The Debanking Crypto Crisis: What It Means for You

Debanking crypto, in simple terms, means that banks are cutting ties with crypto companies, making it harder for users to access their accounts and funds. This crisis is not just about banks and crypto, but about the impact it has on you, the user.

Some banks are citing anti-money laundering and know-your-customer regulations as the reason for debanking crypto companies. However, this move has sparked concerns that it may be a form of financial censorship.

As a result, many crypto users are facing difficulties in accessing their accounts and funds, causing frustration and anxiety. This crisis is a wake-up call for the crypto industry to adapt to changing regulations and ensure the security and stability of users' funds.

Broaden your view: Crypto Index Funds

Debanking crypto is a complex issue, and one of the main concerns is whether politics play a role in account closures. Some argue that traditional banks are hesitant to open accounts for crypto companies due to reputational, regulatory, and financial risks.

Eswar Prasad, an economist at Cornell University, noted that banks are typically averse to taking on clients with dubious financial standing. This could be a legitimate concern for banks, but it's not the only factor at play.

Politics might be at play, with some suggesting that banks are protecting their shareholders by avoiding entities seen as out of favor with the political class. Senior economic adviser John Tamny pointed out that crypto hasn't always been a favorite of politicians, which could contribute to banks' reluctance to work with them.

The issue has sparked a lot of debate, with some high-profile figures weighing in on the matter. For example, Andreessen stated that he knows 30 tech company founders who have been debanked, highlighting the widespread nature of the problem.

As the debate around debanking crypto continues, consequences are already being felt. Tech company founders are reporting being debanked, with Andreessen stating that he knows of 30 such cases in the past four years.

Elon Musk has weighed in on the matter, calling debanking an example of government overreach and suggesting that politically motivated account closures should be considered a federal crime.

A former State Department official, Edward Fishman, believes that banks are petrified of running afoul of sanctions, especially with cryptocurrency businesses becoming more intertwined with the financial system.

Banks are indeed taking a more risk-averse approach since the 2008 financial crisis, with thousands of new regulations and billions of dollars in fines.

Andreessen knows 30 tech company founders who have been debanked, sparking a wave of similar anecdotes on social media.

Elon Musk thinks that politically motivated account closures should be considered a federal crime, joining the chorus of voices criticizing banks' practices.

The Obama-era initiative, Operation Choke Point, aimed to limit banking access for industries like payday lending, and some are now calling the current situation "Operation Choke Point 2.0".

A huge majority of people who have their accounts involuntarily closed are let go for credit risk or operational cost reasons, such as repeatedly overdrawing their accounts.

Decisions to debank an individual often affect their controlled entities and household members, regardless of title or paperwork.

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If you're feeling overwhelmed, start small by making one change to your daily routine, such as turning off lights when not in use.

Reducing energy consumption is crucial, as it can help lower greenhouse gas emissions. In fact, turning off just one light bulb can save up to 150 pounds of CO2 per year.

Invest in energy-efficient appliances and light bulbs, which can use up to 90% less energy than traditional ones.

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Educate yourself and others about climate change, its effects, and ways to mitigate it. Share articles, videos, and personal stories to raise awareness and inspire action.

Every small change counts, and collective efforts can lead to significant positive impacts.

In 2022, the crypto exchange Binance stopped processing transactions for a major Russian bank, VTB, due to sanctions imposed by the US Department of the Treasury.

The US Department of the Treasury's Office of Foreign Assets Control (OFAC) has been actively enforcing sanctions on Russian banks, leading to debanking of several major crypto exchanges.

The OFAC has imposed severe penalties on companies that fail to comply with sanctions, including fines and asset freezes.

Plausibly some crypto founders are low-sophistication about the finance industry in their early days as founders.

Nobody is born knowing everything, and very few people will have a serious and informed encounter with this topic ever, not in school, not at work, not in being a generally well-read individual, unless and until it is professionally relevant to them.

Playing the odds? The bank thinks there is an unacceptable risk that you will use your personal accounts to launder money on behalf of the business (and/or its customers, etc).

The bank has insufficient controls to give them an appropriate level of certainty as to whether you’re doing this or not.

They are disinclined to find out the hard way, so they invite you to find another bank.

Tether maintained access to the banking system by, among other mechanisms, having their executives establish accounts in their own names.

SBF had many talents but one of the main ones was money laundering.

A major mechanism for that was loaning money (mostly customer assets and mostly sham loans) to employees then representing to banks (and others) that the employee was making an independent transaction not affiliated with FTX/Alameda/etc.

The banking industry’s highly-evidenced belief that businesses and their owners routinely commingle funds, generally.

For another approach, see: Which Cryptos Will Survive?

In 2022, Coinbase filed a lawsuit against the Federal Deposit Insurance Corporation (FDIC) in the United States District Court for the Northern District of California.

The lawsuit claims that the FDIC improperly seized $545 million in customer funds held in the accounts of Signature Bank, a bank that had been working with Coinbase to facilitate its customers' withdrawals.

Coinbase asserts that the FDIC's actions were arbitrary and capricious, and that the agency failed to follow proper procedures in seizing the funds.

The lawsuit seeks a court order to return the seized funds to Coinbase.

As people who have experienced debanking firsthand can attest, it's a frustrating and often confusing process. Many have reported being cut off from their accounts without warning or explanation.

In some cases, banks have cited regulatory concerns as the reason for closing accounts, despite the account holder having done nothing wrong. This lack of transparency can be unsettling, to say the least.

One notable example is a UK-based crypto investor who had their account closed by a major bank due to alleged "money laundering" concerns. However, the account holder had been using the account for legitimate business purposes and had never engaged in any suspicious activity.

Anecdotes can be powerful tools for conveying personal stories, and understanding their structure can help us tap into their potential.

A well-crafted anecdote typically begins with a clear setup, establishing the context and situation.

In the article, we see this with the story of John, who was struggling to make ends meet and had to rely on a friend for financial assistance.

A key element of an anecdote is the turning point, where the situation shifts or a realization occurs.

In the story of Sarah, her turning point came when she decided to take a leap of faith and pursue her passion for art, despite initial doubts and fears.

The resolution or outcome of the anecdote provides a sense of closure and reinforces the message.

In the case of John, the resolution came when he was able to pay back his friend and start fresh, thanks to a newfound sense of determination and resourcefulness.

SBF, or short for Sam Bankman-Fried, is a key figure in the story of FTX's downfall. He was the CEO and founder of FTX, a cryptocurrency exchange that promised high returns to investors.

The allure of FTX's high returns was a major factor in its popularity among investors, many of whom were drawn in by the promise of easy money. As a result, FTX grew rapidly, with many people investing their life savings in the company.

But behind the scenes, FTX was struggling financially, and SBF was using customer funds to prop up the company. This is a classic example of a Ponzi scheme, where returns are paid to existing investors using funds from new investors.

SBF's actions ultimately led to the collapse of FTX, with the company filing for bankruptcy and millions of dollars going missing.