The Breakdown - Will Debanking Actually End Now?

Starting point is 00:00:04 Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. What's going on, guys? It is Sunday February 9th, and that means it's time for Long Read Sunday. Before we get into that, however, if you are enjoying the breakdown, please go subscribe to it, give it a rating, give it a review, or if you want to dive deeper into the conversation, come join us on the Breakers Discord. You can find a link at the show notes or go to bit.ly slash breakdown pod. All right, friends, we are limping over the finish line here this week. But since we had these very consequential hearings on debanking in Operation Chokepoint 2.0 on the Hill this week,

Starting point is 00:00:44 I thought it only fitting that Longreed Sunday focuses on that as well. The piece today is by Nathan McCauley, the CEO of Anchorage Digital. It's called It's Time to End the Bureaucer's Secret Weapon, debanking. The hearing that he testified at was called investigating the real impacts of debanking in America. I'm going to turn it over to the AI version of myself, much better than the regular version of myself today, and then I'll be back with a few thoughts at the end. It's time to end the bureaucrat's secret weapon, debanking. Debanking has become a buzzword in Washington lately. The term refers to a controversial practice

Starting point is 00:01:15 where crypto companies and other businesses have been cut off from banking services, allegedly due to pressure from federal regulators. Many in our industry have dubbed this Operation Chokepoint 2.0, comparing it to a previous Obama-era initiative that discouraged banks from serving certain legal but high-risk industries. The issue has sparked heated debate, with multiple congressional investigations examining whether regulators improperly pressured banks to deny services to crypto firms and other businesses. I'm testifying before Congress about it today because my company experienced it firsthand despite being a federally regulated bank ourselves, and because debanking is widely misunderstood. To address this threat to American values, we first need to understand what

Starting point is 00:01:55 happened. Rather than regulators issuing clear transparent rules on who banks can serve, debanking operates through a shadowy and democratically unaccountable process, whereby regulars by regulators warn banks against serving certain types of customers not based on the individual risk they pose, but on hostility or bias towards an entire industry. Banks facing the threat of enforcement action penalties or worse are left with no choice but to comply, and law-abiding individuals and businesses are cut off from basic banking services, which can be devastating. Here's what it looked like for us. In June 2023, we received an urgent call from our bank of two and a half years. Despite an established banking relationship, we were even in active discussions about

Starting point is 00:02:34 expanding into new partnerships. The bank abruptly informed us they were closing our account in 30 days because it was not comfortable with our crypto client's transactions, even though we told them the funds at issue were client payments for custody fees and that these were fully documented as part of our rigorous compliance process. Our contact refused to provide any further explanation or allow us to speak to the bank's risk management team. The irony was stark. We ourselves are a federally chartered bank, regulated and supervised by the OCC, subject to the same stringent capital, liquidity, and risk management expectations as any other national bank. Not once in the course of our partnership had our banking partner ever raised an issue with our account. We were a great bank

Starting point is 00:03:11 customer, well capitalized, well regulated, and well run. Yet out of the blue, our bank abruptly cut us off with no explanation or recourse. While we were eventually able to find banks willing to partner with us, the impact of being nearly shut out of the banking system was devastating. It was extremely disruptive to our business and our clients, and contributed to the difficult decision we made in 2023 to lay off 20% of our workforce. And we weren't alone. Legitimate American businesses across our industry found themselves scrambling for basic banking services, spending time and resources on workarounds rather than innovation and growth, causing major disruption and even driving some out of business. Hello, friends. I am thrilled to share

Starting point is 00:03:50 that Ledger is once again partnering and sponsoring with The Breaktown. Many of you know, but for those you who don't, Ledger is the most secure hardware wallet for your crypto and logins. It's trusted by 7 million users and secures 20% of the world's digital assets. What's more, Ledger is a lot more than wallets. Over the recent years, they've built a comprehensive ecosystem of products and services, all of which are designed to make digital ownership more secure and accessible. You can buy your Bitcoin with Ledger and Ledger Live and so much more. Basically, not only did they want to keep your assets secure, they want you to be able to do more with them. Ledger's newest devices, the Ledger Stacks and Ledger Flex, introduced the world's first secure touchscreens, making it easier and

Starting point is 00:04:28 safer to manage your transactions and assets. Alongside Ledger Stacks and Ledger Flex, the company also launched the Ledger Security Key app, offering a safer alternative to traditional passwords and enhancing your digital security. If you are in this space, you owe it to yourself to at least check out Ledger and their ecosystem what they have available to you. So thanks, once again, to Ledger for sponsoring the show. Regulators' actions amounted to a de facto ban on banking the crypto industry, made even more destructive by its seemingly arbitrary enforcement. No one knew why some firms retained access while others were cut off, creating a climate of constant uncertainty. To be clear, if regulators had enacted such a major policy decision through proper channels, like formal notice

Starting point is 00:05:07 and comment rulemaking, that would be one thing. But no rule was ever proposed, publicly debated, or subjected to legal scrutiny. Nor did Congress ever pass legislation to authorize the choking off of large parts of an industry from the federal banking system. History shows us that without a permanent fix, this will happen again. Just over seven years ago, the FDIC apologized for the first iteration of Operation Choke Point, a concerted campaign to cut off banking to industries disfavored by regulators, promising to retrain its examiners. Fast forward to 2023, and those same debanking efforts,

Starting point is 00:05:37 this time with a different politically disfavored industry, occurred again. Without action, Operation 3.0 is only a matter of time, and any industry could be the next target. So how can we prevent this from happening again? Congressional oversight, like the hearing I will testify at, today is crucial to uncover the facts and hold the agencies accountable. Congress must also act to establish real safeguards. Consider legislation requiring banks to provide fair access to banking services within the

Starting point is 00:06:04 bounds of existing law, require agencies to annually certify that they are not pressuring banks to discriminate against lawful businesses, establish Inspector General Whistleblower Hotlines at the OCC, FDIC, and Federal Reserve to report examiner misconduct, require banks to provide written explanations for account terminations, and mandate clear appeals processes. Such protections would ensure that no federal regulator can abuse its authority to quietly choke off law-abiding individuals, companies, and industries again. More immediate steps that the new administration in Congress can take are to rescind the January 2023 joint banking regulators' guidance that served as the nail in the coffin for many crypto businesses, and rescind the OCC's Interpretive Letter 1179,

Starting point is 00:06:45 which imposed arbitrary preclearance requirements that effectively locked many banks out of crypto activities. These aren't just procedural changes. They are essential to protect American innovation and ensure democratic accountability. When regulators have to own their decisions and defend them before the public and the courts, the backroom pressure campaigns end, and transparency and rule of law prevails. The scrutiny should be on implied threats from bureaucrats, not on legitimate businesses following the rules. Until these reforms are implemented, everyone is at risk. All right, back to the real me. A couple of things stand out. On the one hand, I'm extremely grateful that this has become a political issue, that it appears that

Starting point is 00:07:26 Operation Chokepoint 2.0 is officially done, that the institutions that were most heavily involved with it are being heavily investigated, that we're getting much more information around what actually went on, and so on and so forth. What I don't love as much is how much this is being caught up in the culture war. The hearing was extremely partisan and less focused on crypto than it was on conservative debanking, which obviously people being debanked for political beliefs is a huge issue. But the culture war has a way of eating everything in America and swallowing and killing alliances that might otherwise be made. I think debanking is a fundamental issue of liberty and one that hopefully won't succumb to our toxic partisanship. And yet still, where we are today is a heck of a lot better

Starting point is 00:08:07 than we were just about a year ago. That's going to do it for today's breakdown. Appreciate you listening as always. And until next time, be safe and take care of each other. Peace.

The Breakdown - Will Debanking Actually End Now?

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