In a development that could have major implications for the crypto industry, Congressional committees in both the House and Senate are launching investigations into alleged pressure by financial regulators under the Biden administration to cut off crypto firms’ access to the banking system – a practice critics have dubbed “Operation Chokepoint 2.0” in reference to a similar crackdown on “high-risk” industries under the Obama administration.
The House Committee on Oversight and Government Reform is questioning founders and CEOs of several prominent crypto companies and organizations, including Coinbase, Lightswap, and Uniswap Labs, as part of its probe into what committee chairman Rep. James Comer called the “debanking practice” facing the industry.
Meanwhile, the Senate Banking Committee, now chaired by crypto-friendly Republican Tim Scott following the GOP takeover of the chamber, has scheduled a February 5th hearing titled “Under the Biden Administration: Crypto Debanking.” In announcing the hearing, Sen. Scott alleged that “Biden regulators abused their power and forced financial institutions to cut off services to digital asset firms” in what amounts to discrimination based on “political beliefs.”
Parsing the Pressure Points
While anecdotal accounts of crypto companies struggling to obtain and maintain banking relationships have circulated for years, the Congressional investigations aim to determine the extent to which government regulators may have inappropriately influenced banks’ risk assessments and decisions to provide services to the industry.
In one high-profile case, Coinbase pursued private communications between the FDIC and banks that demonstrated the agency had directed them to stop pursuing digital assets services until specific regulations were in place – regulations the FDIC wasn’t actively developing. Other industry participants have pointed to increasingly burdensome compliance demands and ominous warnings from regulators as driving factors behind banks cutting ties.
Kristin Smith, CEO of the Blockchain Association which also received an investigatory letter from the House Oversight committee, said the group is “grateful to assist in the thorough investigation of this pernicious practice.” The association has been a vocal critic of what it sees as a “shadow ban” on crypto by U.S. authorities.
Distinguishing Risk from Reproach
A key challenge for the Congressional committees will be disentangling legitimate regulatory oversight and risk management from any undue or discriminatory pressure tactics. Banking regulators like the FDIC and OCC have publicly stated that banks engaging with crypto firms would face heightened scrutiny and restrictions.
“Banks that engage in crypto-related activities have stricter risk management requirements and are supervised more closely to ensure they’re mitigating risks appropriately – but they aren’t prohibited from banking crypto companies altogether.”
– Former FDIC official speaking on background
Some banks may have independently determined that crypto clients posed risk levels or compliance burdens beyond their appetites, rather than acting on explicit government directives. The investigations will likely seek to clarify where regulatory guidance ended and any ideological or punitive motives began.
Political Pendulum Swings
The Republican-led probes into crypto debanking mark a stark contrast from recent Democratic priorities. House Financial Services Committee members are pursuing an investigation into former President Donald Trump’s newly launched $TRUMP meme coin, concerned about potential conflicts of interest stemming from his time in office.
The divergent focuses reflect the deepening politicization of crypto policy issues. Many Democrats have advocated for more aggressive enforcement and investor protections, while Republicans have largely embraced the industry as an embodiment of free market innovation and decentralization.
With the House now under Republican control and the Senate Banking Committee chaired by a crypto proponent, the debanking investigations could serve as a springboard for broader GOP efforts to rein in what they see as regulatory overreach and support a budding industry – with the banking access battle the first salvo in a wider crypto policy war.
Industry Impact and the Road Ahead
For the crypto companies in the eye of the debanking storm, the Congressional spotlight offers a chance to air long-simmering grievances and potentially shake loose the banking logjam that has stymied their growth and mainstreaming ambitions. Stable banking relationships are considered crucial infrastructure for an industry seeking wider adoption.
- Coinbase CEO Brian Armstrong has been an outspoken critic of “backdoor” crypto crackdowns via the banking system
- Uniswap founder Hayden Adams tweeted appreciation for Sen. Scott’s “leadership” in confronting denial of services
How far the pendulum swings may depend on the findings and recommendations that emerge from the investigations. Uncovering clear evidence of coordinated debanking pressure campaigns could build momentum for Congressional action to prohibit such practices.
Short of legislation, strongly worded reports and hearings that put regulators on the defensive could still yield a chilling effect on the more aggressive debanking tactics alleged by industry players and their allies. At minimum, the industry is poised for a more receptive audience and sympathetic treatment under the new Republican leadership of key committees.
The long-term impact of the debanking probes will play out against the backdrop of the wider crypto regulatory landscape, including battles over the SEC’s jurisdiction, stablecoin oversight, and the fallout from a spate of high-profile industry implosions. But with the banking access fight now a marquee event, the industry has gained a powerful hand in D.C. – and a chance to start swinging the momentum in its favor.
