FDIC Documents Confirm Crypto Bias

Prior to today’s Senate Banking Committee to investigate the controversial practice of debanking, Acting FDIC Chairman Travis Hill released a treasure trove of documents supporting crypto industry claims of the existence of Operation Chokepoint (OCP) 2.0.

The documents, obtained through a Freedom of Information Act (FOIA) lawsuit filed by History Associates Inc., revealed that regulators had strongly encouraged banks to minimize their involvement with crypto activities.

A series of 23 “pause letters” sent in 2022 strongly advised FDIC-supervised banks to halt all crypto business-related activities until further notice.

“We respectfully ask that you pause all crypto asset-related activity”

While the letters come as no surprise to industry participants, they are the latest artifacts pointing to a concerted effort by the previous administration to stifle the growth of the crypto industry.

U.S. cryptocurrency exchange Coinbase (COIN) hired History Associates Inc. in June 2024 to pursue legal action against the SEC and FDIC, after repeated requests for documents under the Freedom of Information Act were repeatedly and incorrectly denied.

In an interview with CoinDesk, Coinbase Chief Legal Officer Paul Grewal said, “The letters show that this was no conspiracy theory at all, that this was not just rank speculation or the musings of a paranoid industry.”

Senate Banking Committee Hearing on Debanking

The FDIC release preceded a highly anticipated congressional hearing on debanking, where financial institutions deny services to certain industries, political groups, or individuals. “Investigating the Real Impacts of Debanking in America,” put industry representatives front and center, to discuss the implications and potential solutions to this growing issue with lawmakers and regulators.

During the first month of the Trump administration, a number of pro-crypto policy signals have emerged. Today’s hearing is another step forward in advancing this agenda.

Opening Remarks

Senate Banking Committee Chairman Tim Scott (R-S.C.) opened the session by emphasizing the importance of access to financial services for all Americans. Relaying deeply personal experiences with banks, Scott traced the arc of his grandfather’s experience in the Jim Crow South and his mother’s experience with pervasive redlining that was based primarily on the color of [their] skin.

“In the 1990s . . . [I] could get a character loan. With that loan, everything seemed to get better. In this country, access to credit is one of the cornerstones of building your American Dream. . .that’s why access to financial services is so important.”

In a CNBC interview, Scott would go on to say about bias in the banking system, “It’s less about black and white, but unfortunately, today, it’s more about red and blue.”

During his opening statement, Chairman Scott said, “Under the Biden Administration, we’ve seen the rise of what many are calling Operation Chokepoint 2.0. Federal regulators exploited their power, pressuring banks to cut off services to individuals with conservative dispositions or folks aligned with industries they just didn’t like. Like the color of one’s skin in my family’s history.”

In the days leading up to the hearing, Scott pointed to the weaponization of the banking system (debanking) against politically disfavored industries like cryptocurrency, oil & gas and firearms, and private individuals including Melania Trump.

“I wholeheartedly believe that debanking someone over their political ideology is un-American and goes against the core values that our nation was founded upon.”

Testimonies from Industry Experts

Industry experts testifying included Nathan McCauley, CEO of Anchorage Digital, Mike Ring, CEO of Old Glory Bank, Stephen Gannon, a Partner at Davis Wright Tremaine focused on banking, and Aaron Klein, a Senior Fellow in Economic Studies at the Brookings Institution. Testimony offered was pointed and eye-opening with respect to the breadth and depth of debanking and other banking practices affected by regulatory overreach.

During his opening remarks, McCauley specifically pointed out his company’s status as federally chartered bank. Despite being granted their OCC charter as a national trust bank in 2021, Anchorage was unfairly denied access to essential banking services by another federally chartered bank.

McCauley would go on to illustrate a number of instances that would impact Anchorage’s operations. From the closure of a trading business doing “hundreds of millions of dollars” of business a month to the debanking of employees of the firm, OCP deeply impacted Anchorage and other crypto firms.

“When the FDIC asked banks to pause all crypto-related acitivities, the next effect was that crypto entrepreneurs moved their businesses to other jurisdictions.” McCauley emphasized how the debanking trend harmed the crypto industry and stifled innovation.

Old Glory Bank CEO, Mike Ring, focused his testimony on the breadth of industries harmed by debanking and regulatory overreach. In particular, Mr. Ring emphasized that in his banking career, he had never met a regulator that had been a banker or bank officer. Old Glory Bank was formed to bank companies and industries that had been debanked by other banks.

Stephen Gannon highlighted how regulatory misinterpretation and overreach adversely affected bank clients. In one instance a vineyard owner, whose spouse owned a cannabis business, was promptly debanked, alongside four of the vineyard’s employees. “They [the regulators] used a 5-pound sledge hammer, not a scalpel.”

Mr. Klein’s contribution to the hearing highlighted the erroneous ways in which banks are incentivized. With respect to regulatory reporting, Klein said, “banks are not judged on the quality of filings, but the quantity.” He then went on to question the necessity of the reports. “You don’t beed a bank report to tell you where an illicit business is.”

On the topic of adverse impact on clients, Klein addressed the impact that technology could have on the banking system. Currently, banks employ batch processing when dealing with transactions. In some instances, banks have been known to re-order transactions to maximize overdraft fees. Klein pointed out Armed Forces Bank, earning an industry-leading $92 in overdraft fees per customer.

Technological advances like Real-Time Payments (RTP) and other payments networks should ameliorate the adverse affect of batch processing and re-ordering for consumers as payments will flow and be reconciled as and when they occur.

Committee Points of View

While most in the committee spoke with deference and pointed to a willingness to cooperate with the current administration on improving the state of banking, rhetoric was decidedly partisan.

The committe’s ranking member, Senator Elizabeth Warren (D-Mass.), expressed a willingness to work on the debanking of crypto firms, but maintained her staunch defense of the Consumer Finance Protection Bureau (CFPB), which has been tabbed by the Trump administration for shut-down. Citing the CFPB’s role in promoting fair access to financial services, she claimed the bureau’s alignment with administration goals.

Not surprisingly, Senator Cynthia Lummis (R-Wy), a strong advocate for the crypto industry, highlighted the economic potential of digital assets and the need for regulatory clarity.

While little time was spent on it, Senator Raphael Warnock (D-Ga) made light of the almost two year anniversary of the failures of Silicon Valley Bank, Silvergate Bank, and First Republic Bank. While cryptocurrency industry critics attempted to tie their failures to their involvement with cryptocurrency companies, later investigation revealed this not to be the case.

Throughout the course of the hearing, Democrat Senators Alsobrooks (Md), Warnock and Warren used their allotted speaking time to express their displeasure with Elon Musk’s access to the U.S. Treasury payments system and the accompanying data. In 1999, Musk co-founded X.com, which later merged with PayPal.

Regulatory Challenges

While focused on providing open access to legitimate businesses and people, the hearing also addressed the regulatory challenges faced by financial institutions and the need for clearer standards.

Anti-Money Laundering (AML) and Know Your Customer (KYC) requirements sit at the crux of these challenges. Complex AML and KYC regulations can be obstacles to serving businesses. Financial institutions experts argue that unclear rules and regulatory pressure have led to the debanking of industries, such as cryptocurrency firms, because they are perceived as high-risk.

What’s Next

Today’s Senate Banking Committee hearing on debanking practices highlighted the need for legislative action to ensure fair access to financial services for all industries. The testimonies from key witnesses, the perspectives of committee members, and the revelations from the FDIC documents underscored the importance of transparency, regulatory clarity, and accountability.

There remains plenty of work for the committee as the business of enacting common sense legislation can be tricky. The balance of protecting businesses and individuals from unfair debanking practices while promoting fair and inclusive financial services must be balanced with guardrails that protect those institutions from unknowingly financing bad actors.