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All of a sudden “debanking” is a hot topic. Congressional hearings are being held, and the media is breathlessly reporting every claim, no matter how baseless or fact-free. However, this appears to be little more than a sophisticated, coordinated, poll-tested campaign by the crypto industry and its political allies in an attempt to avoid risk-based analysis and risk-reducing regulations that are necessary to protect Americans’ savings accounts and Main Street banks. The claim is that crypto is being unfairly discriminated against by regulators who are supposedly telling banks not to do business with crypto firms.
In fact, regulators are engaged in content-neutral risk-based analysis that is aimed at making sure banks properly identify risks and protect their customers by appropriately mitigating those risks. Frankly, regulators don’t care where risks come from, be it credit or market risk, cybersecurity threats, money launderers, or crypto predators and lawbreakers. Given crypto’s widespread and pervasive illegal and criminal behavior as well as its extreme volatility and boom-bust cycles, it is objectively true that crypto firms are high risk, often dangerous, and too frequently engaged in or connected to criminal activities. The debanking campaign is an attempt to pressure bank regulators to ignore these many known crypto risks and overlook other potential risks crypto poses to banks and the banking system.
Crypto’s rap sheet is broad and deep, as has been detailed here, here, and here. FTX and its now imprisoned CEO Sam Bankman-Fried’s brazen, multibillion-dollar fraud is only the most high-profile example, but a mere tip of the iceberg of crypto’s illegal and criminal behavior. Another glaring example of dangerous non-criminal risk is the so-called “crypto winter” of 2021-2022, which is a misleading euphemism for a breathtaking crypto crash that resulted in the loss of $2 trillion in value in less than one year. That was real money lost by lots of Americans. If the regulators had not aggressively policed and limited banks’ riskiest crypto activities during that time, then it’s likely that the $2 trillion crypto crash would have spread to the banking system, almost certainly causing trillions of dollars more in losses and leading to bank failures. And don’t forget that the bank failures and bailouts during the 2023 banking crisis were connected to and in some part caused by those banks’ crypto activities even though they were limited.
That’s likely to happen if the regulators do as the crypto cheerleaders are demanding: reducing or eliminating neutral risk-based analysis will almost certainly lead to losses, crashes, and bailouts. These are the kinds of risks the crypto industry and its political allies are demanding regulators ignore, effectively creating a special interest exemption from the risk analysis that applies to every other firm and person doing business with banks. That’s what the debanking charade is really all about.
