Crypto’s Banking Battle: Are Regulators Going Too Far?
While debanking has been happening for years, with cash-heavy, small and high-risk businesses impacted the most, its influence on crypto businesses has been particularly severe. How? What can be done to improve the situation? Let’s see.
The Nature of Debanking in the U.S.
Debanking is a situation when most banks decide to stop providing services (closing bank accounts, etc.) to a certain person, company, or whole industry — even at the cost of losing a substantial amount of banking fees. However, since banks want to earn money, they will debank someone only when they are pressured to do so (usually by the government). The push for debanking the crypto industry has been done by government agencies in a sort of a clandestine way, by a series of vague guidelines and consultations by the regulators, all targeting the crypto businesses. Banks don’t want to lose their banking licenses and are known to closely follow the regulators’ wishes. It’s a calculation — it’s better to lose a couple of clients than to be investigated by regulators.
An example of this came when the FDIC sent letters to banks, advising them to “pause” their crypto-related activities. Although this was not an explicit instruction, banks understood the message: continuing such activities could put their regulatory standing at risk. These pressures, especially paired with offline threats, created a strong sense of unease when it comes to onboarding crypto clients — and the banks just did not want to take the risk. This hit crypto companies hard… Crypto companies struggled to maintain essential banking services, which had a direct impact on their operations (paying employee salaries, renting office spaces, or conducting basic financial transactions). It creates an ironic situation: the industry that aims to “revolutionize financial services” is not able to access traditional banking infrastructure.
How Debanking Affects Crypto Adoption
The risk of debanking has, of course, been detrimental to crypto adoption… If you are, let’s say, a small vendor who wants to accept crypto payments and is deciding to do it or not, you will need to weigh the benefits of accepting crypto against the risk of losing access to banks. Unfortunately, the risk of losing access to traditional banking services could easily outweigh the advantages of lower fees or faster settlements. On the other hand, if you are a crypto service provider or a Web3 development company, the risk of debanking is even more pressing. Losing a bank account can mean payroll disruptions, operational instability, and an overall reduction in business confidence. There’s no way around it, since these companies’ core business is related to crypto, if the debanking is happening, they will be debanked. In many ways, debanking has acted as a Sword of Damocles, hanging over the heads of those who “dare enter the Web3 realm.”
Risks of an Anti-Debanking Law
I have heard opinions that passing an anti-debanking law could introduce new risks. However, I would argue that there will be no tangible increase in them for any of the three. If such a law were to be enacted, my guess is that the following would happen:
- The financial system will benefit from traditional, regulated players entering the crypto sphere (which they will be able to do more easily if there is no risk of debanking);
- Crypto companies will be able to focus more on the R&D (Research and Development) and customer service;
- With better access to financial services, consumers will get a higher quality of service.
Some would argue that an anti-debanking law could undermine the stability of the financial system, or even the status of fiat currencies, but so far, I have seen very little evidence to support such arguments.
What Should an Anti-Debanking Law Include?
Honestly, to be effective, not much needs to be said in the debanking law — just that the government will not specially target banks that onboard crypto-related clients. The debanking issue was never about explicit laws prohibiting crypto banking, it was about behind-the-scenes regulatory pressures… Therefore, all that is needed is a clear policy that banks will not face punitive actions for engaging with legitimate crypto businesses. If regulatory uncertainty is removed, they will have no reason to avoid crypto clients. Crypto businesses, in turn, will no longer have to operate in fear of sudden banking disruptions. At the end of the day, what the whole industry needs is for these pressures to stop, and the debanking problem will be gone in an instant. So, seeing the FDIC removing its reputational risk criteria in evaluating bank supervision is already a positive sign.
Disclaimer: The opinions in this article are the writer’s own and do not necessarily represent the views of Cryptonews.com. This article is meant to provide a broad perspective on its topic and should not be taken as professional advice.