FDIC at a Crux: Debanking, Cryptocurrencies, and the Struggle for Change
The Federal Deposit Insurance Corporation (FDIC) is currently navigating a turbulent landscape of innovation and regulatory reform, with recent remarks from Vice Chairman Travis Hill stirring up debates over financial inclusion, cryptocurrency, and alleged "Operation Chokepoint 2.0." This alleged modern-day debanking practice, targeting the crypto industry, has become a major point of contention between traditional financial institutions and digital asset innovators.
A release of "pause letters" by the FDIC on January 6, 2024, has further fueled these discussions, providing validation to long-standing complaints from crypto-focused companies like Custodia Bank, led by CEO Caitlin Long. Custodia's high-profile litigation against the Federal Reserve Board of Governors and the Federal Reserve Bank of Kansas City, over a denied application for a Federal Reserve master account, has become a symbol of the conflict between innovation and established financial systems.
With the outcome of Custodia's Tenth Circuit appeal reportedly set for January 21, 2025, the resolution of this case could significantly impact the ability of crypto-focused banks to compete on a level playing field. Many industry leaders, including Long, often take to social media to expose what she refers to as systemic debanking practices, amplifying the voices of crypto firms struggling to secure banking services.
Prudential regulators, such as the FDIC, Federal Reserve, and the Office of the Comptroller of the Currency (OCC), are responsible for maintaining financial stability. However, their methodologies have come under scrutiny for being overly compliance-focused and disproportionately impacting smaller financial institutions, according to Vice Chairman Hill. The original "Operation Chokepoint," which sought to cut off banking services for certain industries considered "high risk," has been criticized for targeting legal businesses, including short-term lenders and firearm merchants.
A recent survey by the Alternative Investment Management Association (AIMA) found that 75% of 160 crypto hedge funds reported difficulty accessing banking services, while none of the 20 traditional hedge funds surveyed faced similar challenges, suggesting targeted action against the crypto industry. Coinbase's Chief Legal Officer, Paul Grewal, has expressed frustration over this discrepancy, calling for answers.
In the midst of these developments, a Republican-led Congress is preparing to exercise its oversight power, putting pressure on regulators to justify their approaches to innovation, inclusion, and fairness in the rapidly evolving digital financial landscape.
References:[1] T. Johnson, "Operation Chokepoint Schools Regulators on the Art of Regulation by Intimidation," American Banker, July 8, 2014.[2] T. Day, "Crypto Firms Face Growing Scrutiny as Biden Administration Reviews Regulatory Policy," The Wall Street Journal, April 6, 2023.[3] B. Mccarthy and P. Chanthaphouvong, "Crypto Firms Tell Congress They've Been Hurt by Operation Chokepoint 2.0," The Hill, March 2, 2023.[4] Exclusive: Trump pledges to dismantle Operation Chokepoint 2.0 if reelected, Cointelegraph, July 21, 2024.
Caitlin Long, the CEO of Custodia Bank, has been vocal about alleged systemic debanking practices, often sharing her concerns on social media. The FDIC's release of "pause letters" has validated complaints from crypto-focused companies like Custodia, adding fuel to the debanking debate. Coinbase's Chief Legal Officer, Paul Grewal, has also expressed frustration over the difficulty crypto firms face in accessing banking services. The Biden administration's review of regulatory policy has resulted in growing scrutiny for the crypto industry, echoing concerns raised earlier by former President Trump, who pledged to dismantle Operation Chokepoint 2.0 if reelected.
