Congress Investigates Debanking, FDIC’s “Choke Point 2.0” Documents Revealed

U.S. Lawmakers Investigate Allegations of Regulatory Pressure Against Crypto Industry

Lawmakers in the United States are intensifying their scrutiny of allegations that federal regulators, under the Biden administration, have pressured banks to sever ties with certain groups and sectors, notably cryptocurrency firms. On November 15, 2023, the Senate Banking Committee, led by Senator Tim Scott (R., S.C.), convened a hearing to examine claims that federal agencies influenced financial institutions to cut off access to their services. The hearing highlighted growing concerns about what many in the crypto industry have labeled “Operation Choke Point 2.0,” a reference to a controversial Obama-era initiative that denied banking services to businesses like firearm dealers and payday lenders. Crypto executives testified that they were unfairly targeted during this initiative, arguing that the actions of regulators have made it increasingly difficult for their businesses to operate.

Crypto Executives Testify About Banking Challenges

Nathan McCauley, CEO of Anchorage Digital, the first and only federally chartered crypto bank, was among those who testified. McCauley revealed that Anchorage faced significant challenges in securing banking services for its corporate funds, which are essential for day-to-day operations like payroll and administrative expenses. He blamed these challenges on a series of anti-crypto regulatory actions between 2021 and 2023. McCauley cited a joint statement issued in January 2023 by the Federal Reserve, the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC), which warned banks about the risks associated with cryptocurrency. This guidance, he said, led to the loss of a corporate bank account with one of Anchorage’s partners and forced the company to reduce its services, ultimately contributing to a 20% layoff.

McCauley described the process of finding new banking partners as a major hurdle, stating that Anchorage reached out to about 40 banks nationwide but was rejected by all of them, with many citing blanket policies against serving crypto clients. He believes that banks themselves were victims of regulatory pressure, forced to weigh the risks of serving the crypto industry against the potential reputational damage. This sentiment was echoed by other crypto advocates, who argue that vague and subjective terms like “reputational risk” are being used to justify broader debanking of the sector.

The Broader Context of “Operation Choke Point 2.0”

The issue of crypto firms being cut off from banking services first gained widespread attention in February 2023, when Nic Carter, a general partner at Castle Island Ventures, published a report alleging a coordinated effort by federal agencies to marginalize the crypto sector. Since then, several high-profile figures in the crypto industry have come forward with similar accounts. For example, Marc Andreessen, a prominent venture capitalist, shared on The Joe Rogan Experience podcast in November that around 30 founders in his firm’s portfolio had been denied banking services. These revelations have fueled outrage within the crypto community, where leaders see the trend as part of a broader campaign to stifle the industry’s growth.

Other notable figures, such as Jesse Powell, cofounder and chairman of crypto exchange Kraken, and Tyler Winklevoss, billionaire cofounder of Gemini, have also shared similar experiences. They argue that this wave of debanking is part of a systematic effort to undermine the crypto industry, which has been further exacerbated by high-profile collapses like that of Sam Bankman-Fried’s FTX exchange in late 2022. These events, coupled with the subsequent shutdown of crypto-friendly banks like Signature Bank in March 2023, have led regulators to take a more restrictive approach to the sector.

Banks have been compelled to balance the real risks associated with crypto, such as fraud and volatility, against the so-called reputational risks. Trust is a cornerstone of banking, and regulators argue that they must protect the financial system from activities that could undermine public confidence. However, crypto advocates argue that “reputational risk” is a broadly defined and subjective term that is being used as a justification to unfairly target the industry. Stephen Gannon, a partner at Davis Wright Tremaine, testified that the term has no clear definition and can be reinterpreted at the discretion of regulators.

Regulators’ Perspective and the Ongoing Probe

Senator Cynthia Lummis (R., Wyo.) presented an excerpt from the Federal Reserve’s Internal Implementation Handbook as “explicit and undeniable proof of Operation Choke Point 2.0.” The excerpt instructs staff reviewing applications for account access to evaluate “the conduct of the institution and its leadership” and consider whether any association with the institution might pose “undue reputational risk” to the Reserve Bank. It also raises questions about whether the institution’s leadership is associated with controversial commentary or activities. These vague criteria, critics argue, give regulators too much discretion to exclude certain businesses or sectors from the financial system.

The probe continued on November 16, 2023, as the House Subcommittee on Oversight and Investigations held a hearing titled “Operation Choke Point 2.0: The Biden Administration’s Efforts to Put Crypto in the Crosshairs.” Scheduled witnesses included Coinbase’s chief legal officer, Paul Grewal; Austin Campbell, CEO of digital payment company WSPN USA and an adjunct professor at NYU Stern School of Business; Fred Thiel, CEO of MARA; and Shayna Olesiuk, director of banking policy at Better Markets.

The release of internal documents by the FDIC ahead of the hearing has further fueled the debate. The documents detailed the agency’s oversight of banks engaging in crypto-related activities, including 25 “pause letters” sent to institutions seeking to expand crypto services. Caitlin Long, founder and CEO of Custodia Bank, alleged that some banks were pressured to refuse U.S. dollar deposits from crypto companies. These revelations have raised concerns about the use of “regulation by exhaustion” to effectively choke off the crypto industry’s access to banking services.

Conclusion: A Tense Battle Over the Future of Crypto

The ongoing congressional investigation into “Operation Choke Point 2.0” highlights the growing tension between regulators and the crypto industry. While regulators argue that they are acting to protect the financial system from risks, crypto advocates argue that these actions are part of a broader campaign to stifle the industry’s growth. The debate centers on the balance between risk management and fair access to financial services, with crypto firms accusing regulators of using vague and subjective criteria to justify debanking.

As the probe continues, the crypto industry is bracing for further challenges. The hearings have shed light on the stories of companies like Anchorage Digital, which have faced significant hurdles in securing banking services. These accounts underscore the broader implications of “Operation Choke Point 2.0” for the future of financial innovation and access in the United States. The outcomes of these investigations will likely play a crucial role in shaping the regulatory landscape for the crypto industry in the years to come.