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, such as the failure of Meta’s stablecoin project Diem, the obstacles encountered by Custodia Bank, and the phenomenon of many crypto companies being “cut off”, all of which highlight the traditional financial situation. The system strongly rejects the crypto industry. This kind of exclusion not only reflects contradictions, but also a game of competition among multiple forces. In the process of paying customers over the years, Aiying has also witnessed various obstacles that companies face in obtaining financial services. Closure of bank accounts, loss of payment services. This article mainly explores some of the deeper reasons for this.

1. The hidden mechanism of de-banking

The so-called "de-banking" is not just about banks closing the accounts of individual companies. There are often complex and financial considerations behind it. Meta’s Diem project is a typical example 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 bluntly told Federal Reserve Chairman Powell that approving the project would be tantamount to "suicide." This is undoubtedly a ruthless suppression of technological innovation by forces, and this pressure directly affects the Federal Reserve and the banking system, forcing them to cut off their cooperation with the Diem project.

The Diem project originally aimed to achieve faster and cheaper global payments through blockchain-based technology. However, due to the pressure from , banks withdrew their support, resulting in the project being unable to be implemented. This kind of indirect suppression method makes the cryptocurrency industry no longer just a "compliance" issue when facing supervision, but a "survival" issue. Banks have closed accounts and revoked service permissions, resulting in a large number of companies and individuals being unable to obtain financial services. This phenomenon is particularly obvious in "De-Banking 2.0".

Caitlin Long, CEO of Custodia Bank, also revealed that Custodia Bank has been trying to provide legal banking services to the cryptocurrency industry, but its bank license application has been delayed or rejected many times. Custodia Bank even faced pressure from the Federal Reserve to end cooperation with crypto-related services. Long further pointed out that this targeted crackdown not only affected Custodia Bank’s business development, but also caused other banks to follow suit and refused to provide services to the crypto industry, forcing many businesses into difficulties.

2. Erosion of freedom: de-banking suppresses basic rights in the crypto industry

Another level of challenge caused by de-banking is the infringement of basic rights. The cryptocurrency world has always flauntedDecentralization and freedom, and debanking directly shakes the foundation of this freedom. David Schwartz, CTO of Ripple, pointed out that this kind of targeted debanking 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 unlawful searches and seizures.

Schwartz further elaborated on how to indirectly achieve the purpose of suppressing specific industries by putting pressure on banks and other financial institutions. He pointed out that laws are often not introduced directly to ban cryptocurrencies, but rather to "contain" the industry through the financial system. Banks have been pressured to stop working with crypto companies, forcing them to stop functioning properly. This behavior is essentially an interference with market freedom and a manifestation of circumventing due process through a third party.

This phenomenon is not unique in the entire cryptocurrency industry. Sam Kazemian, the founder of Frax Finance, said that in December 2022, his account at JPMorgan Chase was closed for reasons that were not clearly stated but were apparently related to his cryptocurrency business. Coinbase co-founder and CEO Brian Armstrong also requested records related to Operation Kill 2.0 through the Freedom of Information Act (FOIA) in an attempt to uncover the true motivations behind this suppression.

3. The early “Operation Choke Point” continues

The phenomenon of “debanking” did not appear out of thin air. Its roots can be traced back to the early “Operation Choke Point” in the United States. According to Aiying, financial institutions and payment processors are targeted because they are seen as "bottlenecks" or "choke points" in fraudulent activities. By putting pressure on these key nodes, it is hoped to cut off illegal merchants from entering the banking system. However, this widespread exclusion of financial services has spread to a wide range of industries, including legitimate businesses, such as ammunition sales, payday loans, tobacco sales, etc.

Operation Kill not only caused the accounts of numerous legitimate businesses to be shut down, but also resulted in multiple lawsuits and federal investigations, and even received harsh words from former Oklahoma Governor Frank Keating in 2018 criticized it, saying it was more like a "cleansing operation of ideological enemies." Although in 2017, Trump announced the official end of Operation Stifle and the FDIC promised to limit the account termination powers of its personnel, many believe that the control and interference in banking services has not truly ended.

Today, the informal term "Operation Stifle 2.0" is used by critics to describe the U.S. crackdown on the cryptocurrency industry, which is considered risky and controversial. While there is no official plan for Operation Kill 2.0, including the Department of Justice (DOJ)The coordinated actions of multiple regulatory agencies, including 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 have allowed banks in the cryptocurrency industry to Entry becomes difficult.

For example, in the 2023 collapses of Signature Bank and Silicon Valley Bank (SVB), it was argued that they suffered particular regulatory pressure precisely because of their ties to the cryptocurrency industry.

For example, the SEC sued Ripple Labs in 2020, claiming that the XRP tokens it issued were unregistered securities; in 2023, the SEC sued Binance and Coinbase, accusing them of violating securities laws. The existence of these cases makes "Operation Stifle 2.0" considered a systematic suppression method, which aims to restrict financial access to the encryption industry and curb the development of decentralized technology.

4. Banking crisis and regulatory bias

"De-banking" did not end with the termination of "Operation Stifling", but has made a comeback in the development of the cryptocurrency industry. On March 8, 2023, cryptocurrency-focused Silvergate Bank announced voluntary liquidation. The bank, which has been focused on serving crypto clients since 2013, has seen its shares fall sharply due to its association with Meta’s stablecoin project Diem, as well as the turmoil in the crypto market and the collapse of client FTX. At the same time, pressure from U.S. Senators Elizabeth Warren, Roger Marshall and John Kennedy has further exacerbated the bank's difficulties. They require Silvergate to disclose its financial relationship with FTX, causing the bank to face 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 massive customer withdrawals. And on March 12, Signature Bank was shut down by the New York State Department of Financial Services and placed under FDIC conservatorship due to a large number of customer withdrawals. Signature Bank has 30% of its deposits from the cryptocurrency industry, while its cash on hand accounts for only 5% of total assets, well below the industry average, making it very vulnerable to a bank run caused by the SVB problem.

Although the U.S. Treasury Department, the Federal Reserve and the FDIC described the actions to take over SVB and Signature Bank as “protecting the U.S. economy and increasing public confidence in the banking system,” members of the Board of Directors including Signature Bank BarMany, including ney Frank, believe these actions show bias against the cryptocurrency industry. "We became a poster child because this failure was not a fundamental bankruptcy," Frank said. Since then, the FDIC announced that Flagstar Bank would take over Signature Bank's cash deposits, but excluded operations related to digital assets. The decision, criticized by the Journal’s editorial board as blatant bias, confirmed Frank’s suspicions that the crypto industry was being unfairly treated.

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

Despite the intensification of debanking, Marc Andreessen revealed in a podcast that more than 30 technology founders have been arrested in the past four years. The bank "cut off the card", but these crypto entrepreneurs did not choose to endure it silently, but bravely stood up and told their stories. Custodia Bank's Caitlin Long also made clear that her company is going to court with the Fed and plans to hold oral arguments in January. This kind of legal confrontation is undoubtedly an important step for encryption companies to fight for legal living space.

Jered Kenna, founder of Tradehill, shares his experience of being denied 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 of his cryptocurrency business, including some well-known international banks such as HSBC and BofA. ), JPMorgan Chase, Citi and Wells Fargo, etc. He emphasized that this "de-banking" phenomenon covers almost all mainstream financial institutions.

Kraken founder Jesse Powell also revealed that Kraken faced years of no banking services in the United States, and the only bank willing to provide services later terminated cooperation due to pressure. The experiences of these founders reveal how the banking system can be used to exert systemic pressure on the crypto industry to achieve the goal of “de-banking”. But all this is in the past. After Trump was recently confirmed as the new president, we can see that major crypto companies are exerting public pressure on the Federal Reserve and the entire banking system as mentioned above. We can also see that many litigation cases that were still controversial in the past are now 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 become better in the future.