want to be able to sell tokens to ordinary investors because the retail market is the real source of funding.

In fact, as long as you allow them to sell tokens to retail investors, they are very willing to operate according to the procedures you set. Spending $1 million on compliance to achieve unrestricted issuance is completely acceptable to them. This cost can also reduce reputational risks by filtering out some projects similar to the 2017 ICO chaos, and venture capital firms are willing to cover these initial costs.

Once you open this path, the crypto industry will quickly industrialize and promote on a large scale, marketing crypto investment opportunities as investment opportunities to all Americans currently investing in any form, even covering those who have not yet invested. They are very confident (without a doubt) that if conditions allow, they can sell hundreds of billions of dollars in related products. But this is still far from enough, as the crypto industry has already invested heavily in infrastructure to get to this point. Their goals are higher: they believe that trillions of dollars are not out of reach. Only reaching the trillion-dollar level counts as true success.

However, the crypto industry is starting to become a bit impatient about when they can achieve their "trillion-dollar goal." Some crypto investors are under time pressure set by capital partners. For them, Bitcoin rising to $100,000 is undoubtedly good news, but it is far from sufficient to meet the conditions for victory. What they need is a clear path to tens of trillions of dollars in token sales.

The crypto industry hopes for lenient guidance policies for innovative crypto-related banking products. Banks should be able to issue loans secured by crypto assets under the same conditions as publicly traded stock-backed loans, at least for mainstream crypto assets (like BTC/ETH). Stablecoins should also receive treatment similar to loans backed by certificates of deposit (CDs) or money market funds. (These are very niche products, but isn't the essence of finance to imagine scenarios where these niche products are needed in specific situations?)

Other services provided by banks? The crypto industry also hopes to gain equal access.

The crypto industry also hopes to establish some institutional examples. They want at least one regulator to be completely replaced and permanently removed, making it clear to the world that this is the result driven by the crypto industry. They do not expect the target to be the Federal Reserve (unrealistic) or the Federal Deposit Insurance Corporation (FDIC) (as an indispensable infrastructure related to retail satisfaction). But the Consumer Financial Protection Bureau (CFPB)? They would be willing to accept actions against the CFPB.

Now you understand why we are suddenly discussing "decoupling from banks."

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