02.03.2025|Alex GrieveJonathan Hurowitz
This week, the Senate Banking Committee and House Financial Services Committee will take a hard look at a troubling issue: how regulators in the last administration pushed banks to cut crypto companies off from financial services. These hearings are critical to turning the page on the past few years and ensuring that the United States shows true leadership in digital assets and financial technology, an important goal set out in the President’s recent Crypto Executive Order.
Crypto, AI, and other frontier technologies are critical to our country's future. But if the founders building these companies are debanked, or the companies themselves can't safely and easily set up and keep a bank account, it’s not possible to do business or hire teams in the United States. This week, that starts to change. Here's what to watch for.
In the past, many crypto companies lost (or nearly lost) access to all banking services. For example, Stellar Development Foundation’s CEO reported that the Foundation was debanked, after which they approached ten different financial institutions to gain sufficient coverage. 1 That demeaning shuffle has been a too-common occurrence over the last few years in crypto.
Without a bank account, it is presently difficult to interact with traditional financial systems or receive institutional financing. The problem is compounded if payment processors also refuse the company’s business, jeopardizing on- and off-ramps. Being debanked is not a one-time embarrassing event, but exposes a company to a dangerous cascade of risks that can capsize even a well-managed firm. Not everyone has stayed afloat after all those waves.
Banks justified the debanking of crypto companies with generalized arguments that such companies present legal or financial risk. However, providing basic financial services to crypto companies is not the same as taking crypto assets as deposits or even lending to such companies. And while risk management can be a legitimate consideration, we are concerned that banks were looking for a pretext to avoid regulatory scrutiny rather than genuinely mitigate risk, especially when even rigorously-vetted companies were losing bank accounts.
Crypto founders and employees have also been debanked. 2 For example, Hayden Adams reported that JPMorgan Chase debanked him in 2022 without explanation. He noted that nearly every attendee at a crypto-related dinner he attended that year had also been debanked.
Even if banks see crypto companies as uniquely risky, there is no reason to expect the personal bank accounts of founders and employees to carry the same degree of legal or financial risk.
Losing a personal bank account can seriously impact people’s lives, making it difficult to obtain a credit card, secure a mortgage, or engage in routine financial transactions. Often, these debanking decisions culminate in nonsensical results. For example, Austin Federa, founder of DoubleZero, described how after his bank tried to debank him three times, a second bank denied him a mortgage because he worked in crypto but said that if he resigned (and therefore had no income), they would lend to him.
One of the most contentious issues that will be raised in the hearings is whether federal regulators pressured banks – implicitly or explicitly – to cut off access to crypto businesses. This “Operation Chokepoint 2.0” echoes a 2014-era effort by federal banking regulators (known as “Operation Chokepoint”) to cut off banking services to various legal industries that the government disfavored, including payday lenders and firearms manufacturers.
Recent FOIA requests revealed that the FDIC sent letters to 25 banks in 2022 advising them to pause crypto-related activities until the agency could assess risks. Later, in January 2023, the FDIC, OCC, and Federal Reserve issued a joint statement to banks that business models with concentrated exposure to the crypto-asset sector posed “significant safety and soundness concerns.” This statement was endorsed by the Biden White House, which encouraged federal regulators to “limit financial institutions’ exposure to the risks of digital assets.”
The implied threat of increased regulatory scrutiny, additional examinations, or potential enforcement actions was enough to deter many banks from servicing the entire industry. In 2022, Senator Elizabeth Warren praised “President Biden’s regulators,” including then-Acting Chairman of the FDIC Martin Gruenberg, for fighting “to keep crypto from becoming dangerously intertwined with our banking system.” Indeed, Travis Hill, the Acting Chairman of the FDIC, recently acknowledged the existence of “public perception that the FDIC is closed for business if institutions are interested in anything related to blockchain or distributed ledger technology.”
As noted above, the downstream effect of the bank regulators’ previous disfavor towards crypto has been the debanking of individuals in their personal capacity, which runs directly contrary to regulators’ longstanding goals of decreasing the unbanked population. 3
A narrative that should feature heavily in the hearing is that the closures of Silvergate and Signature Bank were not inevitable. Indeed, both are examples of situations where regulators let their politics get ahead of smart oversight.
In March 2023, Silvergate filed for voluntary liquidation and, shortly thereafter, the New York State Department of Financial Services (NYDFS) forcibly closed Signature. Silvergate initially expressed liquidity concerns in late 2022, after experiencing a large outflow of customer deposits following the bankruptcy of FTX, but successfully averted collapse after securing loans from the Federal Reserve Bank of San Francisco and the Federal Home Loan Bank (FHLB) of San Francisco.
However, in the subsequent months, Silvergate’s ability to conduct business and secure further loans was complicated by intense government scrutiny. On March 1, 2023, Silvergate disclosed risk of potential adverse financial performance due to, among other things, (i) “the safety and soundness concerns expressed by the federal banking agencies regarding banking institutions with business models that are concentrated in digital asset related activities," 4 (ii) congressional inquiries, 5 and (iii) investigations by the Department of Justice. Three senators, including Senator Elizabeth Warren, specifically criticized Silvergate’s reliance on the FHLB loan. The resulting crisis of confidence in Silvergate by depositors and lenders led to its filing for voluntary liquidation later that month.
Not long after Silvergate collapsed, NYDFS closed Signature Bank over insolvency concerns due to outflows of customer funds from the bank. Executives at Signature were surprised by NYDFS’s closure given their belief that the bank was solvent and well capitalized.
The immediate causes of these banks’ failures were not any unique risk of the crypto industry, 6 but instead a simultaneous outflow of customer deposits and an apparent inability to secure emergency financing (both due to their heavy concentration of customers in a single industry and government pressure). 7 It is incorrect to suggest that siloing the crypto industry into a small number of banks decreased systemic risk; rather, the resulting concentration increased systemic risk.
Although not directly related to debanking, the hearings (and surrounding media coverage) are likely to mention SAB 121, an accounting rule the SEC introduced in 2022 that made it prohibitively expensive for banks to custody crypto assets.
Under this rule, financial institutions were required to treat crypto assets (including those they custodied) as liabilities on their balance sheets, necessitating offsetting capital reserves (lest bank capital holding requirements be negatively impacted). SAB 121 did not solely target crypto asset deposits at banks (where, similar to any dollar bank deposit, a bank will lend the deposit), but instead targeted assets under custody (where a bank would, similar to a custodian like Coinbase, custody the private keys to a user’s hosted wallet). Custodying crypto is like storing gold in a bank vault for safekeeping: the bank will maintain some insurance to offset risk of loss, but it is not lending the asset itself. SAB 121 made the business of crypto custody prohibitively expensive, substantially shrinking the number of custody options available to the market. 8
SEC Commissioner Hester Peirce noted that SAB 121 was just one of many examples of the SEC providing a “supervisory signal” to dissuade traditional financial firms from servicing crypto clients. Underscoring the arbitrary nature of this guidance, Jim Kroeker, the former Vice Chair of the Federal Accounting Standards Board (FASB) and the SEC’s Chief Accountant from 2009 to 2012, recently stated that SAB 121 was not consistent with existing GAAP standards, and was clearly “punitive” in intent.
SAB 121 was rescinded by the SEC on January 23, 2025, concurrent with President Trump’s recent executive order on crypto. 9
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