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America’s banking backstop is ready to embrace all things ‘crypto’ while Congress engages in Orwellian ‘two minutes hate’ sessions against the banking regulators who tried to keep crypto fraud at bay.
- FDIC opens the crypto banking floodgates
- Liz Warren flips her crypto script
- Senate hearing a one-note affair
- Lummis claims ‘hard proof’ of debanking
- Choke Point doc dump: debanking or debunking?
- Grewal cool with no rules
February 5 saw the U.S. Senate Banking Committee hold a hearing titled Investigating the Real Impacts of Debanking in America. The stated aim of the hearing was to dig into allegations that federal regulators ‘debanked’ individuals/entities involved in stuff the feds didn’t like, including digital assets.
This view has become accepted wisdom among American conservatives, and the ‘crypto’ crowd has labeled it Operation Choke Point 2.0, the sequel to the financial targeting of alleged ‘undesirables’ under President Barack Obama.
Before the hearing got underway, the Federal Deposit Insurance Corporation (FDIC) released 175 documents spanning 790 pages of correspondence between itself and various financial institutions involved in ‘crypto-related activities.’
Acting FDIC chair Travis Hill issued a statement saying the documents were released ahead of a court-ordered February 7 deadline and that a “comprehensive review” of the FDIC archives for additional related evidence “remains underway.”
Hill said the newly released documents showed that requests from banks seeking to involve themselves in digital asset activities “were almost universally met with resistance, ranging from repeated requests for further information, to multi-month periods of silence as institutions waited for responses, to directives from supervisors to pause, suspend, or refrain from expanding all crypto- or blockchain-related activity.”
Hill said the message these communications sent to banks was that “it would be extraordinarily difficult—if not impossible—to move forward [with digital asset plans]. As a result, the vast majority of banks simply stopped trying.”
Hill added that the FDIC was “actively reevaluating our supervisory approach to crypto-related activities. This includes replacing Financial Institution Letter (FIL) 16-2022 [which required FDIC-supervised institutions to notify the regulator ahead of time regarding their crypto plans] and providing a pathway for institutions to engage in crypto- and blockchain-related activities while still adhering to safety and soundness principles.”
We’ll dig deeper into those files below but first let’s get through the dog-and-pony show that was Wednesday’s hearing.
Warren suffering from crypto amnesia
Perhaps the most surprising takeaway from the hearing was the apparent shift by ranking member Elizabeth Warren (D-MA), a renowned crypto scold who appeared to have just returned from Damascus.
Warren’s opening statement called debanking “a real problem,” and said President Donald Trump was “onto a real problem” when he criticized Bank of America (BofA) at last month’s World Economic Forum (WEF).
But Warren focused on debanking’s impact on low-income Americans, Muslims, ex-convicts and other marginalized groups. Warren didn’t reference ‘crypto’ or ‘digital assets,’ neither in her statement nor in her questions to the witnesses, even when the witnesses themselves referenced alleged instances of crypto-related debanking.
Hear ye, hear ye
The witness list was firmly on crypto’s side, making the hearing sorta like that bar in the Blues Brothers movie that featured “two types of music: country AND western.”
The ‘anti-debanking’ faction was represented by Nathan McCauley, CEO/co-founder of digital asset custodian Anchorage Digital; Mike Ring, CEO/co-founder of the online-only Old Glory Bank; and Davis Wright Tremaine LLP partner Stephen Gannon, co-author of a crypto primer for the American Bar Association.
McAuley’s opening statement revealed how, in June 2023, Anchorage was told by its banking partner that “our account would be closed in thirty days because they were not comfortable with our crypto clients’ transactions.” This bank “refused to engage in further discussions, provide any additional explanation, or offer any chance to appeal the decision.”
Following the flurry of crypto-related bank failures that spring, Anchorage spoke to “over 40” banks over a seven-month period, all of which rejected doing business with Anchorage. This led Anchorage to lay off 20% of its workforce.
Asked by the appropriately named Sen. Jim Banks (R-IN) if these banks had “incentives” to debank Anchorage as an up-and-coming competitor, McAuley said he didn’t think so, given that he’d been having “active conversations” with big banks about “adding crypto as an offering” and thus debanking crypto clients “was not something they wanted to do.”
Old Glory didn’t launch until April 2023 but CEO Ring claimed the FDIC’s FIL 16-22 and the Securities and Exchange Commission’s (SEC) (since-repealed) SAB 121 was a “one-two punch” that prevented banks from serving as either a digital asset custodian or a fiat off-ramp.
Sen. Jack Reed (D-RI) stated that crypto is helping to finance rogue nations such as North Korea, terror groups, and other illicit activities, then asked Ring whether that justified banks applying extra scrutiny to potential crypto clients. Ring acknowledged that these were real issues but suggested banks shouldn’t be on the front lines of these investigations. Ring called the Bank Secrecy Act (BSA) “the Trojan horse for banks to do whatever they want.”
Sen. Thom Tillis (R-NC) noted the lack of concrete definitions regarding the suitability of banking clients, then asked Gannon whether regulators were doing “a wink and a nod” regarding whether or not bank clients were “unsavory.” Gannon agreed, saying the definition of ‘reputational’ risk was “almost the definition of subjective,” and emphasized the need for more objective/definitive terms.
Sen. Pete Ricketts (R-NE) asked Gannon if banks and regulators had exceeded their statutory authority by “focusing on reputation and risk instead of safety and soundness?” Gannon agreed, saying this was “a backdoor way of making [undesirable] businesses illegal.”
Ring complained that he’d “never talked to a regulator that was actually a banker,” only unelected “bureaucrats, people that never signed the front side of a check.” This allowed several Democrats to raise the subject of the unelected Elon Musk’s Department of Government Efficiency (DOGE) and its ongoing takeover of the federal payment systems, which prompted pushback from several GOP senators who studiously avoided saying anything re Musk’s lack of electoral victories.
It was left to Aaron Klein, Senior Fellow in Economic Studies at the Brookings Institution, to occasionally interject some discouraging words into this not-cloudy crypto sky. When Ring claimed that Silicon Valley Bank’s (SVB) March 2023 failure was due to “a lack of liquidity,” Klein clarified that SVB’s failure was due to its “horrible investment strategy” in long-term T-bills, adding that bank runs occur when customers “realize the bank is out of capital.”
Klein then pivoted to the fact that SVB’s clients had to be bailed out by the FDIC, including SVB’s single-largest depositor, Circle, the issuer of the USDC stablecoin, which dramatically lost its 1:1 peg with the U.S. dollar until the FDIC handed Circle $3.3 billion to restore their balance sheet.
Klein said this demonstrated the “connection between crypto and the banking system,” adding that SVB’s CEO sat on the board of the San Francisco Federal Reserve Board. Notably, he was cut off by Sen. Scott before he could continue his speech.
Lummis show & tell
Sen. Cynthia Lummis (R-WY) showed up near the end of the hearing bearing a printed section of a Federal Reserve Bank implementation handbook on account access.
The quoted text said Fed staff “generally should consider the conduct of the institution and its leadership and whether association with the institution poses undue reputational risk to the Reserve Bank.” The quote then cites an example, asking whether an institution’s leadership is “associated with controversial commentary or activities?”
Lummis asked Gannon whether the Fed should be “serving as judge and jury over a particular banker’s speech?” Gannon said he found the excerpt “chilling” and it bolstered his arguments regarding the subjectivity of reputation risk.
Ring, who earlier slammed regulators for using “preferred pronouns,” said that given “the things I’ve said about pro-America causes and the flag, I feel like [the ‘controversial’ quote] was written for me.” McAuley said the language “appears to be a tacit attempt to hold back speech that is considered undesirable.” Lummis called it “hard proof of Operation Choke Point.”
Scott closed the proceedings by noting that this was in no way the last time Congress would be discussing this issue. Indeed, the House Financial Services Committee (FSC) is holding its own hearing on February 6 titled Operation Choke Point 2.0: The Biden Administration’s Efforts to Put Crypto in the Crosshairs. It’ll be a fair and balanced soirée, we’re sure.
The nonsmoking guns
Getting back to that massive FDIC document dump, the usual suspects were out in force, making claims that the trove was proof positive that Choke Point 2.0 was real and not simply a ghost story told around a fire at Crypto Bro Summer Camp.
Paul Grewal, chief legal officer at the Coinbase (NASDAQ: COIN) exchange, tweeted a triumphant “We were right” along with selected screenshots from the 175 letters in Wednesday’s dump. Grewal claimed these “shakedown letters” show the FDIC “again and again … used their supervisory authority to kill crypto-related offerings.”
The crypto-focused Custodia Bank, which received a special-purpose depository institution (SPDI) permit from Wyoming regulators, has waged a long legal fight against the Federal Reserve for denying it access to Fed master accounts. Custodia’s CEO Caitlin Long tweeted her own analysis of the FDIC docs, with similarly celebratory references to alleged smoking guns.
And yet, as with previous FDIC releases of similar documents, the letters largely show the FDIC expressing concern over banks getting entangled in this new financial sector—which at the time was undergoing a tsunami of bankruptcies, frauds, and rug pulls—and asking banks for more information before they proceeded further.
It doesn’t take a conspiracy theorist to imagine that the FDIC wanted to pump the brakes on its member institutions—whose depositors, like those of SVB, would need bailouts should things go squirrelly—before allowing them to jump into the crypto swamp without knowing how deep it was or whether poisonous snakes and hungry alligators lurked beneath its surface.
Your bias is showing
Grewal will be one of the witnesses at Thursday’s House hearing, where he will almost certainly celebrate the FDIC’s new ‘sure, what’s the worst that could happen’ stance. His prepared remarks slam the FDIC’s previous leadership for “allowing anti-crypto bias to hinder a legal industry.”
Grewal’s remarks make no mention—and he’s unlikely to raise the matter in the room—of the fact that his company is a partner with Circle on the USDC stablecoin. As such, Coinbase would have been on the hook for a healthy chunk of that $3.3 billion shortfall had the FDIC not ridden to their rescue.
While warning of ‘anti-crypto bias,’ these techno edgelords never acknowledge their own bias, let alone their fallibility, or that countless retail ‘investors’ may be irrevocably harmed through exposure to poorly regulated ‘crypto’ products. As will the U.S. economy if the contagion isn’t limited to a handful of risk-hungry banks like last time.
Coinbase has proposed a new system in which it foregoes any scrutiny of the soundness—or even the semblance of utility—of any token before listing it on its exchange. Nevermind that 86% of memecoins lose 90% of their value within three months of their launch. Are the listed tokens in which Coinbase and/or members of its board of directors have financial stakes getting that lonely?
Don’t forget that the Commodity Futures Trading Commission (CFTC) is expected to be given the primary oversight role in our coming crypto paradise. The CFTC was also responsible for regulating financial derivatives ahead of the 2008 global economic crisis. It was assumed then that since the companies issuing OTC derivatives were themselves regulated, there was no need to specifically regulate OTC derivatives. How’d that work out again?
Those who forget—or ignore—history are doomed to repeat it. And a lot of others will be doomed in the process. Choke on that.
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