0/ What is debanking and what are the mechanics?
Since @pmarca blew the whistle on Operation Chokepoint 2.0 on @joerogan's podcast, this issue has finally gotten the attention it deserves. However, as is usual with these things, the discourse has become the embodiment of chaos.
Since @pmarca blew the whistle on Operation Chokepoint 2.0 on @joerogan's podcast, this issue has finally gotten the attention it deserves. However, as is usual with these things, the discourse has become the embodiment of chaos.
1/ Therefore, as a long time banking expert (yeah, it's as bad as you think, I'm pretty dire) and someone who has been writing about this from the early days and was paying attention even back during Operation Chokepoint 1.0, I wanted to take a moment to explain a few things.
2/ So let's start with debanking. Mechanically, this is very simple: a bank closes all of your accounts with them. Why? Well, funny you should ask that, because the bank often is not going to tell you.
This part is often a surprise to people outside the industry, but there's a reason I wrote a whole thread about this and advise every single two-legged person to have two bank accounts in the United States, and if they are with two very different banks, even better.
But yes, the punchline is simple: they close all your accounts and they don't tell you why.
This part is often a surprise to people outside the industry, but there's a reason I wrote a whole thread about this and advise every single two-legged person to have two bank accounts in the United States, and if they are with two very different banks, even better.
But yes, the punchline is simple: they close all your accounts and they don't tell you why.
3/ So lets talk about some of the reasons this has been happening, ranging from the legitimate to the not legitimate, what should be done to ensure things are legitimate, and then talk about the mechanics of it.
Legitimate: they actually think you are a criminal. I don't mean like "saw bitcoin in the text of a post you made on social media", I mean like "are pretty sure you are a drug mule for the Mexican cartels", and let me be clear, that stuff totally happens. I have personally seen and been in discussions about this kind of activity and it's worth, before we leap off the deep end into conspiracy territory, acknowledging that real criminals do try to defraud the banking system and evade controls on a daily basis.
Also legitimate: the bank actually fucked up and is getting pressured by regulators to shut down all this activity because it's pretty clear they have absolutely no idea what the fuck they are doing. The key here is regulators have to identify the risk and causation properly. If there was a crypto-focused bank that had good KYC/AML and customer deposits were draining because of volatility and the bank goes under because... the treasury people YOLO'd into 15 year duration MBS in a generational rates uptrend, the problem there is not the crypto. It's the insanely, hilariously, tragically bad ALM, so if the regulatory comes down on the crypto banking part of this as the problem, that is exceptionally not legitimate (see below). On the other hand, if a bank runs a totally inadequate reconciliation process for a crypto or fintech partner that leads to tens of millions of dollars of customer assets missing and basically refuses to cooperate with creditors or the courts to find it? That, uh... you know what, close all the accounts and actually shut that bank down while you are at it. Looking at you Evolve.
Somewhat legitimate: they think you are a high risk customer for justifiable reasons from a controls perspective and probably not worth the hassle and or profit profile. This is annoying for people, but if you are something like a merchant with very high levels of ACH chargebacks or fraud complaints, it's justifiable for a bank to get rid of you. Not allowing banks to do this is basically saying they cannot run a for-profit payments business. Maybe there should be some sort of bank of last resort type framework, but I am highly dubious this should exist for normal banks without literally turning them into government owned utilities.
Not legitimate: someone didn't do their homework and thinks you are in one of the first buckets above. This happens a lot. A good example of this would be having your account closed because you have a tangential association to an industry a bank thinks is high risk, and by "thinks is high risk" I mean "has a 65 year old compliance person who still thinks PayPal is probably a scam and hears the word bitcoin and is 100% convinced you are part of Hamas for saying it" levels of risk analysis. Banks should not be doing this shit. There should be tangible, concrete reasons to offboard people, not "I have a bad feeling about that", which by the way is the exact same reason banks used to redline and was not driven entirely by risk analysis but rather by actual old-school racism. In short, uninformed idiot-tier bias is not a legitimate reason for debanking, and I think this is the one that hit the crypto industry the hardest on the personal account level.
Very not legitimate: management of a bank doesn't want to deal with an entire industry and orders people to shut them out (fine), but then also bullies partners, payments companies, and others in the ecosystem to shut them out (not only not fine, but also a massive antitrust problem and something the DoJ under the new administration should look into).
Exceptionally not legitimate: banks that otherwise want to do the business and do not have systemic problems, but the regulators don't let them anyways. This is when your account gets closed, they won't tell you why, and they wanted to keep it open but it's not allowed. This is the government censoring your access to the financial system for non-risk reasons, but rather political or personal animus.
Legitimate: they actually think you are a criminal. I don't mean like "saw bitcoin in the text of a post you made on social media", I mean like "are pretty sure you are a drug mule for the Mexican cartels", and let me be clear, that stuff totally happens. I have personally seen and been in discussions about this kind of activity and it's worth, before we leap off the deep end into conspiracy territory, acknowledging that real criminals do try to defraud the banking system and evade controls on a daily basis.
Also legitimate: the bank actually fucked up and is getting pressured by regulators to shut down all this activity because it's pretty clear they have absolutely no idea what the fuck they are doing. The key here is regulators have to identify the risk and causation properly. If there was a crypto-focused bank that had good KYC/AML and customer deposits were draining because of volatility and the bank goes under because... the treasury people YOLO'd into 15 year duration MBS in a generational rates uptrend, the problem there is not the crypto. It's the insanely, hilariously, tragically bad ALM, so if the regulatory comes down on the crypto banking part of this as the problem, that is exceptionally not legitimate (see below). On the other hand, if a bank runs a totally inadequate reconciliation process for a crypto or fintech partner that leads to tens of millions of dollars of customer assets missing and basically refuses to cooperate with creditors or the courts to find it? That, uh... you know what, close all the accounts and actually shut that bank down while you are at it. Looking at you Evolve.
Somewhat legitimate: they think you are a high risk customer for justifiable reasons from a controls perspective and probably not worth the hassle and or profit profile. This is annoying for people, but if you are something like a merchant with very high levels of ACH chargebacks or fraud complaints, it's justifiable for a bank to get rid of you. Not allowing banks to do this is basically saying they cannot run a for-profit payments business. Maybe there should be some sort of bank of last resort type framework, but I am highly dubious this should exist for normal banks without literally turning them into government owned utilities.
Not legitimate: someone didn't do their homework and thinks you are in one of the first buckets above. This happens a lot. A good example of this would be having your account closed because you have a tangential association to an industry a bank thinks is high risk, and by "thinks is high risk" I mean "has a 65 year old compliance person who still thinks PayPal is probably a scam and hears the word bitcoin and is 100% convinced you are part of Hamas for saying it" levels of risk analysis. Banks should not be doing this shit. There should be tangible, concrete reasons to offboard people, not "I have a bad feeling about that", which by the way is the exact same reason banks used to redline and was not driven entirely by risk analysis but rather by actual old-school racism. In short, uninformed idiot-tier bias is not a legitimate reason for debanking, and I think this is the one that hit the crypto industry the hardest on the personal account level.
Very not legitimate: management of a bank doesn't want to deal with an entire industry and orders people to shut them out (fine), but then also bullies partners, payments companies, and others in the ecosystem to shut them out (not only not fine, but also a massive antitrust problem and something the DoJ under the new administration should look into).
Exceptionally not legitimate: banks that otherwise want to do the business and do not have systemic problems, but the regulators don't let them anyways. This is when your account gets closed, they won't tell you why, and they wanted to keep it open but it's not allowed. This is the government censoring your access to the financial system for non-risk reasons, but rather political or personal animus.
4/ So now, let's talk about Operation Chokepoint 1.0, and what happened.
Initially, that operation targeted payday lenders, a favorite punching bag of politicians for the extremely high interest rates that they charge in order to operation.
I'm going to leave aside any political judgment here and instead say this: if OCP 1.0 had been confined to that industry and had, in particular, focused on concrete and objective criteria, it actually would have been fine. Wanting your banks to be careful around high risk industries that have large fraud or credit issues? That's actually okay!
Here's the problem: that is the cover story used for a bunch of actions that were really, really bad.
Expanding from there, regulators also targeted firearms companies (because fuck the right), porn and adult entertainment companies (because fuck women and the left), cannabis businesses in states where it was legal (more complicated as this was technically illegal federally), telemarketers (and seriously, fuck them, everyone hates them, but it was still illegal), tobacco sales and even crowdfunding (because fuck... non-institutional capital?).
Also, rather than any objective criteria, this was done with vague insinuations about 'reputational risk' and 'enhanced regulatory scrutiny' if banks did not offboard these customers. Often that was not even said publicly (or in some cases even written down) and it was not objective or concrete. Rather, it was just "Hey we're a bunch of old people and we object to these things because reasons", which, again, full circle to the redlining and having those same feelings about black customers or black-owned businesses.
Helpfully, the FDIC settled this case and agreed to enhance examiner training about not providing informal guidance on what businesses to bank or how to do these things. This particular point is going to be very, very helpful to those investigating OCP 2.0 as there are theories of legal liability for individual persons where qualified immunity should not apply as it was already clear and known to the FDIC that this conduct was not okay. Looking at you DOGE guys here @elonmusk and @VivekGRamaswamy as well as the new folks at the DOJ.
Initially, that operation targeted payday lenders, a favorite punching bag of politicians for the extremely high interest rates that they charge in order to operation.
I'm going to leave aside any political judgment here and instead say this: if OCP 1.0 had been confined to that industry and had, in particular, focused on concrete and objective criteria, it actually would have been fine. Wanting your banks to be careful around high risk industries that have large fraud or credit issues? That's actually okay!
Here's the problem: that is the cover story used for a bunch of actions that were really, really bad.
Expanding from there, regulators also targeted firearms companies (because fuck the right), porn and adult entertainment companies (because fuck women and the left), cannabis businesses in states where it was legal (more complicated as this was technically illegal federally), telemarketers (and seriously, fuck them, everyone hates them, but it was still illegal), tobacco sales and even crowdfunding (because fuck... non-institutional capital?).
Also, rather than any objective criteria, this was done with vague insinuations about 'reputational risk' and 'enhanced regulatory scrutiny' if banks did not offboard these customers. Often that was not even said publicly (or in some cases even written down) and it was not objective or concrete. Rather, it was just "Hey we're a bunch of old people and we object to these things because reasons", which, again, full circle to the redlining and having those same feelings about black customers or black-owned businesses.
Helpfully, the FDIC settled this case and agreed to enhance examiner training about not providing informal guidance on what businesses to bank or how to do these things. This particular point is going to be very, very helpful to those investigating OCP 2.0 as there are theories of legal liability for individual persons where qualified immunity should not apply as it was already clear and known to the FDIC that this conduct was not okay. Looking at you DOGE guys here @elonmusk and @VivekGRamaswamy as well as the new folks at the DOJ.
5/ Nic Carter (@nic__carter) was the original writer on this topic, and I will link to his @PirateWires post at the end of this thread for those who want to dig back into the initial conduct, but I am going to sum things up this time around on the regulatory side as follows:
Crypto, post SBF, increasingly was in the political crosshairs. Why? Some people are just financial nanny state panic mongers who wanted something evil to throw rocks at because they long for the glory days of the past when they were heroes for fighting the big banks but have lost their edge and are sad, desperate old men and women looking to recapture it and don't care who they hurt in the process (Warren, Brown). Others were ashamed they had taken a ton of money from SBF and had been taken in by a scammer, but if he was one of the "good" ones and they knew that, then wow, everyone else in crypto must be worse! And some of them are Chinese, and boy, you know how those Chinese are (funny how things always come back to redlining, isn't it?). Others just wanted control.
Lastly, there was a group of large banks who did not look around the corner and were egging on the regulators because they didn't like the space, didn't want competition, and thought Bitcoin was a Ponzi scheme and going to zero. They also sure as hell didn't want small banks finding sources of revenue to threaten their oligopoly. Don't believe me? Go look at my bio and when I worked at some of these places and consider what I might have heard.
After all, without this angle, it's hard to understand why banks are saying that a pile of bankruptcy remote t-bills in a trust are an existential threat to the banking system but highly levered deposits backed by commercial real estate loans are not... unless you understand they mean an existential threat to the profit margins of banks and executive compensation.
Crypto, post SBF, increasingly was in the political crosshairs. Why? Some people are just financial nanny state panic mongers who wanted something evil to throw rocks at because they long for the glory days of the past when they were heroes for fighting the big banks but have lost their edge and are sad, desperate old men and women looking to recapture it and don't care who they hurt in the process (Warren, Brown). Others were ashamed they had taken a ton of money from SBF and had been taken in by a scammer, but if he was one of the "good" ones and they knew that, then wow, everyone else in crypto must be worse! And some of them are Chinese, and boy, you know how those Chinese are (funny how things always come back to redlining, isn't it?). Others just wanted control.
Lastly, there was a group of large banks who did not look around the corner and were egging on the regulators because they didn't like the space, didn't want competition, and thought Bitcoin was a Ponzi scheme and going to zero. They also sure as hell didn't want small banks finding sources of revenue to threaten their oligopoly. Don't believe me? Go look at my bio and when I worked at some of these places and consider what I might have heard.
After all, without this angle, it's hard to understand why banks are saying that a pile of bankruptcy remote t-bills in a trust are an existential threat to the banking system but highly levered deposits backed by commercial real estate loans are not... unless you understand they mean an existential threat to the profit margins of banks and executive compensation.
6/ So what was happening with debanking this time around?
I would say there were a couple of kinds that I have observed:
1 - debanking of companies who were thought to be actual fraudsters or criminals, especially when they refused to answer or obfuscated on significant risk issues. I may have been someone who did not want to onboard @FTX_Official while at a bank, and I'm going to tell you I think that decision aged pretty well. There were similar concerns around places like Celsius (not the energy drink, @CelsiusOfficial you guys are cool). There were also some shady Bitcoin ATM operators and offshore exchanges that were clearly fronts for scams or money laundering, and then the pump and dump ICOs, etc.
Real talk: debanking or refusing to bank these people while approaching other parts of the space was a sign of highly effective risk management and banks that did that should be commended, not condemned.
2 - debanking of companies after banking the space because their risk people can't find their ass with both hands and a map. This is what I was discussing above with compliance and risk people who are just not willing to do the work, and because there was a problem in crypto somewhere, rather than do their job, they just say no. This happens a lot in banks because of ineffective leadership at the top and in the risk stripes that empower those who are lazy, on power trips, or simply incompetent. But there's a lot of this where you will get debanked as a company even though you did nothing wrong.
3 - debanking of companies because the bank itself ran into severe controls issues. There are a few of these. It's not the median situation, but when you get debanked by Mercury after everything went sideways post the Evolve situation, that's much less shocking to me and might be more of a comment on Mercury. Here this should be handled much better but I don't think it's malfeasance, unlike 2, which is essentially depriving people of access to the financial system because either you are too lazy or too biased to care.
4 - debanking of companies becuase larger entities put pressure on them to not touch the space for anti-competitive reasons. This definitely happened. Some folks are already talking about it. This is one for the department of justice, because I did plenty of compliance trainings when I was at JPM and Citi that made very clear that forming industry cartels to hobble competition or exclude people was 100% an anti-trust problem. Here, if any evidence can be found, there should be charges, just like in the FX and Libor scandals. Only those charges this time might also need to include regulators.
5 - debanking of individuals because of association with crypto. This I find incredibly pernicious. When you are closing personal accounts that is a statement that goes far beyond controls. This is when you are saying to someone "the industry is so bad the fact that you are associated with it at all is disqualifying". To be blunt, if you don't have very good paperwork backing up your risk analysis and you debanked individuals merely for working in the space, there should be an investigation. If you did it on your volition, this is essentially discrimination and should be illegal. If you did it because a regulator made you do it, you should speak up now.
6 - debanking of companies because regulators made them. Again, this is fundamentally evil. If there was nothing particularly risky or problematic for the company and the regulator cannot point to a specific action of the company that was generating a practical, real, measurable problem (so not hand-wavy issues around "oh crypto is scaaaaaary" but rather "uh that $10B belongs to literally North Korea"), this is OCP 1.0 all over again and it was very clear that was illegal already. In cases where this happened, my personal view is there should be criminal charges and personal liability for the regulators involved as this is known to be illegal and there should not be qualified immunity.
I would say there were a couple of kinds that I have observed:
1 - debanking of companies who were thought to be actual fraudsters or criminals, especially when they refused to answer or obfuscated on significant risk issues. I may have been someone who did not want to onboard @FTX_Official while at a bank, and I'm going to tell you I think that decision aged pretty well. There were similar concerns around places like Celsius (not the energy drink, @CelsiusOfficial you guys are cool). There were also some shady Bitcoin ATM operators and offshore exchanges that were clearly fronts for scams or money laundering, and then the pump and dump ICOs, etc.
Real talk: debanking or refusing to bank these people while approaching other parts of the space was a sign of highly effective risk management and banks that did that should be commended, not condemned.
2 - debanking of companies after banking the space because their risk people can't find their ass with both hands and a map. This is what I was discussing above with compliance and risk people who are just not willing to do the work, and because there was a problem in crypto somewhere, rather than do their job, they just say no. This happens a lot in banks because of ineffective leadership at the top and in the risk stripes that empower those who are lazy, on power trips, or simply incompetent. But there's a lot of this where you will get debanked as a company even though you did nothing wrong.
3 - debanking of companies because the bank itself ran into severe controls issues. There are a few of these. It's not the median situation, but when you get debanked by Mercury after everything went sideways post the Evolve situation, that's much less shocking to me and might be more of a comment on Mercury. Here this should be handled much better but I don't think it's malfeasance, unlike 2, which is essentially depriving people of access to the financial system because either you are too lazy or too biased to care.
4 - debanking of companies becuase larger entities put pressure on them to not touch the space for anti-competitive reasons. This definitely happened. Some folks are already talking about it. This is one for the department of justice, because I did plenty of compliance trainings when I was at JPM and Citi that made very clear that forming industry cartels to hobble competition or exclude people was 100% an anti-trust problem. Here, if any evidence can be found, there should be charges, just like in the FX and Libor scandals. Only those charges this time might also need to include regulators.
5 - debanking of individuals because of association with crypto. This I find incredibly pernicious. When you are closing personal accounts that is a statement that goes far beyond controls. This is when you are saying to someone "the industry is so bad the fact that you are associated with it at all is disqualifying". To be blunt, if you don't have very good paperwork backing up your risk analysis and you debanked individuals merely for working in the space, there should be an investigation. If you did it on your volition, this is essentially discrimination and should be illegal. If you did it because a regulator made you do it, you should speak up now.
6 - debanking of companies because regulators made them. Again, this is fundamentally evil. If there was nothing particularly risky or problematic for the company and the regulator cannot point to a specific action of the company that was generating a practical, real, measurable problem (so not hand-wavy issues around "oh crypto is scaaaaaary" but rather "uh that $10B belongs to literally North Korea"), this is OCP 1.0 all over again and it was very clear that was illegal already. In cases where this happened, my personal view is there should be criminal charges and personal liability for the regulators involved as this is known to be illegal and there should not be qualified immunity.
7/ So why did I write all that down? Because I am seeing accusations being thrown around about what debanking is (refusing to give you an account the first time is not debanking), or what the motive was (pretty sure Mercury and Evolve are facing existential questions about their existence vs. TD Bank being assholes to another Austin - don't fuck with the Austin cabal, we will come for you). Therefore I want you, dear reader, to be informed on the topic and understand what was really going down.
8/ As a final point, I'm going to name the agencies I think were involved in these tactics and link to some of Nic Carter's work as well as raise a few other points.
1: The FDIC appears to have been the nexus of this activity. They have been informally telling banks that they are limited to 15% of deposits being in "crypto" with no justification for this other than they are "risky" in some unspoken / unknowable way that means even if you back them purely with t-bills, that's too much risk. Read that again. Short-dated obligations of the US Treasury are too risky as matching assets. This is in addition to harassing any bank that touches crypto, requiring them to go through extreme procedures to get new business approval and then never giving it by asking endless questions without ever giving an answer, and threatening the charter of banks that don't comply with this industry blockade. An almost exact replay of OCP 1.0, including the shady justifications about reputational risk and complete absence of commentary on specific, concrete things. They even damaged shareholders and very nearly depositors of Signature bank by refusing to include the fast payments business in the disposition of the bank after it failed because that helped crypto clients do business.
2: Similarly, elements of the Federal Reserve appear to have been involved. I'm going to be a bit more gentle than many here with the Fed because I will rightly point out that the Fed is many regional banks, the board, and no matter what view you attribute to them there are people who believe more extreme things, less extreme things, directly contradictory things, or have a take totally perpendicular to what you said on an issue. Sometimes many of those exist inside the same person! In other words, the Fed is an institution of warring economists, and some of the arms of the Fed appear to have done some shady stuff, but other parts appear to have actually been somewhat supportive so I'm not going to say the entire leadership is out to sea.
3: With apologies to Marc, I have not seen the CFPB active in this space, though I also don't think they did anything to stop it.
4: The OCC was also involved, but more in the form of acting as a bagman for the other regulators by keeping the large banks out and signing on to the guidance in the Federal Register in early 2023 that essentially blocked banks from approaching the space (something which did not go through rulemaking, I would add for our legal mavens out there).
5: The SEC issuing Wells Notices, running around scaring banks about the activities of companies and then blaming the companies when accounts were closed and lying about it in court (don't believe me? Ask @ohaiom for all the filings around Debt Box), or promulgating SAB-121 with the express goal of crippling bank custodial offerings should also make the list.
1: The FDIC appears to have been the nexus of this activity. They have been informally telling banks that they are limited to 15% of deposits being in "crypto" with no justification for this other than they are "risky" in some unspoken / unknowable way that means even if you back them purely with t-bills, that's too much risk. Read that again. Short-dated obligations of the US Treasury are too risky as matching assets. This is in addition to harassing any bank that touches crypto, requiring them to go through extreme procedures to get new business approval and then never giving it by asking endless questions without ever giving an answer, and threatening the charter of banks that don't comply with this industry blockade. An almost exact replay of OCP 1.0, including the shady justifications about reputational risk and complete absence of commentary on specific, concrete things. They even damaged shareholders and very nearly depositors of Signature bank by refusing to include the fast payments business in the disposition of the bank after it failed because that helped crypto clients do business.
2: Similarly, elements of the Federal Reserve appear to have been involved. I'm going to be a bit more gentle than many here with the Fed because I will rightly point out that the Fed is many regional banks, the board, and no matter what view you attribute to them there are people who believe more extreme things, less extreme things, directly contradictory things, or have a take totally perpendicular to what you said on an issue. Sometimes many of those exist inside the same person! In other words, the Fed is an institution of warring economists, and some of the arms of the Fed appear to have done some shady stuff, but other parts appear to have actually been somewhat supportive so I'm not going to say the entire leadership is out to sea.
3: With apologies to Marc, I have not seen the CFPB active in this space, though I also don't think they did anything to stop it.
4: The OCC was also involved, but more in the form of acting as a bagman for the other regulators by keeping the large banks out and signing on to the guidance in the Federal Register in early 2023 that essentially blocked banks from approaching the space (something which did not go through rulemaking, I would add for our legal mavens out there).
5: The SEC issuing Wells Notices, running around scaring banks about the activities of companies and then blaming the companies when accounts were closed and lying about it in court (don't believe me? Ask @ohaiom for all the filings around Debt Box), or promulgating SAB-121 with the express goal of crippling bank custodial offerings should also make the list.
9/ So with all that said, more to come at a later date and questions welcome, and let me drop that link to Mr. Carter's work I mentioned earlier...
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