How “de-banking” has become a systemic dilemma for the development of the Web3 industry

Source: AiYing Compliance

With the rapid development of the cryptocurrency industry, the phenomenon of "debanking" in the Web3 world has attracted increasing attention. This phenomenon shows the confrontation between the traditional financial system and the cryptocurrency industry. For example, the failure of Meta's stablecoin project Diem, the obstacles encountered by Custodia Bank, and the phenomenon of many crypto companies being "disconnected" all highlight the strong rejection of the traditional financial system to the crypto industry. This rejection not only reflects policy contradictions, but also the game of multiple forces. In the process of paying customers over the years, Aiying has also witnessed the various obstacles faced by companies in obtaining financial services. Closure of bank accounts and lack of payment services. This article mainly explores some of the deeper reasons.

1. The hidden mechanism of debanking

The so-called "debanking" is not just the closure of individual corporate accounts by banks, but often contains complex political and financial considerations. Meta's Diem project is a typical case of this. According to former head David Marcus, although Diem has fully complied with regulatory requirements in 2021 and plans to launch it on a small scale, U.S. Treasury Secretary Yellen told Federal Reserve Chairman Powell that approving the project is tantamount to "political suicide." This is undoubtedly a ruthless suppression of technological innovation by political forces, and this pressure directly acts on the Federal Reserve and the banking system, forcing them to cut off their cooperation with the Diem project. The Diem project was originally designed to achieve faster and cheaper global payments through blockchain-based technology, but due to pressure from the government, banks withdrew their support for it, resulting in the project ultimately failing to land. This type of indirect suppression means that the cryptocurrency industry is no longer just a matter of "compliance" when facing regulation, but a matter of "survival." Banks closed accounts and revoked service permissions, resulting in a large number of companies and individuals being unable to obtain financial services normally. This phenomenon is particularly evident in "de-banking 2.0."

Custodia Bank CEO Caitlin Long also revealed that Custodia Bank has been trying to provide legal banking services to the cryptocurrency industry, but its application for a banking license has been delayed or rejected many times. Custodia Bank has even encountered pressure from the Federal Reserve System to terminate cooperation with crypto-related services. Long further pointed out that this targeted suppression has not only affected the business development of Custodia Bank, but also caused other banks to follow suit and refuse to provide services to the crypto industry, forcing many companies into trouble.

Second, the erosion of freedom: the suppression of basic rights in the crypto industry by debanking

Another challenge caused by debanking is the infringement of basic rights. The cryptocurrency world has always boasted of decentralization and freedom, and debanking directly shakes the foundation of this freedom. Ripple's CTO David Schwartz pointed out that this targeted debanking behavior not only harms the development of the industry, but also erodes basic constitutional rights, including due process, freedom of speech, and the right to be free from illegal search and seizure.

Schwartz further elaborated on how the government indirectly suppresses specific industries by putting pressure on financial institutions such as banks. He pointed out that the government often does not directly introduce laws to ban cryptocurrencies, but "encircles" the industry through the financial system. Banks are pressured to stop cooperating with crypto companies, forcing them to be unable to operate normally. This behavior is essentially an interference in market freedom and a manifestation of the government circumventing due process through a third party.

This phenomenon is not an isolated case in the entire cryptocurrency industry. Frax Finance founder Sam Kazemian said that in December 2022, his account at JPMorgan Chase was closed for reasons that were not clearly stated, but were obviously related to his cryptocurrency business. Coinbase co-founder and CEO Brian Armstrong also applied for government records related to "Stranglehold 2.0" through the Freedom of Information Act (FOIA) to try to reveal the real motives behind this suppression.

3. The "choke point" of the early years is still continuing

The phenomenon of "de-banking" did not appear out of thin air, and its roots can be traced back to the "choke point" of the US government in the early years. According to Aiying, the government targeted financial institutions and payment processors because they were seen as "bottlenecks" or "choke points" in fraudulent activities. By putting pressure on these key nodes, the government hopes to cut off illegal merchants' access to the banking system. However, this widespread exclusion of financial services has affected many industries, including legitimate businesses, such as ammunition sales, payday loans, and tobacco sales.

The "choke point" not only caused the closure of many legitimate business accounts, but also led to multiple lawsuits and federal investigations. It was even severely criticized by former Oklahoma Governor Frank Keating in 2018, saying that it was more like a "cleansing operation of ideological enemies." Although the Trump administration announced an official end to Operation Stranglehold in 2017 and the FDIC pledged to limit its personnel’s account termination powers, many believe that the government’s control and intervention in banking services has never really ended. Today, the informal term “Operation Stranglehold 2.0” is being used by critics to describe the U.S. government’s crackdown on the cryptocurrency industry, which is considered risky and controversial. While there is no formal Operation Stranglehold 2.0 plan, the coordinated actions of multiple regulators, including the Department of Justice (DOJ), the Federal Deposit Insurance Corporation (FDIC), the Office of the Comptroller of the Currency (OCC), the Financial Crimes Enforcement Network (FinCEN), and the Securities and Exchange Commission (SEC), appear to make banking access to the cryptocurrency industry difficult.

• For example, in the collapse of Signature Bank and Silicon Valley Bank (SVB) in 2023, it is believed that they suffered special regulatory pressure precisely because of their connection with the cryptocurrency industry.

• For example, the SEC sued Ripple Labs in 2020, claiming that its XRP tokens were unregistered securities; in 2023, the SEC sued Binance and Coinbase, accusing them of violating securities laws. The existence of these cases makes "Stranglehold 2.0" a systematic means of suppression, which aims to limit financial access to the crypto industry and curb the development of decentralized technologies.

Fourth, the banking crisis and regulatory bias

"De-banking" did not end with the termination of "Stranglehold", but made a comeback in the development of the cryptocurrency industry. On March 8, 2023, cryptocurrency-focused institution Silvergate Bank announced a voluntary liquidation. The bank, which has focused on serving crypto clients since 2013, saw its stock price plummet due to its association with Meta's stablecoin project Diem, as well as the turmoil in the crypto market and the collapse of its client FTX. At the same time, pressure from U.S. Senators Elizabeth Warren, Roger Marshall, and John Kennedy further exacerbated the bank's difficulties, requiring Silvergate to disclose its financial relationship with FTX, exposing the bank to greater regulatory risks.

Just two days later, the California Department of Financial Protection and Innovation took over Silicon Valley Bank (SVB), marking one of the second-largest bank failures in U.S. history. SVB's collapse was directly related to the decline in the market value of its long-term securities holdings and large-scale withdrawals by customers. On March 12, Signature Bank was also closed by the New York State Department of Financial Services and placed under FDIC custody due to large customer withdrawals. Signature Bank has 30% of its deposits in the cryptocurrency industry, while it holds only 5% of its total assets in cash, well below the industry average, making it vulnerable to a bank run triggered by SVB’s problems.

While the U.S. Treasury, the Federal Reserve, and the FDIC described the actions to take over SVB and Signature Bank as an effort to “protect the U.S. economy and strengthen public confidence in the banking system,” many, including Signature Bank board member Barney Frank, believe that these actions show government bias against the cryptocurrency industry. “We became a classic case study because the failure was not based on fundamentals,” Frank said. The FDIC later announced that Flagstar Bank would take over Signature Bank’s cash deposits, but excluded digital asset-related businesses. The decision was criticized by the Wall Street Journal editorial board as obvious bias, confirming Frank’s suspicion that the crypto industry was being unfairly treated.

5. Trump returns to the White House, and the worst period of relations may be over

Although the phenomenon of de-banking is intensifying, Marc Andreessen revealed in a podcast that more than 30 technology founders have been "disconnected" by banks in the past four years, and these crypto entrepreneurs did not choose to endure silently, but bravely stood up to tell their stories. Caitlin Long of Custodia Bank also made it clear that her company is in court with the Federal Reserve and plans to hold an oral argument in January next year. This legal confrontation is undoubtedly an important step for crypto companies to fight for legal living space.

Jered Kenna, the founder of Tradehill, shared his experience of being refused service by a bank. Kenna said that he once had a list of dozens of pages of banks that refused to provide services to him because he was engaged in cryptocurrency business, including some well-known international banks such as HSBC, Bank of America (BofA), Chase, Citi and Wells Fargo. He emphasized that this "de-banking" phenomenon covers almost all mainstream financial institutions.

Kraken founder Jesse Powell also revealed that Kraken had faced a situation of no bank services in the United States for many years, and the only bank willing to provide services later terminated cooperation due to government pressure. The experience of these founders reveals how the government uses the banking system to exert systemic pressure on the crypto industry to achieve the goal of "de-banking". But all this is in the past. Recently, after Trump was confirmed as the new president, we can see that major crypto companies are exerting public opinion pressure on the Federal Reserve and the entire banking system as mentioned above. We can also see that many lawsuits that were still controversial in the past are also clearing up. The entire legal boundary is moving from ambiguity to clarity. Similarly, the current situation of banks refusing to provide banking services to crypto institutions due to unclear rules should improve in the future.