From a16z crypto editorial

“Debanking” has been happening behind the scenes for years but is back in the public conversation, with many individuals, policymakers, companies, and — most importantly for U.S. innovation — entrepreneurs coming forward on the issue. Since the crypto industry and specific agencies have come up again and again in this conversation, here’s a quick explainer on the phenomenon to help separate the signal from the noise.

But first, what is “debanking”?

Simply put, debanking is when a law-abiding person or entity unexpectedly loses their banking relationship, potentially being kicked out of the banking system.

Debanking is different than when an entity loses banking services because they are suspected or confirmed — after some investigation or other process — to be engaging in fraud, money laundering, or other illicit activity.

Debanking can occur without any apparent investigation, detailed explanation, or advance notice that would provide the entity enough time to move their funds. Most importantly: there is no due process, appeal process, or other recourse.

Why does it matter, in the big picture?

We already have fair banking rules that try to ensure that people aren’t discriminated against — on the basis of age, gender, marital status, national origin, race, religion, and more. But no such rules limit banks (or their regulators) from denying or revoking someone’s right to banking services at whim.

Debanking can therefore be used as a tool or weapon systematically wielded by specific political actors/ agencies against private individuals or industries without due process. Imagine if the government decided who could or couldn’t get electricity merely because of their politics, or some arbitrary reason… without having to explain, investigate, notify, or offer recourse. That’s what’s happening with debanking.

Why debank?

Not every closing of a bank account is “debanking”. Banks can justifiably close their clients’ bank accounts for many reasons, including if they believe those clients are engaged in suspicious activity. Banks may also proactively choose to reduce their regulatory compliance costs and efforts by limiting their exposure to certain individuals, industries, or business models.

However, this type of legitimate activity is not what’s raising red flags around debanking. Rather, many of the debanking concerns come from reports of regulatory authorities unlawfully wielding their power by placing undue influence on banks to drop clients in certain industries — or to drop clients with political affiliations or interests those political authorities don’t like. This enables those regulators to exert authority over industries, even though Congress never authorized that authority.

Banks often acquiesce to this pressure because they don’t want to be adversarial with the regulators that oversee them. Many banks also don’t want to deal with the compliance headaches — or additional examinations — that their banking regulators could levy on them if they fail to comply.

Where does ‘Operation Choke Point’ come in?

In 2013, the U.S. Department of Justice was found to have launched — as a policy initiative of the president’s Financial Fraud Enforcement Task Force — a probe into fraud and money laundering against certain businesses. This marked a shift in strategy for the government: Instead of targeting individual firms for wrongdoing, the government was now issuing subpoenas to the banks and payments companies about their clients who were running high-risk or politically disfavored — but legal — businesses.

In other words, the government was using its regulatory oversight to improperly “choke off” access to financial services and shut down accounts — in order to stifle businesses in industries the administration didn’t favor (as observed by the then-head of the U.S. banking industry trade association, the American Bankers Association). In his 2014 op-ed for the Wall Street Journal, Frank Keating — former president and CEO of the American Bankers Association, former Oklahoma Governor, and chairman emeritus of the Board of the Washington-based Bipartisan Policy Center — observed:

When you become a banker, no one issues you a badge, nor are you fitted for a judicial robe. So why is the Justice Department telling bankers to behave like policemen and judges? Justice’s new probe, known as ‘Operation Choke Point’, is asking banks to identify customers who may be breaking the law or simply doing something government officials don’t like.

The program was ostensibly shut down the following year following legal, congressional, and agency backlash.

Today, the phrase “Operation Choke Point 2.0” is sometimes used to refer to the government debanking “political enemies and disfavored tech startups”, to put it one way. Or as others put it, the term refers to a bank “cutting ties with a customer deemed politically incorrect, extreme, dangerous, or otherwise out of bounds”. Regardless of how the term is defined, it is an issue affecting entities at either end of, and across, the political spectrum.

Which agencies are involved?

The inner workings of Operation Choke Point — and any other related or subsequent systematic efforts to debank specific entities or industries — have not previously been clear to anyone, since investigations if any were conducted behind closed doors, and FOIA requests are still pending. But, on December 6, a court filing in one such FOIA case revealed that the Federal Deposit Insurance Corporation (FDIC) instructed at least one bank (in a letter dated March 11, 2022): “…at this time the FDIC has not yet determined what, if any, regulatory filings will be necessary for a bank to engage in this type of activity. As a result, we respectfully ask that you pause all crypto asset-related activity.” There were numerous FDIC letters filed in the case as exhibits to the record.

Meanwhile, we already knew that the original Financial Fraud Enforcement Task Force (2013) which implemented Operation Choke Point “1.0” included the FDIC, and Department of Justice (DOJ), among others. The Office of the Comptroller of the Currency (OCC) — an independent bureau within the U.S. Department of the Treasury — was also apparently involved, as was the U.S. central banker, the Federal Reserve Board (FRB). The Consumer Financial Protection Bureau (CFPB) has been cited as well.

Note: The U.S. government isn’t alone in debanking. Other governments like Canada have used the tactic; and the U.K. has had to investigate complaints of government-led debanking as well.

Why would the government do this, and what are the effects?

The reasons cited for debanking range from tackling payment processor fraud to preventing risky businesses from doing business, since those businesses may be perceived to be more associated with money laundering. Rather than being referred to as “debanking”, these reasons are more often described as de-risking: “the practice of financial institutions terminating or restricting business relationships indiscriminately with broad categories of clients, rather than analyzing and managing the risk of clients in a targeted manner”.

Applied in a broader sense, de-risking and debanking can be used as “a partisan tool” to kill legal businesses for political reasons alone. Still another reason may be that certain government agencies want more discretion and authority on deciding “where and under what circumstances consumers can obtain loans, financial products, and other banking services”.

To be clear, the issue isn’t about a specific government agency doing their job. The issue is about government overreach (or general abuse of power) against legitimate businesses — without any meaningful due process or the ability to curtail their actions, which often take place behind closed doors. Especially since sufficient laws and legal methods already exist to regulate businesses for legitimate reasons like providing consumer protection, preventing money laundering, and stopping other criminal violations.

Using debanking as a tactic has many unintended consequences. Even if the goal were to truly protect consumers and the banking system, the results can backfire by impeding consumer choice, or by having a chilling effect on commerce overall. Such practices also undermine the U.S. government’s own policy objectives, as observed in a report (2023) on de-risking from The Department of Treasury, by:

Finally, using the tactic of debanking can punish legitimate businesses and people merely by association. Take for instance the example of someone having their previously approved mortgage revoked simply because they worked for an open source foundation in the crypto industry.

For all of the reasons listed here, many have described the practice of debanking as “un-American”. It’s certainly anti-innovation when indiscriminately aimed at emerging technologies.

What is the scope of the problem?

While we can’t speak for an entire industry or particular interest, we as a VC in the crypto industry have seen, first-hand, at least 30 instances of debanking occur with our portfolio companies and founders over the last four years. Coinbase also publicly shared that they had uncovered at least “20 examples of the FDIC telling banks to ‘pause’ or ‘refrain from providing’ or ‘not proceed’ with offering crypto-banking services”.

There are likely many more cases. The issue has been unreported since many entrepreneurs and small businesses have been hesitant to come forward, due to fear of further repercussions or lack of resources to fight the issue.

For our portfolio companies, many debankings happened to pre-revenue — and pre-token — companies. Their bank accounts received VC funding (which came via institutions like pension funds and university endowments), and those companies were spending those funds on employee salaries and ordinary business expenses — just like other tech startups.

So what were the reasons these companies were told, either in writing or (more often) verbally? Cited reasons ranged from “we aren’t banking crypto” to more commonly: “Your account is being closed for compliance related issues. Please move all funds immediately.” The companies were also told this without receiving any specifics on which specific “compliance” issue, and without the ability to remedy if there really were an issue. Finally, other reports we received from our companies include:

What can you do?

Please continue to share your stories publicly; we continue to track incidents. You can also reach out to relevant partners you are in touch with here for further resources and support.

We’d also like to thank the banking partners (as well as legal counsel and others) who have been diligent — and took the time to build logical and thoughtful underwriting capabilities — by striving to understand the underlying business models and risks involved in any individual company. We know who you are, and thank you.

Acknowledgments: Michele Korver , Miles Jennings, and Emily Westerhold; thanks also to Paul Cafiero, David Sverdlov, and Aiden Slavin

Editor: Sonal Chokshi