Debanking, Crypto, And The Fight For Reform #CriptoNews

The Federal Deposit Insurance Corporation (FDIC), once a trusted pillar of financial stability, now finds itself navigating the turbulent waters of innovation and regulatory reform. Recent remarks by FDIC Vice Chairman Travis Hill have ignited fresh debates over the agency’s approach to financial inclusion, cryptocurrency, and what critics have dubbed “Operation Chokepoint 2.0.” This latest iteration of debanking practices—seemingly targeting the crypto industry—has resurfaced as a flashpoint in the broader struggle between traditional financial institutions and the burgeoning world of digital assets.

The release of redacted “pause letters” by the FDIC on January 6, 2024, has added fuel to these debates, providing stark validation of long-standing complaints from crypto-focused companies. Among the most prominent voices is Caitlin Long, CEO of Custodia Bank, whose Wyoming-chartered Special Purpose Depository Institution (SPDI) has become a symbol of the clash between innovation and entrenched financial systems. Custodia’s high-profile litigation against the Federal Reserve Board of Governors and the Federal Reserve Bank of Kansas City centers on its denied application for a Federal Reserve master account—a critical gateway to the nation’s banking infrastructure.

The stakes are high. Custodia argues the denial violates statutory mandates and represents arbitrary and capricious regulatory overreach, while the Federal Reserve contends it retains discretion over granting master accounts. Interestingly, big banks are siding with the Fed. On April 26, 2024, Custodia filed its notice of appeal. With oral arguments in Custodia’s Tenth Circuit appeal reportedly set for January 21, 2025, the outcome of this case could have far-reaching implications for the ability of crypto-focused banks to operate on a level playing field.

In the midst of these developments, many industry leaders like Long often take to social media to expose what she calls systemic debanking practices, amplifying the voices of crypto firms struggling to secure or maintain access to banking services. As a Republican-led Congress prepares to flex its oversight muscles, the FDIC and Federal Reserve are under growing pressure to justify their approaches to innovation, inclusion, and fairness in a rapidly evolving financial landscape.

The Scope of Prudential Oversight

Prudential regulators like the FDIC, Federal Reserve, and the Office of the Comptroller of the Currency (OCC) are tasked with ensuring the stability of the banking system. However, their methodologies have come under scrutiny. Critics argue that regulatory processes are overly compliance-focused and fail to account for broader risks to financial stability. For example, Vice Chairman Hill, noted that such approaches have imposed disproportionate compliance burdens on smaller financial institutions, stifling their ability to innovate in a rapidly digitizing economy.

Hill’s comments also touched on the fallout from “Operation Chokepoint 2.0,” a term describing the Biden Administration’s continuation of a controversial initiative from the Obama era. As detailed in a 2014 U.S. House Oversight Committee report, the original “Operation Chokepoint” sought to cut off banking services for industries considered “high risk,” even if they were legal businesses. These included short-term lenders, firearms merchants, and others deemed objectionable by regulators.

According to a recent survey by the Alternative Investment Management Association (AIMA), “three quarters of 160 crypto hedge funds polled reported difficulty accessing banking services,” while none of the 20 traditional hedge funds surveyed faced similar challenges. This discrepancy strongly suggests targeted action against the crypto industry​​​.

Crypto and the Legacy of Operation Chokepoint

“Debanking crypto companies appears to be part of a coordinated attack by government regulators, colloquially known as ‘Operation Chokepoint 2.0,’” according to AIMA’s findings. The report further aligns with a 2023 paper by law firm Cooper and Kirk, which revealed that the OCC issued informal guidance in 2021 curtailing banks’ authority to engage in cryptocurrency activities. This guidance was seen as the “first shot” in the regulatory effort to marginalize digital asset firms​.

Coinbase’s Chief Legal Officer, Paul Grewal, responded sharply to the findings, stating, “Why would three quarters of 160 crypto hedge funds report issues with basic banking services over three years when zero were reported by twenty other alternative investors surveyed? We need answers, now.” Grewal’s remarks underscore the growing frustration within the industry regarding what appears to be a systematic effort to limit access to financial services for crypto firms​. Both he and I expressed similar concerns as witnesses for a March 9, 2023, House Financial Services Subcommittee on Digital Assets, Financial Technology and Inclusion hearing titled Coincidence or Coordinated? The Administration’s Attack on the Digital Asset Ecosystem.

The Political Dimension

The political landscape has further complicated these dynamics. In his keynote address at the Bitcoin Conference in July 2024, President-elect Donald Trump pledged to dismantle Operation Chokepoint 2.0 if reelected, calling it a tool to “choke [the crypto industry] out of business.” With Trump’s return to power and a Republican-controlled Congress, the regulatory tide may be poised to turn in favor of innovation-friendly and bullish bitcoin policies​​.

Hill’s call to reinvigorate the FDIC’s innovation lab, FDiTech, is particularly relevant in this context. FDiTech, which has been largely dormant, could serve as a bridge between regulators and innovators, fostering the kind of collaboration necessary to clarify expectations and promote responsible growth in the digital economy.

Challenges and Opportunities for Reform

Despite these potential shifts, significant challenges remain. The fallout from Chokepoint 2.0 has eroded trust within the financial sector, particularly among smaller firms and crypto companies that feel unfairly targeted. Rebuilding this trust will require more than rhetoric; it demands tangible policy changes that ensure regulatory neutrality and consistency.

The FDIC, for example, can play a leadership role by modernizing supervisory frameworks to account for the realities of a digital economy. Hiring technical experts, issuing clear guidance on digital assets, and embracing transparency will be critical. Similarly, Congress must act decisively to establish a coherent regulatory framework for digital assets, providing clarity for both innovators and investors.

The Path Forward

The FDIC stands at a crossroads, with new leadership poised to redefine its legacy and Congress ready to assert its influence in reshaping financial oversight. The incalculable harm to markets and innovation from Operation Chokepoint 2.0 serves as a stark reminder of the perils of regulatory overreach, especially when innovation and inclusion hang in the balance. Vice Chairman Hill’s remarks and the mounting concerns of industry leaders underscore the critical need for a regulatory reset—one that champions fairness, fosters innovation, and protects the integrity of our financial system.

What happens next won’t just determine the FDIC’s direction but will set the tone for the future of U.S. financial regulation in a world increasingly defined by digital assets on the rails of decentralized technologies. Transparency, collaboration, and forward-thinking inclusive policy must guide this evolution. If prudential regulators embrace these principles, it is possible not only to preserve financial stability but also to unlock the full potential of a financial system ready to meet the challenges and demands of the new economy.