a16z: Where does the U.S. government's crackdown on crypto come from? Which agencies are involved?

Original Title: Debanking: What you need to know

Source: a16z crypto

Compiled by: 0xjs@, Golden Finance

Marc Andreessen, co-founder of a16z, revealed during the Joe Rogan podcast on November 28 that 30 tech founders had their accounts closed by U.S. banks due to crypto-related issues. In response, a16z crypto published an editorial on December 6 discussing "Debanking: What you need to know." Compiled by 0xjs@ Golden Finance, the full text is as follows:

"Debanking" has been happening behind the scenes for years, but it has recently resurfaced as a topic of public discussion, with many individuals, policymakers, companies, and the most important entrepreneurs for American innovation stepping forward to talk about it. As the cryptocurrency industry and specific institutions repeatedly appear in this discussion, here is a brief explanation of this phenomenon to help distinguish signal from noise.

But first, what is "debanking"?

In short, debanking refers to law-abiding individuals or entities unexpectedly losing their banking relationships, and they may even be kicked out of the banking system.

Debanking is different from a situation where an entity loses banking services due to being suspected or confirmed of engaging in fraud, money laundering, or other illegal activities after certain investigations or procedures.

Debanking can occur without any apparent investigation, detailed explanation, or prior notice, providing the entity with insufficient time to transfer funds. Most importantly: there is no due process, appeal process, or other recourse.

Why is this important?

We have established fair banking rules to try to ensure that people are not discriminated against based on age, gender, marital status, nationality, race, religion, etc. However, these rules do not prevent banks (or their regulators) from arbitrarily denying or revoking someone's banking service rights.

Therefore, debanking can be used as a tool or weapon by specific political actors/institutions to systematically target individuals or industries without due process. Imagine if the government decided who could or could not receive electricity solely based on political stance or arbitrary reasons… without explanation, investigation, notification, or remedy. Debanking is that situation.

Why debank?

Not all account closures are "debanking." Banks can close customer accounts for various reasons, including their belief that those customers are engaging in suspicious activities. Banks may also proactively choose to reduce regulatory compliance costs and workload by limiting exposure to certain individuals, industries, or business models.

However, this legitimate activity is not the reason for concerns about debanking. Instead, many debanking concerns arise from reports of regulators illegally exercising power, improperly influencing banks to cancel customers from certain industries or those associated with political factions or interests that the authorities dislike. This allows these regulators to exert power over industries, even though Congress has never authorized such power.

Banks often tacitly accept this pressure because they do not want to clash with regulators. Many banks also do not want to deal with compliance issues, which could lead to additional scrutiny from banking regulators if they do not comply with regulations.

Where did the "Choke Point" action come from?

In 2013, the U.S. Department of Justice was found to have initiated a fraud and money laundering investigation targeting certain businesses as part of a policy initiative from the President's Financial Fraud Enforcement Task Force. This marked a shift in government strategy: the government no longer targeted the illegal activities of individual companies but instead issued subpoenas to banks and payment companies, requiring them to provide information about their customers engaged in high-risk or politically unfavored but legal businesses.

In other words, the government improperly used regulation to "cut off" financial service channels and close accounts, aiming to stifle businesses in industries that the government disliked (as noted by the then-head of the American Bankers Association). In 2014, Frank Keating (former president and CEO of the American Bankers Association, former governor of Oklahoma, and honorary chairman of the Bipartisan Policy Center) pointed out in a Wall Street Journal column:

"When you become a banker, no one gives you a badge or puts you in a judicial robe. So why is the Justice Department telling bankers to act like police and judges? The Justice Department's new investigation, called 'Operation Choke Point,' requires banks to identify customers who may be engaging in illegal activities or simply doing things that government officials do not like."

Due to strong opposition from legal, congressional, and institutional fronts, the initiative was shut down the following year.

Today, the phrase "Operation Choke Point 2.0" is sometimes used to refer to the government cutting off banking services to "political enemies and unpopular tech startups." Or in other words, the term refers to banks "cutting ties with customers perceived as politically incorrect, extreme, dangerous, or out of bounds." Regardless of how this term is defined, it is an issue that affects entities across the political spectrum.

Which institutions are involved?

The inner workings of "Operation Choke Point"—and any other related or subsequent systemic efforts aimed at depriving specific entities or industries of banking services—were previously unknown, as investigations (if any) were conducted behind closed doors, and Freedom of Information Act requests remained pending. However, on December 6, a court document from such a Freedom of Information Act case revealed that the Federal Deposit Insurance Corporation (FDIC) instructed at least one bank (in a letter dated March 11, 2022): "……Currently, the FDIC has not determined what regulatory documents (if any) are required for banks to engage in such activities. Therefore, we respectfully request that you suspend all activities related to crypto assets." A large number of FDIC letters were submitted as attachments to the case record.

At the same time, we have learned that the original Financial Fraud Enforcement Task Force (2013) that implemented "Operation Choke Point" included entities such as the Federal Deposit Insurance Corporation (FDIC) and the Department of Justice (DOJ). The Office of the Comptroller of the Currency (OCC)—an independent agency under the U.S. Department of the Treasury—was also evidently involved, along with the Federal Reserve Board (FRB). The Consumer Financial Protection Bureau (CFPB) has also been mentioned.

Note: The U.S. government is not the only country implementing debanking policies. Governments in other countries, such as Canada, have also used this strategy; the UK has also had to investigate complaints against government-led debanking policies.

Why does the government do this? What are the effects?

The reasons for debanking are varied, ranging from combating fraud by payment processors to preventing high-risk businesses from operating, as these businesses may be perceived as having more connections to money laundering. These reasons are often referred to as "de-risking," rather than "debanking": "Financial institutions indiscriminately terminate or limit business relationships with broad categories of customers, rather than analyzing and managing customer risk in a targeted manner."

More broadly, de-risking and debanking can serve as "partisan tools," stifling legitimate businesses solely for political reasons. Another reason may be that certain government agencies wish to have more discretion and power in deciding "where and under what circumstances consumers can obtain loans, financial products, and other banking services."

It is important to clarify that the issue is not with the performance of a specific government agency's duties. The problem lies in the government's excessive interference with legitimate businesses (or general abuse of power)—without any meaningful due process or ability to limit its actions, which often occur behind the scenes. Especially since there are already sufficient laws and legal methods to regulate businesses for legitimate reasons, such as providing consumer protection, preventing money laundering, and curbing other criminal activities.

Using debanking strategies can lead to many unintended consequences. Even if the goal is to genuinely protect consumers and the banking system, the results may backfire, hindering consumer choice or creating a chilling effect on entire businesses. These practices also undermine the U.S. government's own policy objectives, as pointed out in the U.S. Treasury's report on de-risking (2023):

• Excluding financial activities from the regulated financial system;
• Hindering remittances or delaying the smooth transfer of international development funds and humanitarian/disaster relief funds;
• Impeding low-income and middle-income groups and other underserved populations from effectively utilizing the financial system;
• Undermining the central position of the U.S. financial system.

Finally, using "debanking" strategies may punish legitimate businesses and individuals by association. For example, a previously approved mortgage may be revoked simply because someone works for an open-source foundation in the crypto industry.

For all the reasons mentioned above, many people describe the practice of debanking as "un-American." When debanking indiscriminately targets emerging technologies, it is undoubtedly anti-innovation.

How widespread is debanking?

While we cannot represent the entire industry or specific interests, as venture capitalists in the crypto industry, we have witnessed at least 30 cases of debanking affecting our portfolio companies and founders over the past four years. Coinbase has also publicly stated that they have identified at least "20 instances where the FDIC required banks to 'pause' or 'stop providing' or 'not continue' providing crypto banking services."

There may be even more such cases. Many entrepreneurs and small businesses have been hesitant to report these issues due to fears of further retaliation or a lack of resources to address them.

For many companies in our portfolio, much of the debanking occurs in companies that are not yet profitable and have not issued tokens. Their bank accounts received venture capital funding (provided through institutions like pension funds and university endowments), which these companies used for employee salaries and ordinary business expenses—just like other tech startups.

So what reasons were these companies given? Whether in writing or (more commonly) verbally? The reasons cited include "We do not provide cryptocurrency banking services," and more commonly, "Your account has been closed due to compliance-related issues. Please transfer all funds immediately." These companies were also informed of this, but they received no specific information about which "compliance" issue was at play, and if there was indeed a problem, they had no way to remedy it. Finally, other reports we received from companies include:

• Being told "the business compliance back office team closed the account and prohibited us from opening any other accounts. No other reasons were provided, nor was there an appeal process";
• Being denied due to "a lack of trust in all individuals operating crypto companies";
• Receiving baseless inquiry letters and notices, causing costly cycles and unnecessary pressure for startups—whose operations are already streamlined compared to larger companies.