"A very dangerous precedent": Debanking dispute politicizes financial system

Everyone needs a bank, right? Seems easy enough to agree on, unless you're on Capitol Hill.

But in a rare show of bipartisanship, Republicans and Democrats agreed this week on the perils of debanking — the notion of banks refusing to work with certain industries, individuals or political groups. Banks have denied this happens. 

The allegations, described in hearings conducted by the GOP-controlled Senate Banking Committee on Wednesday, came from the cryptocurrency industry that bankrolled Donald Trump's reelection. Some told the committee they've had trouble opening basic checking accounts, while others claimed banks have refused service without providing evidence of fraud or systemic risks.

Their complaints stem from an industry-wide collapse in 2022 that sent crypto bosses to prison for defrauding customers and prompted President Joe Biden's administration to warn banks of working with digital assets. Trump, a crypto skeptic in his first term, has pledged a more friendly approach since embracing crypto and investing in it. 

Some senators took issue with the hearings' focus on the Biden administration as well as crypto taking on the role of victim — leaving out people of color that have been historically discriminated against by the banking sector. 

And if banking has indeed become politicized, the Trump administration's pro-crypto approach raises the prospect it will escalate. Operations have been frozen at the Consumer Financial Protection Bureau, a federal watchdog that investigates financial wrongdoing, including debanking. Trump's team has floated eliminating the agency, along with banking regulators like the FDIC.

"We're in a situation where under Democratic administration, banks are pressured to debank conservatives, and then under Republican administration, banks are under pressure to debank liberals. This is a very dangerous precedent that can easily cut both ways,” Omid Malekan, an adjunct professor at Columbia Business School, told Salon.

“And it's not hard for me to foresee situations where conservative people in Washington or even at the state level could start pressuring banks to debank abortion clinics, for example," Malekan added. "What we don't want is for banks to be the arbiter — to do the dirty work of the government." 

Debanking is a "real problem," Sen. Elizabeth Warren, D-Mass., told the Senate committee. 

But, she noted, the CFPB has halted ongoing enforcement investigations and paused litigation against banks and other financial institutions accused of legal violations, including debanking.

This means "more Americans across the country will be unfairly debanked, and they will lose the one agency that is working to help them,” Warren said. 

GOP lawmakers appear to be aligned with Trump in a mission to legitimize crypto's debanking claims. The U.S. House Financial Services Committee, also controlled by Republicans, held a hearing on Thursday. 

“We’re looking for directed evidence where bank supervisors have, verbally or in writing, encouraged their banks to not do business with a company that in any other terms, legally, financially, stability-wise, would be perfectly fine to have as a customer,” said Arkansas Rep. French Hill, a Republican who chairs the committee.

Is debanking happening?

Prior to the Senate hearings, FDIC acting chairman Travis Hill released documents that show federal regulators strongly encouraged banks in 2022 to minimize their involvement with crypto activities until further notice. But the full scope of debanking is difficult to determine. 

Marc Andreessen, a billionaire venture capitalist who backed Trump's reelection bid, raised eyebrows when he told podcast host Joe Rogan last year "we’ve had like 30 founders debanked in the last four years." He did not provide evidence to back up his claim.

"Basically, it’s a privatized sanctions regime that lets bureaucrats do to American citizens the same thing that we do to Iran: kick you out of the financial system," Andreessen said. 

Some of the biggest names in the crypto universe share his view, including Tyler Winklevoss, co-founder of the Gemini crypto exchange. 

"Yes. I was debanked because I’m in crypto, as was @Gemini," he said in a post on X. "The number is probably much larger than 30, that's just in the 16z portfolio alone. They also assassinated several banks because they banked crypto companies. Totally unlawful, evil behavior."

Speaking at the recent World Economic Forum, Trump accused Bank and America and JPMorgan Chase of being unfair to conservatives. 

“I hope you start opening your bank to conservatives because many conservatives complain that the banks are not allowing them to do business within the bank, and that included a place called Bank of America,” Trump told the CEOs at the event, according to CNBC.

Bank of America said it "would never close accounts for political reasons," Business Insider reported.

No consensus on solutions

While common ground can be found on the concept of debanking, there is less agreement on how to address it. The crypto industry sees it as an opportunity to relax regulations and allow the industry to grow and operate freely.

To that end, Trump has appointed pro-crypto leaders of departments that regulate financial institutions and cryptocurrencies: The CFPB's acting director is Treasury Secretary Scott Bessent. Trump's commerce secretary pick, Howard Lutnick, has deep ties to crypto and has been tapped to join Trump's crypto task force to develop government policies for the industry. Paul Atkins is a crypto advocate poised to lead the Securities and Exchange Commission following its Biden-era crackdown. 

Coinbase, one of the main players in the industry, is lobbying for banks to be allowed to "offer crypto [credit and equity] services either directly or through established third parties" and to "remove unlawful, inconsistent impediments for C&E service providers to partner with banks," according to Faryar Shirzad, chief policy officer at Coinbase.

Critics of the industry, however, warn their products are highly speculative and require consumer protections like FDIC deposit insurance that protects Americans' money in the event of a bank failure.

"For nearly a century, FDIC deposit insurance has been trusted by Main Street Americans, who have not lost a penny of insured funds since the FDIC was created," said Shayna Olesiuk, director of banking policy at the Better Markets, a nonprofit group that supports stronger regulation. "In recent years, though, crypto firms and other fintech companies have endangered this trust by claiming that funds customers place with them are also FDIC insured, when in fact they are not."

She acknowledged changes can be made to existing regulations to allow for more transparency.

"The current banking rules put limits on the amount of information on the reasons for a bank account closure that can be shared publicly," Olesiuk said. "If banks were required to specify the reason for an account closure, however, there would be less chance of misunderstanding or jumping to conclusions about malicious intent or discrimination when an account is closed."

Malekan, of Columbia Business School, suggested other regulations should be revised as well, such as those requiring financial institutions to help prevent and detect money laundering. 

"We need to revisit laws like the Bank Secrecy Act and the Patriot Act, because it probably [has] become too strict, and they probably deputized the banking industry to do the work of law enforcement," he said.