Original Author: Patrick McKenzie, Stripe Advisor

Original Title: Debanking (and Debunking?)

Original Translation: Ismay, BlockBeats

Recently, prominent venture capitalist Marc Andreessen sparked a discussion on "debanking" during a podcast he participated in with co-founder Ben Horowitz, as well as during an appearance on the Joe Rogan podcast. The venture capital firm they founded, a16z, also released a brief specifically discussing this topic.

Related Reading: "In-Depth Conversation with a16z Co-Founders: The Dark Side of U.S. Financial Regulation and the Truth about Debanking"

The core point of the brief is: "Debanking can therefore be used as a tool or weapon, systematically used by specific political actors/institutions against private individuals or industries, without due process. Imagine if the government decided who could or could not use electricity based solely on someone's political views or for arbitrary reasons—without explanation, notification, or recourse. That's what debanking is all about."

If this is your first time reading this column, I would like to introduce myself. Here, we mainly discuss compliance issues in the intersection of the financial system and tech companies. This is one of the core topics I focus on, and I also have some unique personal insights on this.

"If someone is really targeting you, it's not a conspiracy theory." This statement partly reflects my views, but only to some extent. I believe there is currently some confusion: one is what private actors are doing, two is what state actors have actually or legally required them to do, and three is which specific countries and political actors are pulling the strings behind. These factors together constitute a complex system that is not completely independent of each other.

Some disclaimers:

I have worked at Stripe and am currently an advisor to the company. Stripe is not a bank, but many regulated financial institutions face similar considerations. I am not speaking on behalf of Stripe here, and Stripe does not necessarily endorse the views I express in my personal capacity.

The recent discussion on "debanking" has been focused (even overly focused, as detailed below) on cryptocurrency. I am skeptical of cryptocurrency, as is well known. But opinion is not the same as a warrior; a fact is a fact. In this discussion, facts sometimes support cryptocurrency advocates, in which case I will heavily cite sources. And when facts do not support it, I will also proactively cite numerous sources.

The discussion about "debanking" originates from a project that apparently has a political purpose. Furthermore, in a democratic society, public policy issues are often closely related to politics, and the ballot box is the ultimate safeguard against government abuse of power. Although I do not have a specific stance on this issue and strive to remain neutral in my professional field, in order to alleviate the concerns of cryptocurrency supporters: I am definitely not a closet Warrenite.

Bank Account Closure

"Debanking" describes a series of behaviors.

The most notable behavior is the involuntary closure of a customer's bank account, usually an account that has been established for many years, sometimes without even providing any reasons. Since "debanking" is a term with advocacy connotations, this concept is often conflated with the refusal to open accounts for someone or some entity.

The impact of these two scenarios on individuals or businesses and our moral intuitions are vastly different, with the difference being akin to that between divorce and being rejected for a date.

Advocates usually approach it from the user's perspective, emphasizing the impact of debanking on individuals or businesses. They then blur it with regulatory decisions regarding bank oversight, which seem unrelated to the direct impact on users, and we will discuss banking regulation issues later.

Within the industry, it is not referred to as "debanking," partially due to the industry's common euphemisms and partially because the industry does not always agree with advocates' assumptions about how the world should operate and is concerned that the term "debanking" implies these assumptions.

Therefore, when discussing this issue with colleagues, people may use terms such as "customer offboarding," "risk reduction," "account closure," and so on.

The decision-making behind debanking implies—though it is relatively rare in reality—that it is not a unilateral decision of a particular financial institution. Highly correlated "independent" decisions among some financial institutions may deprive a business or individual of access to banking services. We will explore some overstated collaborative mechanisms and some related mechanisms that are not yet fully understood.

Why Do We Hear About "Debanking"

The reason we hear discussions about "debanking" is because it sometimes affects prominent wealthy entrepreneurs and their companies. These affected individuals often have extensive social networks and are associated with some outstanding communicators who have platforms for dissemination (to use today's terminology). It needs to be made clear that these are not typical characteristics of "debanking" victims.

The vast majority of people whose bank accounts are forcibly closed are usually due to credit risk or operational cost reasons. For example, if you repeatedly overdraw your account and appear unable to cover the associated fees, you are likely to lose that account, and all other accounts at that institution will be affected as well.

Do you know some elderly individuals? They may be feeling overwhelmed by age-related issues, perhaps have been scammed a few times, or even occasionally lose their temper with customer service representatives? The impact of "unbanking" on them may be much greater than they currently realize.

A personal decision to "unbank" typically affects the entities they control, and vice versa. This impact may also quickly extend to the accounts of the same household, regardless of whether the account holders are nominally the same (for non-professionals, understood as the "name on the account"; but in the banking industry, this is not entirely accurate). Banks usually consider accounts within the same household to likely be under common control, regardless of how paperwork, account holders, or politically influential subcultures define it. In this regard, the banking industry's moral compass is more akin to traditional middle-class values than those of the coastal elite.

However, sometimes accounts are closed because certain activities fall outside the bank's risk tolerance or contradict its compliance stance. I myself have been "unbanked" twice, and the reasons were both related to this.

Two Stories of Being "Fired" by a Bank

Once upon a time, I had a checking account in the US. One day, the bank called me to ask why my account received an average of two ACH transfers per day. I explained that I operated a sole proprietorship, selling software online. These ACH transfers were from my two payment processors, who would pay out my sales revenue to me each business day after deducting their fees. The bank, after hearing my explanation, acknowledged that this business seemed legitimate. However, they then informed me that I had 30 days to transfer the business-related funds out to another bank; otherwise, they would close all my accounts.

“Why would a bank 'fire' a customer like this?” In general, a regular consumer's checking account is a type of service with very low risk for the bank and is not a focal point of bank examiners. Due to the accessibility issues of these basic financial service accounts, they are prioritized for support by both the bank and regulatory agencies. Therefore, the bank's monitoring investment in consumer checking accounts is usually low, based on its risk analysis. Regulators, after reviewing these analyses and decisions, typically do not disagree.

However, this bank's personal banking department did not offer services for small businesses at the time. Many banks do, but this one did not. Hence, it lacked the policies and procedures to support small business banking needs. When they discovered I was using their services as a sole proprietorship, while they considered my behavior harmless, they still felt unable to support this type of business. The reason was not that they did not like my business but because they had not established the necessary infrastructure to support any form of business account.

Next, we will delve into a small business case study that is more complex than you might imagine to further illustrate this issue.

At another institution, I had once logged into my U.S. personal retirement account from a Japanese IP address. While I had done this several times before, the last instance triggered an issue. The bank's affiliate made a brief phone call to confirm my residency in Japan and then informed me that the account would be immediately restricted and subsequently closed. I needed to arrange for the transfer of stocks from the account to a new (U.S.) brokerage account or authorize them to sell the stocks and send me a check.

“Why would the bank ‘fire’ a customer like this?” This was likely due to the implementation of a procedure to ensure that the institution's affiliated brokerage did not operate beyond the scope of its broker-dealer license. The institution was well aware that they did not have any licensing from Japanese regulatory authorities.

When these events unfolded, it was indeed frustrating. I did not understand the reasons for these circumstances at the time. Dealing with these issues forced me to take time away from daily life, work, and business, make more phone calls, learn more about the financial industry, and eventually open a new account.

It was also the typical conclusion to a “bank firing” story—“In the end, I opened another new account.”

Banking Experiences of Immigrant Communities and Small Software Enterprises

Immigrant communities often compile a list of banks willing to work with them, as do groups involved in online small software businesses. Therefore, although immigrants and small software enterprises face more friction in banking than the average American working for Google or a university, they actually have a high likelihood of being “bankable.”

Take, for example, cryptocurrency entrepreneurs who have received millions of dollars in investment. One can hold the following views: (a) the life experiences within this group are diverse; (b) but on average, they still belong to the privileged class in most common social dimensions. Despite having these significant social advantages, there is ample evidence that these businesses and their entrepreneurs often face “bank firing.”

I have a deep understanding of this, and it largely stems from them touching upon a risk factor: they are more pronounced in this regard compared to other similarly sized and professional legitimate enterprises. At certain times and places, this issue has even led to cryptocurrency companies almost being unable to access banking services—if the bank knew what they were dealing with. This situation also directly impacts banks' decisions regarding cryptocurrency founders and employees.

Bank Account Closure Due to Anti-Money Laundering Risks

I have extensively written about KYC (Know Your Customer) and AML (Anti-Money Laundering) in the past, so I won't go into detail here. Banks operate under various obligations in compliance with regulations, one of which is to establish anti-money laundering policies, including policies to identify high-risk activities. Banks must strictly adhere to these policies. Making too many commitments may be acceptable, but failing to fulfill them is not; once a bank commits to a regulatory entity to take a certain action (such as X), failing to implement that measure may result in fines and other penalties, even if the regulatory entity did not explicitly require the implementation of that specific measure.

Before delving into cryptocurrency, let's first examine the anti-money laundering risk and its impact on Money Services Business (MSB).

Operating as a Money Services Business is considered a high-risk activity in almost all banks' internal anti-money laundering policies. To explain this in detail, we need to trace back through the entire history of anti-money laundering and its purpose. For now, please accept this fact: all banks have a similar high-risk activities list, and Money Services Business is always on that list.

Some banks have established what is known as an Enhanced Due Diligence (EDD) program to service Money Services Businesses. Others have not; if a bank's client indicates they are a Money Services Business, or if their transaction monitoring suggests the client may be such a business (for example, if there's a bank transfer deduction from a Western Union remittance of tens of thousands of dollars, which might signal to the analyst that the client is a Western Union agent and the transaction amount exceeds the minimum threshold), the bank usually sends a notification letter to the client.

Whether they will successfully enforce the decision announced in the notification letter, and whether the decision itself can be implemented, may vary, but in intent, they aim to consistently arrive at a decision in similar situations.

Such notification letters are unlikely to be transparent about what happened and why. The letter may not mention that the client is a Money Services Business (MSB) or why the bank considers the client to be in such a business. The letter will not refer to the bank's internal anti-money laundering policies categorizing MSBs as high-risk activities, but may vaguely refer to risk using four or five templated words. Similarly, the letter will not explain that the bank strategically decided not to invest in establishing a compliant Enhanced Due Diligence (EDD) program, hence unable to service MSB clients.

The letter will simply state that the bank will close the client's account.

The letter may characterize this as a "business decision" by the bank, using these two words. This decision is often presented as final. However, this may not actually be the true final decision but more of an initial negotiating position akin to "we don't discuss salary." If the client does not contest this, then the bank has achieved its goal. The core implication in this wording is: "We probabilistically consider engaging in conversation with the typical recipient of such notification letters as a negative expected value behavior."

So why isn't a bank willing to discuss matters with the typical addressee of a notice letter? Because the typical MSB customer is often a small convenience store that also engages in alternative financial services.

You might think it's absurd that the government is concerned about what appears to be just a local convenience store's side gig of offering money services (MSB). I won't comment on whether this priority is absurd, but I suggest you take a look at the Financial Crimes Enforcement Network's (FINCEN) enforcement actions against unregistered money services businesses. These cases are just a small sample of actual enforcement actions, handpicked by FINCEN. A discerning person would understand that FINCEN's selection of these samples is not intended to embarrass itself or the entire anti-money laundering system, as this system ensures that FINCEN employees will still have a job tomorrow.

To give you a sense of the reality, let me rephrase with fictional names some real cases that FINCEN has both prosecuted and publicly shamed to set an example: for example, "Bob Smith, operating 'Bob's Quick Gas Station'," "Taro Snack Shop Co., Ltd.," "Budget Cellphone Store Co., Ltd.," "Ben Goldberg, operating 'Jewish Deli'."

FINCEN has publicly disclosed the full text of each settlement agreement, often including statements of the alleged illegal activities. In these documents (not all, but many), if you completely believe FINCEN's narrative, you might get the impression that yes, this is indeed just a convenience store. The Financial Crimes Enforcement Network pursued the case because the store owner did not have written anti-money laundering (AML) or know-your-customer (KYC) policies in place, and the temporary staff at the store did not receive AML training while he was away on a trip. After winning the case, FINCEN fined him $10,000. Therefore, a fair reader would likely assume that this convenience store is not a front for a Colombian drug cartel, Hamas, or a foreign intelligence service.

Through these irrefutable facts, we can understand FINCEN's almost absurd enforcement interest in the "criminal activity of selling money orders along with laundry detergent and delicious sandwiches." Therefore, when banks take FINCEN's requirements seriously in this regard, their actions may seem almost crazy to many. Banks have hired a specialized team to ensure they can differentiate between ordinary convenience stores and those "unlawful convenience stores," to avoid FINCEN's questioning: "Why are you transferring funds for an unlawful convenience store?! How many times have we told you?! Be vigilant against unlawful convenience stores!"

The cost of running an enhanced due diligence (EDD) process and ongoing monitoring is very high. Yet, the profit from providing banking services to a convenience store is very low. Therefore, most banks will not serve convenience stores that also engage in money services businesses (MSBs), even though they have no ill will toward the convenience store or its operators. This situation will not change because of a convenience store owner's protest, even if he claims to be a legitimate business owner, believes that the service cessation is against the "American spirit," or feels that the bank is discriminating against him because he is an immigrant. Banks have had this conversation with thousands of convenience store owners time and time again, and they do not want to go through it again.

Some currency service businesses are financial technology companies (fintech). These companies have a team of professionals highly sensitive to financial regulations. They deliberately choose banks that can service certain MSBs and engage in a laborious and customized dialogue with the banks to reach an agreement on risk tolerance and mutually agreed compliance procedures.

In recent years, many fintech companies have been "debanked" by banks, but they are usually not hearing this news for the first time through a physical letter. Their internal banking affairs team may have learned about this situation long ago from the fintech team they were working with. Even if they eventually receive this letter, they generally understand why they are receiving it and do not take the surface text of the letter at face value.

"Layer" is a system interwoven by culture, established behavior patterns, and associated advantages and disadvantages. As part of the American Professional Management Class (PMC) culture, members sometimes exhibit an attitude towards the "truth" that can be perplexing to outsiders. In particular, PMC members who are professionally engaged in banking tend to view a "service termination letter" as a ceremonial item rather than something to be taken literally and seriously.

Ordinary people often feel confused and unsettled when receiving a "service termination letter." Most recipients of such letters lack sufficient professional knowledge of the financial system to understand what is happening. Many people (reasonably) feel angry at the seeming reluctance of the bank to provide a clear answer. If they eventually squeeze some answers out of the bank, these answers may sound like gibberish or even contradict each other.

In such situations, supporters often believe that the bank lacks basic humanity, customer care, or simple business capability. I would tell them that these viewpoints are not at the heart of the issue. As described in "Seeing like a Bank," these phenomena are more driven by systemic issues than mere malice, indifference, or incompetence.

However, account terminations driven by anti-money laundering (AML) have more distinctive features than general "debanking," making this experience consistently confusing and unpleasant for most customers.

Some customers receive this letter because their account was flagged for review due to a suspicious transaction. This is usually because some automated system triggered an alert on that transaction. The so-called "alert" is often a false positive, but the bank must establish and adhere to a set of procedures to screen these alerts. This process usually involves "simplifying the alert into a tweet-length summary and sending it to analysts to review the context." Each bank needs at least one person responsible for alert review, while the largest banks may require thousands of staff to be involved.

So, what if an analyst, based on their training, experience, data provided by an alert system, and access to account history, determines that a particular transaction does indeed exhibit some anomaly? At that point, they need to write a special format memorandum.

This memorandum is known as a Suspicious Activity Report (SAR). The bank, through the analyst's operation, submits it from one computer to another to the U.S. Department of the Treasury's Financial Crimes Enforcement Network (FINCEN). Once the submission is complete, the analyst proceeds to handle new alerts.

For FINCEN, dealing with minor retail violations is just a side job; receiving SARs is its main responsibility.

An SAR is not a criminal conviction, not even a criminal charge. It's simply an internal memorandum recording unusual activity, usually spanning two to three pages. Banks submit around 4 million SARs annually (with some non-bank institutions also required to submit, but since no one is complaining about casinos being cleaned up at the moment, this can be overlooked. Banks are still the primary submitters of SARs). For example, about 10% of SARs fall into the category of transactions 'lacking an apparent economic, business, or lawful purpose.' FINCEN has approximately 300 staff members, so it's impossible for them to read the vast majority of the content in these memoranda. They are mainly responsible for maintaining a system that stores these memoranda in a database accessible to multiple law enforcement agencies. The majority of SARs are essentially in a 'write and forget' status.

Banks are well aware that most SARs have low signal value, and even good customers could inadvertently end up on the record. However, within set thresholds and risk tolerance levels, SARs sometimes lead banks to make 'mechanical' decisions that they may not want to keep holding onto a 'hot potato.' Such behavior may carry some risks and certainly comes with a hefty price tag. In many institutions, for retail accounts, if a customer's account is SAR'd a second time, serious doubts arise about continuing to do business with that customer, but the answers are usually not deeply deliberated.

So, can banks directly explain to customers that preparing a SAR involves a significant amount of staff time and that continued service to a customer who is eventually proven to be a money launderer could lead to billions in fines? No, they can't.

Typically, individuals mentioned in an SAR often have lower social standing, making it difficult to engage in meaningful conversations with compliance officers because they are likely on the social fringe. Have you ever paid particular attention to some form of disadvantage? Immigrants, those with a limited financial background, limited English proficiency, small business owners, marginalized socioeconomic status, and so on? Any of these factors could increase the likelihood of inadvertently triggering an SAR. Moreover, many individuals SAR'd are at a disadvantage in multiple ways simultaneously.

The bank cannot explain why a SAR would lead to an account closure because disclosing the existence of a SAR is illegal (U.S. Federal Regulation 12 CFR 21.11(k)). Yes, according to U.S. law, a non-law enforcement entity, if in possession of a memorandum drafted by a non-intelligence analyst, not only cannot describe the "non-charge" made in that memorandum but also cannot even confirm or deny the existence of that memorandum. This is not a James Bond movie, nor is it a farcical comedy about a security agency, nor is it a right-wing conspiracy theory. This is the true state of the law.

If you work at a regulated financial institution in the U.S. or any allied nation, within a few days of joining, you will be required to understand SARs (Suspicious Activity Reports) and broader Anti-Money Laundering (AML) confidentiality requirements and be explicitly instructed to strictly comply. Failure to comply could result in penalties for your employer. You personally could face private sanctions from your employer (including dismissal) or even potential criminal prosecution. If your trainer has a British accent, they might describe such misconduct as "tipping off."

Not only is it illegal to disclose a SAR to a customer, but the compliance department also strongly opposes any information flow within the bank that would allow the majority of employees who interact directly with customers (such as call center representatives or branch account managers) to know about the existence of a SAR. This is to prevent them from providing targeted answers when facing customer inquiries such as "Why is my account being closed?" Therefore, this is one of the situations where, from the bank's perspective, the institution intentionally chooses to "turn a blind eye" to itself. Shortly after an account closure decision is made, the bank usually cannot specifically know why your account was closed.

Many people find this practice reminiscent of a plot from Kafka's works (I certainly do!). However, this has been a long-standing banking practice in the U.S. and its allied nations. This practice stems from laws passed by elected representatives and is not a political tool developed arbitrarily in recent years. (We will talk about the latter later on.)

Venture capitalists in the crypto investment field are not low-level operators of a corner convenience store. They are well aware that in many institutions, cryptocurrency is classified as a high-risk category. They hope this is not the case.

Their views on high-risk lists (such as those related to fintech companies in their investment portfolios) are complex and nuanced. For example, they would (rightly) point out that a high-risk list compiled by a company closely related to them does not appear out of thin air. Some entries are imposed on them by financial partners. And their financial partners may occasionally express a sense of powerlessness in barroom gossip. Equally perplexing is that their regulatory bodies also often express similar sentiments.

Of course, this is only applicable to certain cases. We will delve into these mechanisms in detail later.

Founder's Personal Account Closure, Not Company Account

Some founders in the cryptocurrency space may have had limited knowledge of the financial industry in the early days. This is not a judgment of their character. Nobody is born knowing everything, and most people rarely delve deeply into this topic unless it becomes closely relevant to their profession at some stage, be it through schooling, work, or extensive reading.

Perhaps a founder might ask their friend, "I run a legitimate cryptocurrency business, but suddenly, my personal account has been closed. Why is this happening? I haven't done anything wrong."

Probabilistically, the bank may believe you pose an unacceptable risk of using a personal account for money laundering on behalf of a company (or its clients, etc.). The bank's controls are not sufficient to give them confidence that you are not doing so. They prefer not to find out through painful experience, hence they suggest you look for another bank.

Why would they think you might be laundering money on behalf of the company?

Part of the reason is that there have been numerous cases in the history of cryptocurrency companies laundering money through founder and employee accounts, and it is widely held in the banking industry that companies and their owners often commingle funds. This perspective is based on a significant body of evidence.

Tether has maintained contact with the banking system in various ways, including having executives open accounts in their own names, depositing funds in lawyers' names, and using non-executive employees as "money movers." SBF (Sam Bankman-Fried) is indeed talented, with one of his main "specialties" being money laundering. One of his core methods is to provide loans to employees (mostly customer assets, most of which are fictitious loans), and then to falsely claim to banks and other institutions that these employees are engaging in independent trades unrelated to FTX, Alameda, etc.

If someone is interested in a cryptocurrency company but is unaware of these histories, they are either complete newcomers or lack curiosity. However, banks were not established yesterday, and an indifferent attitude towards certain interests is highly unwelcome.

Business Institutions' Assumption of Presumption of Innocence

However, supporters' criticisms do have some merit: after fifteen years of rampant disorder in the crypto space, institutions should not let this perception be stereotyped and imposed on an innocent cryptocurrency project founder. Supporters believe that banks should only take action to terminate services after investigating and finding the following: a) there is concrete evidence of a problem; b) there is a clear and describable risk; c) the risk is one that society genuinely cares about.

This stems from a philosophical idea: they believe they are entitled to similar individualized attention and the presumption of innocence. This assumption is deeply rooted in our legal system.

However, this assumption has not taken root in our banking system.

If applied to a credit account, this idea almost seems absurd: "I have never defaulted on your loan, so you must trust me and approve this loan." No one would seriously expect a bank to do this. The operating logic of banks is not based on the presumption of innocence but on building a probability model based on observed factors to predict who is more likely to repay a loan. Of course, certain factors that are prohibited by law are excluded. If we believe that your likelihood of repayment is insufficient, even if that likelihood is still relatively high, we will not approve the loan. In the financial system, standards are not like high school, where 92% no longer equals an 'A-'. Banks do not need to wait for you to default, have specific suspicions about you, or conduct a time-consuming years-long investigation.

Discrimination in lending based on factors such as race is prohibited. Why? Because the American people have a strong consensus on this and want it to be a reality, so their representatives have passed a series of related laws. These laws are already quite mature and undisputed. At the same time, young data scientists will quickly learn that a customer's zip code, even if it has some reference value, cannot be used as an evaluating factor. This is because a zip code can often serve as an effective proxy variable for race, leading to indirect discrimination. (Side note: This is also why California chooses to use zip codes when prioritizing critical medical resources for specific racial groups, primarily for political reasons.)

However, using someone's occupation or business ownership as a loan evaluation criterion is not prohibited. This information is very relevant and conveniently has related regulations that explicitly require banks to obtain this information. (Anti-money laundering regulations require banks to inquire about the source of funds when opening transactional accounts for customers, typically including wages and/or business income, after which the bank needs to further inquire, '...where does the wage come from?')

So, is there a robust appeals mechanism or higher authority that can address situations where one is denied banking services? Does our moral intuition demand the existence of such a mechanism?

Many individuals with 'capitalist' in their title will tell you that if a certain allocator of capital rejects your proposal, there is indeed a higher authority you can 'appeal' to, and that is Mr. Market. This capital allocator has competitors, and you can pitch your project to others. Are there some projects that no capital allocator is willing to fund? Certainly. This is also one of the key reasons we employ capital allocators: they help us avoid wasting resources meant for societal expectations like supporting teacher retirement funds on ineffective endeavors.

Therefore, a capital allocator will tell you: if you can't find any allocator willing to support you, even though you believe you have a good business plan that requires capital to implement, then your business plan is not good enough, and you should pivot to do something else.

I have not encountered a venture capitalist who believes that rejecting a project requires accepting some kind of "higher authority" review higher than their partners. Many people won't even routinely tell entrepreneurs why they rejected a proposal because there is no benefit in doing so. Rejection is not an opportunity to invite founders to be persuasive. The meeting itself is an opportunity for persuasion, and the meeting is already over.

But banks are clearly not venture capital firms. Banks in some ways are no different from infrastructure providers, with utility companies often used as an analogy. For example, why build a society that requires the power company to make investment decisions to supply power?! (Those surprised by this who delve into negotiations such as power purchase agreements may be even more surprised.)

Besides providing infrastructure, banks are also deeply involved in capital allocation. Some departments in a bank may be more like people's perception of a power company, while other departments may be closer to people's understanding of a venture capital firm. And some departments may be a mix of both intuitions, which can be confusing.

You may be surprised that an apparently ordinary deposit account is both a form of infrastructure and a capital allocation decision.

First, a typical U.S. deposit account is actually a credit product. This characteristic is inherent to its nature and cannot be removed; otherwise, it will not be able to achieve its goal.

Secondly:

Providing banking services to legitimate, reputable cryptocurrency businesses is a high-risk endeavor.

For a bank, the sources of credit risk go far beyond simple scenarios of loan default. Financial institutions providing banking services to a business may face credit losses even without establishing what most non-professionals think of as a "credit relationship." This is especially common when providing services to financial service providers.

Here is a specific example:

Suppose a cryptocurrency exchange suddenly collapses, an extreme event that has about a 20% probability of occurring in the operating years of all exchanges. In that case, the last financial institution to provide it with banking services may be left holding the bag.

Take Voyager Digital, for example. This is a regulated, publicly listed entity with an experienced leadership team of professionals, a compliance department, a certain level of formalized risk management processes, and has been endorsed by legitimate supporters, including well-known venture capital firms.

However, Voyager still collapsed because the above conditions were not sufficient to prevent a company's failure.

When they went bust, their bank (Metropolitan Commercial Bank) received a series of ACH payment reversal requests. Customers (usually, it is fair to say) felt they were sending money to purchase cryptocurrency but did not receive the cryptocurrency, which looked a lot like fraud, so they complained to their own bank (the customers' bank).

However, Metropolitan Commercial Bank characterized these complaints as fraudulent. There certainly are cases where some customers profit by falsely accusing a cryptocurrency exchange of fraud, for example, by claiming they did not receive the cryptocurrency after paying for it and then applying for a refund while keeping the cryptocurrency. However, the customers Metropolitan Commercial Bank was trying to charge back actually had neither money nor cryptocurrency. These customers merely exchanged their money for claims in a bankruptcy asset liquidation.

It is said that cryptocurrency is a product widely adopted by various socio-economic classes. Do you think if you randomly asked a passerby to "explain what a claim in bankruptcy asset liquidation is?" they would confidently and quickly respond? I think they may be more confident in answering a different question, such as "have you ever tried to purchase a claim in bankruptcy asset liquidation?"

If someone called their bank and said, "I opened an app on my phone, tried to buy something, but didn't get it. Those jerks took my money," what would happen? Normally, the bank's customer service representative would quickly jot down some brief notes in a web app and then press a button. The customer service representative would try to appear helpful, but their performance levels vary. They earn about $15 an hour, receive training far inferior to a judge's. They do not conduct a real investigation or carefully weigh the facts and circumstances. They probably have no understanding of the notorious bankruptcy events in the crypto industry because these events represent a tiny fraction of all complaints that enter their phone queue. Customer didn't receive something from some internet merchant? Press the button, read the script to the customer, then hang up and immediately take the next call.

After a few steps, this button's action would mechanically lead Metropolitan Bank to refund some funds to Voyager's dissatisfied customers. However (and this is crucial), this money was not actually intended to be allocated by Voyager as it was in bankruptcy. So, whose balance sheet were these funds deducted from? The answer is: Metropolitan Bank's. Its shareholders fulfilled the "sacred duty" of equity—bearing credit losses to spare depositors.

If you provide banking services for a rapidly growing financial services company that has high daily transaction volumes, collecting small fees per transaction and/or earning net interest from deposits, the total risk exposure at a specific time T (within the refund or transaction dispute window) may far exceed all service revenues collected from time 0 to T. A rough estimation formula is: number of days in the relevant refund/dispute window × average daily transaction volume × dispute rate. (This dispute rate can range from low to high double-digit percentages, depending on various factors such as the maturity of the customer base and the widespread dissemination of guidelines on consumer banking rights among customers.)

Therefore, banks are very cautious in selecting which financial services companies to serve. Because as soon as one collapses, just one, it could potentially bring down an entire related business line.

Ultimately, Voyager and Metropolitan Bank applied to the court to modify the ACH agreement rules in their favor. Subsequently, bank technologists told the court that the ACH agreement is computer code maintained in a decentralized manner and therefore outside the jurisdiction of any court. Wait, this line is from my unpublished cyberpunk novel and has inadvertently slipped into this article, please disregard it. No serious person would claim that courts cannot intervene in software or its developers. The court ordered an upgrade to the agreement. Like many court orders, this court order was promptly executed by professionals from several companies.

Naturally, Metropolitan Bank was sued due to the chaos caused by Voyager's incident. A key focus of the lawsuit was: Voyager implied to customers that their funds were protected by Federal Deposit Insurance Corporation (FDIC) insurance, therefore their deposits were safe. Voyager's CEO claimed this was a sales tactic suggestion from Metropolitan Bank's management. Meanwhile, Voyager's marketing department published blatantly false statements about FDIC insurance, claiming: "[FDIC insurance] means that in the rare event of a company or our bank partner's financial loss, your US dollar funds will be fully reimbursed (up to $250,000)."

Marketing departments often misunderstand these subtle distinctions, which is why in well-operating fintech companies, the legal department would never allow the marketing department to draft any content on FDIC insurance without review. The two most fatal words in the above statement are "the company": FDIC insurance does not and has never guaranteed debts of uninsured customers in the banking system. It only guarantees debts of insured financial institutions. (If Metropolitan Bank were to fail, Voyager's customers might seek compensation from FDIC insurance, but the issue is that Metropolitan Bank did not fail.)

Therefore, the FDIC (Federal Deposit Insurance Corporation) has never paid a single cent to Voyager's customers, nor will it ever pay. The FDIC has neither the obligation nor the legal authority to do so.

The FDIC is vehemently opposed at the institutional level to using false claims of FDIC insurance to induce customers to transact. As one of the banking regulatory agencies, one of the FDIC's primary responsibilities is managing the deposit insurance fund. We will discuss the FDIC's responsibilities in detail shortly. However, it is first necessary to clarify that the FDIC is responsible for the deposit insurance fund. The cryptocurrency industry has a history of false promises where the FDIC would backstop losses resulting from its own failures, which is one of the reasons the FDIC approaches the cryptocurrency industry with caution.

Subsequently, Metropolitan Bank stopped its cryptocurrency banking services. Around the same time, several banks with significant or nascent cryptocurrency businesses also exited the cryptocurrency banking sphere.

So, did Metropolitan Bank have the right to do this? Absolutely, without a doubt.

Did they also have the ability to choose not to exit the cryptocurrency banking business? Indeed, some external factors exerted pressure, which Metropolitan Bank acknowledges, although these factors may not have been decisive in their decision. In fact, the cryptocurrency business they ventured into brought them significant issues, and the outcome may have been inevitable, even without these external pressures; someone internally may have been accountable.

Metropolitan Bank described its exit decision as influenced by business and regulatory considerations, but this decision was not abrupt; it had been in the making for a long time. Their statement reads as follows:

"Today we announce our exit from the crypto-related asset field, marking the completion of a transformation process that began in 2017. At that time, we decided to pivot to other businesses and cease the expansion of crypto-related operations."

Imagine you are a cryptocurrency advocate within a mid-sized U.S. bank. When you submit a proposal to the management, the regulatory environment undoubtedly casts a shadow on the reception of the proposal. Another significant reason is that the management can read the news—other banks that accepted similar proposals and were approved have experienced significant losses, months of negative publicity, and will be under strict regulatory scrutiny for at least the next year. All this while the related business has brought in almost no revenue. Why would the management agree to say, "As long as the client is a high-quality cryptocurrency company, as long as you can be meticulous in the details, this seems like a low-risk business. Let's embrace Shiba Inu Coin, shall we, bro?"

Anyway, when cryptocurrency entrepreneurs in 2011 couldn't find a bank, it could still be attributed to the banking industry's inherent conservatism and low level of technical understanding. However, cryptocurrency has had 15 years of development, and this industry's performance has a sufficient historical record to be evaluated. And now, cryptocurrency is being scrutinized and judged based on this record.

Some supporters believe that such evaluation is unfair. They would say, indeed, there was some "cowboy" behavior in the early days, but this was just the cost of innovation. Those weird geniuses and geeks always stand at the forefront of technology, perhaps not always following legal advice. But the early stage has basically passed. What we bring now is something entirely new. We are compliance-first responsible professionals, fully committed to partnering with counterparts in the financial and government sectors to dispel all doubts. We have impeccable credentials, speak courteously, and maintain a professional tone. We can also hire lobbyists, make political donations, and devise meticulously crafted media strategies!

Some Chill Originating From the Shadow of SBF

There have been numerous reports about Sam Bankman-Fried (SBF) and his cohorts and supporters; however, the significance of this story is far from fully understood and comprehensively disclosed.

SBF and others, through a deep understanding of the U.S. power dynamics, meticulously plotted a gradual privilege escalation attack on the U.S. system. They used trusted institutions as a springboard, transferring the weight of each domino to the next target, and the complete narrative of this political strategy could fill a book. Just the seized asset accusation part alone filled 26 pages of print paper, with each targeted political figure described in just one or two lines, and the U.S. even accused him of attempting to "buy out" the entire Bahamas.

SBF and most of his accomplices primarily focus on the Democratic Party's sphere of influence, while his proxy Ryan Salame is responsible for channeling interests to the Republican camp. Salame's lawyer in his sentencing memorandum (page 11) adopted a unique legal strategy, explicitly denying any good intentions: "Regardless of the topic of the meetings, Ryan's ultimate goal has always been to influence cryptocurrency policy, including meeting with government officials such as Senator Mitch McConnell and then-Representative Kevin McCarthy, and focusing on pandemic response issues."

Due to the treaty commitments with the Bahamas, SBF was not charged with the bribery of officials. See Extradition Treaty Article 3. (I fully believe this is a complex factor, but I do not consider it an insurmountable constraint.) This part is mentioned in the plea agreements of multiple accomplices, most of whom received lighter sentences for cooperating with the government. Salame, on the other hand, refused to cooperate and was sentenced to 90 months in prison. SBF's parents seem unlikely to be charged, although they actively participated in criminal activities and were well aware of their illegal nature. They not only provided a lot of professional advice, but this advice was directly related to their professional field. For example, SBF's mother—a Stanford law professor and Democratic fundraiser—advised him to utilize colleagues as "straw donors" to circumvent mandatory disclosure laws' potential image damage. Although I am not a Stanford law professor, it is apparent that such behavior is illegal.

SBF was once considered the successor to George Soros, becoming the new generation's Democratic standard-bearer in Washington with substantial funding support. Since 2022, the crypto industry has experienced what is called "performative outrage" from the Democratic Party, with one key reason being their attempt to demonstrate that the cryptocurrency has not successfully "bought off" them.

Whether in Washington or in the crypto industry, many people seem to have selective memory—selective forgetting of their actions such as the meetings they attended, deals they signed, calls they made, and hospitality they enjoyed in 2020 and 2021.

But before criticizing others, examine your own issues: My impression of SBF is that he is extremely intelligent and fiercely cynical, but candid in his motivations. I believe he may be one of the most capable traders in the crypto industry. (Please do not take this as too high praise.) Furthermore, I once believed he was a "runner" for Tether and privately told someone, "Don't get too close; there's a 5% chance he'll end up in jail."

In hindsight, I overestimated his abilities in several key areas, completely overlooking the fact that he was involved in large-scale fraud, largely due to a strong sense of kinship. For those who remind us of ourselves or close friends, we develop Jupiter-sized blind spots, which seems to be a human trait.

Anyway, the most important "runner" for Tether currently is Howard Lutnik, but he may step back from this role as he is currently leading Trump's transition team, aiming for bigger goals. In comparison, MicroStrategy's high implied volatility is not even worth mentioning. If there is a "trade of the century," it might be Lutnik's convertible bond arbitrage.

Some cryptocurrency supporters believe that it is unfair to smear the entire industry with SBF's scandal, whether for reasons within the industry ("He is centralized finance, not true DeFi, and he tries to force us to follow his lead! Let him go!") or political reasons ("This is not our camp's issue! Salame? Never heard of it!").

We are once again faced with such contradictions: On the one hand, a democratic system should judge individuals based on their actual performance, rejecting collective punishment; on the other hand, the political system should not be as forgetful as a squirrel.

"Choke Point Operation"

There was once a series of stunningly unethical decisions. This was not a one-time isolated event carried out in a smoky backroom; it started small, spread gradually, was then covered up, and finally the truth surfaced, facing severe and just condemnation.

Some highly nefarious industries frequently and intensively use the banking system, while also triggering a large number of customer complaints. The debt collection industry is one of them.

Frankly speaking, I have spent years advocating for consumers facing issues in debt collection (and banking) in a pro bono capacity. I have described the debt collection industry as "one of the most abominable cesspools in America." Furthermore, I have categorized some of the bottom-feeders in the consumer credit arena under the umbrella of "debt collection," otherwise the list would be endless, including payday loan companies, so-called "credit repair" organizations, and debt-related telemarketers.

Banking regulatory agencies, upon receiving customer complaints (some savvy customers, such as those following the advice of advocates like me, file complaints through regulatory agencies because this approach is often more effective than contacting customer service directly), have issued warnings to banks, stating that debt collection agencies exhibit a high risk ratio in ACH transactions claimed by customers to be unauthorized. Of course, customers claiming these transactions to be unauthorized are not always entirely truthful. However, debt collection agencies do often intentionally exploit people's common-sense understanding of how the banking system operates to achieve their goals. Refer to previous articles for more insight on this point.

Now, banks serving debt collection agencies can calculate how many of the ACH payments they process have been complained about. Some may think that these banks may lack an understanding of the unusually high complaint structure in the debt collection industry, which is one of the reasons for the "banking worldview." Furthermore, it can be reasonably argued that regulatory agencies have the authority to inform banks of information they may not be aware of. This sounds reasonable and falls within the reasonable scope of public service duties.

Banks willing to open accounts for debt collection agencies (note: not all banks will do this!) are receptive to such business. Although the debt collection industry is not noble, it is legal and regulated in the United States. And banks are not the all-encompassing monitoring bodies ensuring their clients fulfill various obligations under the law.

But problem resolution through legislative bodies and courts is both slow and expensive, so why not just let banks handle it? We've long made them operate like private intelligence agencies! What's wrong with having them take on some responsibilities of a private consumer protection bureau?

The Obama administration also disliked debt collection agencies for reasons very similar to why I don't like them. Hence, they further expanded the scope of criticism: the risks posed by providing banking services to bad actors are more extensive compared to the (known, acceptable, controllable, and certainly not survival-threatening) ACH reversal risks. These customer complaints could damage the bank's reputation in the community, potentially leading to outcomes like customer deposit outflows. This puts the bank in a precarious situation, which is as normal as can be. If a certain risk could jeopardize a bank, it naturally warrants the Federal Deposit Insurance Corporation (FDIC) to voice its opinion.

To eliminate this danger, it is necessary to kick debt collection agencies out.

However, to get the FDIC to accept this view, a group of highly talented individuals would need to engage in lobbying and persuasion.

The Department of Justice has a very proud legal theory. The Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) gave the Department of Justice the power to investigate any fraud affecting federal deposit insurance financial institutions (among many other crimes). FIRREA was passed in the wake of the savings and loan crisis to protect small financial institutions from risk and prevent a similar crisis from happening again.

Your common sense might lead you to think, "Oh, Congress probably intended to crack down on fraud against banks, such as fraud large enough to threaten a small community financial institution. I can understand that a large fraudulent bank loan could put a small bank in jeopardy. Checking the historical record, indeed there were some serious fraudulent bank loans during the savings and loan crisis. Okay, so we are federalizing the prosecution of fraudulent banks? Sounds reasonable."

If you have such an intuition, then obviously, you are not creative enough to be a lawyer in the Obama administration's Department of Justice. Their idea is that if you provide some kind of "channel" for fraudulent conduct, such as opening a bank account for a fraudster, then you have an impact on a financial institution (yourself). Therefore, the Department of Justice can hold you accountable for "self-affecting" reasons. Note that this does not require you to actually lose money. Oh no, the Department of Justice can also hold you accountable because you have caused your regulatory agency to assess you lower. When settling with the Department of Justice, it will require you to sign a legally binding commitment to stop your "self-affecting" conduct and to stop providing banking services to a specific industry, like payday loan companies.

I know this sounds unlikely. Here is a direct quote from a report by the Department of Justice's Office of Professional Responsibility (DOJ OPR), which is on page 16 of the report outlining their conclusion on the accountability of Department of Justice lawyers:

"As detailed below, [Consumer Protection Division] relied on the 'self-affecting' theory and other theories of responsibility in three cases arising from the 'Choke Point' initiative."

When the Department of Justice (DOJ) or the Federal Deposit Insurance Corporation (FDIC) instructs a bank to do something or strongly recommends that a bank take a certain action, things usually do not end there. You can certainly negotiate and even resist to some extent.

This is a long-term, repeated game of tit-for-tat, where both participants have limited resources and extremely complex preferences. Both sides are constantly choosing their battles, seeking both compromise and concession. When your opponent is pleased with you, your emails are answered more promptly, your requests are more easily approved, and you can report smooth progress to your superiors. Whether it's a bank or a regulatory body, they are ultimately made up of people who have emotions, need to plan their careers, and must complete annual performance reviews.

In reality, banks did not make much money from serving debt collection agencies. The banking culture often views the debt collection culture as rough, undignified, and low-status. Therefore, banks often choose to comply. In the notification letter sent to debt collection agencies to end the service relationship, many banks appear unusually candid compared to typical such correspondence: "This is not your fault, we apologize for this, but due to regulatory guidance specific to your industry, we no longer wish to serve this industry."

Indeed, the Obama administration had diverse policy preferences.

For example, the government did not particularly support firearms.

Firearms dealers do not use banking services as frequently as debt collection agencies. They do not regularly use deceptive practices to facilitate "guns for cash" transactions. They do not have a strong need for the Automated Clearing House (ACH) pull function (confidence level of 99% based on industry knowledge), nor do they have a particularly high transaction dispute rate (confidence level of 95% based on the same industry knowledge).

However, regulators found that simply mentioning "reputational risk" could slap a high-risk label on any unpopular industry, with almost no one questioning it. They believe that providing banking services to firearms dealers carries a high risk: Haven't you seen the news? School shootings. Do you want any association with that? Accepting firearms dealers' business could jeopardize your reputation, affecting the stability of your deposit base, thereby threatening the security of your bank and insurance funds.

During a congressional hearing, the FDIC stated that they had not required any banks to stop serving certain unpopular industries.

"What we do is issue guidance as clearly as possible, clearly and publicly stating that as long as banks have appropriate risk mitigation measures, we will not prohibit or prevent them from engaging in business with anyone they wish to work with."

Surprisingly, someone might think they are indeed stating facts here. For phrases such as "Explain to me why payday lenders are not on the high-risk list," "Have you established a robust Enhanced Due Diligence (EDD) plan for the deposit risk posed by payday lenders?" and "Are you sure you should be taking this type of business?" whether viewed individually or as a set of talking points, are consistent with this statement. (These are not direct quotes but summaries of the dialogue phase, which I believe fairly reflects a large portion of the authentic dialogue content shown in the records.)

The Office of Inspector General of the Federal Deposit Insurance Corporation (FDIC) in an investigative report attempts to shift all responsibility for the "Operation Choke Point" to the Department of Justice (DOJ).

The report notes: "We did not find evidence to suggest that the FDIC used a high-risk list to target financial institutions. However, certain merchant types mentioned in the Summer 2011 edition of the 'FDIC Supervisory Insights' and related supervisory guidance did indeed leave some bank executives we interviewed feeling that the FDIC discouraged institutions from engaging with these merchants. This sentiment was particularly strong when it came to payday lending institutions."

When a regulatory agency issues a policy statement directing you to take certain actions and reiterates this in individual supervisory guidance, authors usually do not believe that these policy directions were randomly generated by a group of monkeys pounding on a keyboard and posted online.

As is often the case, regulatory officials instructing banks to cease serving a target industry ignored Stringer Bell's advice—not to leave a paper trail in criminal conspiracies. However, emails sent internally by the FDIC and DOJ are routinely archived, and banks (of course) also retain correspondence from regulatory agencies. The contents of these emails are unavoidable and highly damaging.

For example, the U.S. Department of Justice wrote in its internal document "Operation Choke Point Six-Month Status Report" (excerpted in a congressional report):

"Given the significant questions about the Internet payday lending business model and the legitimacy of consumer bank account lending it is based on, many banks have decided to cease processing transactions supporting Internet payday lending institutions. We view this as a significant achievement, a positive change for consumers... While we recognize that this may lead banks to decide to cease doing business with legitimate lenders, we do not believe this determination should alter our investigative plans."

Not once, not twice, not on several occasions, and certainly not by the whims of individual inspectors. Three regional directors out of the six in the FDIC's regional offices have indicated to the Office of Inspector General (OIG) that they understood Washington's intent was to discourage the payday lending business, with two explicitly stating that they expected, as the OIG described, institutions supporting payday lending to "formulate exit plans."

Does this necessitate top-down direct orders? Indeed, even without top-down directives, a nationwide plan can be furthered through similar actions at local offices. Cultural homogeneity, coupled with grassroots staff buy-in to a policy direction, often suffices in achieving such an outcome. We have ample experience in the tech and finance fields regarding this, and we will discuss this further later on.

In Japanese, there is a beautiful term called "sonchō" to describe the diligent attitude and actions taken by a subordinate to cater to the intentions of a superior in the absence of clear instructions. Sonchō is a core skill in the American professional class. People with this ability are sometimes described as "self-starters," "highly autonomous," "bold," "initiative-driven," or "acting like a boss," and so on. If you work in the compliance field but have never practiced "sonchō" for regulatory agencies, then you are a terrible compliance professional. Similarly, if you are a regional director at the FDIC but have never practiced "sonchō" for Washington, then you cannot be considered competent.

However, "chokepoint action" itself is indeed official policy. If not, entities as complex as those in the United States could never be described as having had even a single official policy.

As the former FDIC Chairman wrote in a Wall Street Journal op-ed:

"Documents released by the House Oversight and Government Reform Committee show that the Justice Department is more inclined to use 'chokepoint actions' to force banks to drop certain customers rather than directly prosecute illicit or fraudulent businesses because it is simpler, quicker, and requires fewer resources."

Chokepoint actions target not only debt collection agencies, gun sellers, and payday loan companies. The FDIC's enumerated list has 30 items, ranging from clearly invasive and illegal activities (such as fraud) to "can construct a narrative that providing banking services to this industry is challenging" (such as the adult entertainment industry) and even to "things we don’t like" (like racism and... fireworks? Really?).

When "chokepoint action" was exposed, the media and Congress were in an uproar because its behavior was both arbitrary and unbridled. (Here I am using the common American understanding of "unbridled" rather than the professional definition of Justice Department lawyers—they might take offense at being called "unbridled" because they have three court cases and a 25-year-old regulation that clearly explains in a memo that they support everything they do.)

The designers of "chokepoint action" have always insisted that the action was not intended to achieve its obvious goals and have denied that it produced obvious consequences.

These agencies were then directly accused of lack of candor with Congress. If you tell a member of Congress that his interpretation of The Wall Street Journal is incorrect, and in fact, your superiors are celebrating each other because The Wall Street Journal accurately reported their important work, Congress clearly won't be pleased. Then they will pull out copies of your boss's emails to show you, which they can obtain through a subpoena because they are Congress. (See House Oversight Committee Report, supra note, at 10)

Some academic literature shows sympathy towards regulatory agencies' perspectives. (Although more literature does not.)

If you wish to understand from a "steelman" perspective, this is probably the best version you will find. This viewpoint acknowledges the Department of Justice's efforts to combat fraud through a creative interpretation of the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) targeting third-party payment processors and banks, while accusing the financial industry of sensationalizing the issue for commercial gain and attempting to mitigate controversy through limited disclosure of a "high-risk list." Furthermore, this argument also claims that the firearms industry merely exploited this news frenzy for political purposes, even though there were no specific enforcement actions taken against it.

My take? I look at emails. The emails are what they are, even if admitting this content might cost a civil servant their job. I have also read postmortems of the event (including analyses from years past; it's a hobby of mine that has since become my job). I believe much of this analysis was done to save face, penned by bureaucrats ashamed of their colleagues who may lose their jobs and pensions for favoring government policy enforcement.

Sometimes, indeed, there are lies in politics. Sometimes, justice is not served. I know this may shock you; please try to digest this impact.

The "choke point action" has almost been forgotten, except by those obsessed with banking affairs.

Until...

The So-Called "Choke Point 2.0"

Nic Carter is a cryptocurrency venture capitalist and podcast host who occasionally shares influential insights. Recently, he staunchly attempted to label a series of cryptocurrency-related regulatory activities as "Choke Point 2.0." This branding effort aims to associate these activities with politically motivated wrongdoing, thereby undermining their legitimacy. As a result, this term has gradually gained popularity among cryptocurrency supporters.

Unlike the original "Choke Point action" (which was actually a centrally directed action with a written project plan, status meetings, ongoing progress reports, and a code name decided upon by participants — in hindsight, they should have consulted their PR department to choose a less off-putting name to describe their scheme), "Choke Point 2.0" is more like pulled taffy, attempting to encompass all recent cryptocurrency supporters' grievances about regulatory actions. Thus, we need to review a complex and diverse history to fairly understand the viewpoints of these supporters.

Carter has produced a significant amount of related content on this topic, one of which is "Did the Government Spark a Global Financial Crisis to Crush Cryptocurrency?".

As for the question in the title, the answer is: no. We did spark a financial crisis, which, so far, has been fortunately contained to a smaller scale, and this crisis was primarily an unintended side effect of interest rate hikes to curb inflation.

Silvergate: Once a Bank for Cryptocurrency, Now Gone, Fondly Remembering the Good Times

Cryptocurrency supporters have specific and widespread concerns about a small number of banks closely related to their interests. They connect these concerns with the narrative of "debanking".

Although they lack attention to procedural history and in-depth knowledge of the specific cases mentioned, some supporters have attempted original reporting. This is worth acknowledging.

As we have discussed, nearly all banks consider cryptocurrency-related businesses high risk and therefore choose to stay away. However, a small number of banks were actively involved in cryptocurrency business. These banks publicly and to regulatory authorities claimed to have enhanced due diligence (EDD) in place necessary to handle these businesses compliantly. This is crucial for the cryptocurrency industry for two reasons: one obvious (almost every business needs a bank account), and the other less so.

Cryptocurrency often touts the superiority of decentralization, but centralized systems are actually more efficient than decentralized ones. When using the banking payment network, making transfers outside regular banking hours is very difficult (the normal uptime of banking payment systems is around "5 9s"). This increases the risk for businesses and also becomes a continuous cost of capital.

The cryptocurrency market trades 24/7, and cryptocurrency companies want to be able to settle transactions at any time, especially those involving stablecoins and the U.S. dollars backing them. The cryptocurrency industry's solution is to do business with the same bank—this is Silvergate. I once described it as the "First National Bank of Cryptocurrency" during its initial public offering (IPO), which surprised me.

Silvergate's former key product SEN: Key Infrastructure for the Cryptocurrency Industry, Fond Memories

Silvergate offered a special product called the Silvergate Exchange Network (SEN). SEN can be seen as both a mundane but critical infrastructure and of great importance to the cryptocurrency industry. Today, cryptocurrency companies deeply cherish their memories of SEN.

In essence, SEN enables almost real-time ledger transfers between Silvergate clients, swiftly moving USD balances from one account to another. This allows them to continuously settle the USD portions of their crypto transactions with each other.

This is particularly crucial for stablecoin issuers, such as Circle issuing USDC. Circle's USDC custody bank is primarily Silvergate Bank (SVB). Circle aims to be able to issue hundreds of millions of USDC at any given time to market makers like DRW and Alameda Research, or conversely convert USDC into USD cash in a similar manner—a process usually resolved within minutes.

In the fintech space, a common yet not overstated occurrence is fintech companies partnering with multiple banks and delineating clear responsibilities. For instance, one bank may agree to handle a fintech company's customer-facing high-frequency, low-balance transaction activities, while another bank may be in charge of managing the low-frequency, high-balance deposit business. These two types of operations represent entirely different business models for banks! They involve distinct risks, comparative advantages, and revenue opportunities.

If your business meets the following two criteria simultaneously: a) processes significant daily inflows and outflows of funds, and b) desires to hold billions of dollars within the regulated banking system, then finding partners that can accommodate both aspects is paramount.

As a fintech company, your argument to the bank responsible for the deposit business would be: the other cooperating bank is also a US-regulated qualified financial institution with robust anti-money laundering (AML) and know your customer (KYC) compliance controls. Therefore, when your business day concludes, settling the net transaction amount with this bank's omnibus account via wire transfers may involve hundreds of thousands of customer transactions, totaling in the billions of dollars. Even if the deposit bank knows little about the specifics of the day's transactions, it should be reassured.

The transaction patterns are likely not markedly different from yesterday or tomorrow, and the bank's compliance department can rest easy because the trusted partner has appropriate control measures in place. Thus, the bank managing this substantial fund will not be seen as aiding or abetting money laundering. It can rely on the monitoring and controls of the second bank, in addition to the compliance departments of the crypto company. Furthermore, both parties will establish a trust relationship through many formal contractual commitments and informal verbal or written assurances. This model is indeed effective, and reputable professionals accept such arrangements, but the integrity and operational compliance of the high-frequency trading bank are crucial pillars of the entire system.

Silvergate is not a well-managed institution

In fact, SEN does not have a robust risk management environment. Instead (as described in paragraph 70), it has almost no transaction monitoring capabilities. Silvergate did purchase many off-the-shelf automated monitoring standard packages commonly used by banks, but due to configuration issues, this system has no effect on SEN transactions.

Carter's description of the situation is: "SEN's transaction monitoring system failed and shut down after an upgrade."

Silvergate acknowledged this "shutdown" at an institutional level, but was unable to address the issue.

I have an engineering degree, have founded five software companies, and have worked in the tech industry for many years. In my professional career, I have never referred to a problem unresolved for fifteen months as a "shutdown." A day's shutdown is understandable, a week without resolution is a human capacity issue, but a year without resolution is a manifestation of strategic failure.

During this time, SEN has processed over a trillion dollars in transactions. Silvergate was not unaware of the increasing volume of SEN usage (congratulations to them!), but they turned a blind eye to daily flows of billions of dollars, even though these transactions were completed through their banking license. We know this because of Silvergate's internal communications records during the same period, the actual implementation status of the technology tools they purchased and deployed, and in sworn statements filed in litigation and submitted to regulatory agencies. This point no longer requires any rational argument.

So what does this amount to? Just a harmless paperwork oversight? I'm glad you asked that question.

Historically, the anti-money laundering risk of internal bank ledger transfers was low because such operations are difficult to achieve "layering" purposes: the same compliance department can see the complete path of fund flows. In addition, most such transactions usually occur between entities under the same controlling entity. The purpose of "layering" is to break the monitoring chain of fund flows, and moving funds from one pocket to another in front of compliance officers clearly does not achieve this goal. This low-risk assumption has clearly been deeply embedded in Silvergate employees' understanding of the new upgraded monitoring suite ATMS-B.

However, while SEN transactions are operationally manifested as internal bank ledger transfers, they are actually high risk. The design purpose of SEN is to allow non-controlled counterparties to settle a portion of transactions at high speed. The other part of the transaction usually occurs on the blockchain, a part of the transaction that banks cannot monitor. If you cannot see the part on the blockchain and cannot see the part on the bank ledger, then it sounds like exchanging bank deposits equivalent to cash in daily flows amounting to billions of dollars without any effective anti-money laundering monitoring measures.

This is not just my opinion. Silvergate's Chief Risk Officer Kathleen Fischer once remarked internally about the lack of monitoring for SEN, saying, "We know about this issue, either we have put in place other controls to compensate for it, or we haven't, and if we haven't, we just have to accept the consequences."

The fact is, Silvergate did not establish any other controls.

Carter claims that all of the bank's customers have undergone rigorous KYC (Know Your Customer) and onboarding processes. While Silvergate may have consistently carried out KYC and onboarding processes, to skeptics, considering it a formalistic practice is not unreasonable.

Silvergate provides services to multiple entities associated with Binance, which is a recognized criminal conspiracy engaged in large-scale money laundering activities. Binance and its management are like villains in a movie, flagrantly flouting the law for years, circumventing financial regulations through jurisdictional games. Through Silvergate, Binance and its related entities conducted $220 billion in transactions.

Mandatory compliance training always feels dull, so sometimes we like to make it more engaging through fun little games. Let's play the "Spot the Risk Signals" game together.

We have just received an account opening application from a company registered in Seychelles. The company is beneficially owned by a globally renowned billionaire, and this beneficial owner claims to have no fixed address. He often appears in negative news reports. Both he and his company have received cease-and-desist orders from multiple countries, accusing them of providing unlicensed financial services, involvement in money laundering, intentional non-compliance with regulations, and lying to regulatory authorities, all extensively documented. The company has no actual operations or employees and is merely a shell company. Its planned fund flow involves receiving wire transfers (including international transfers) from third-party counterparties that the bank hardly has any direct knowledge of. The company plans to immediately transfer these deposits to third-party financial institutions to allow these counterparties to purchase anonymous bearer instruments, specifically cash-equivalent tools. The company expects its transaction volume to reach billions of dollars, with individual transaction amounts potentially reaching eight figures.

Silvergate readily opened an account for Key Vision Development Limited (mentioned on page 4), the aforementioned shell company, and allowed it to deposit and withdraw over $11 billion. Of course, it is worth mentioning that Silvergate terminated banking services for Key Vision Development Limited in 2021. The records do not specify the exact reasons, but astute readers may be able to guess. However, Binance's main entity still enjoys Silvergate's "attentive service," or more precisely, the "satisfactory neglect" in the service, until the bank goes bankrupt.

However, the main minefield that Silvergate has repeatedly stepped on is its relationship with FTX/Alameda and its executives. They are the bank's largest clients, with deposits accounting for tens of percentage points. As the bank and its executives have acknowledged, Silvergate's monitoring of these clients can be said to have been severely negligent.

Carter quoted an unnamed Silvergate executive, whose statement was broadly consistent with the bank's previous statements to the media and regulatory agencies:

"When dealing with FTX/Alameda clients, we did not indeed exercise sufficient diligence. This was partly due to the bank's extremely rapid growth... Perhaps we could have identified the situation where FTX was depositing through Alameda. In hindsight, I think we could have put together these clues and identified the issue. But this was not a legal dereliction, and we were not obligated to discover all issues. Our compliance procedures meet legal requirements. This is indeed an area where we could have done better. But this was not intentional misconduct, nor did we collaborate with bad actors."

This statement is in line with their previous remarks, but it is not deserving of blind trust.

Ryan Salame, an expert in laundering cryptocurrency through the banking system (his lawyer describes this "skill" on page 7 and subsequent sections), once tweeted that it is hard to believe Silvergate did not know that Alameda Research and North Dimension were actually receiving flows of funds from FTX's clients. Salame has repeatedly stated clearly that Silvergate intentionally worked with him, coordinating these fund flows. Even if it was not intentional, Salame's viewpoint still holds: even if FTX completely internally designed this scheme, even if Salame himself single-handedly conducted all operations, Silvergate could not have been unaware of it.

But suppose you neither believe Salame nor think I understand the mechanics of banking operations, or you choose to unconditionally believe the bank executives' denial, perhaps because you believe bank executives would never lie. In that case, the most favorable explanation for Silvergate is that, in its years of focusing on growth and neglecting its legal responsibilities, as a regulated financial institution, it has repeatedly fallen below the minimum compliance capability required in the United States.

After the FTX collapse, Silvergate opted for voluntary liquidation. Here, they can be given some credit: they largely managed the liquidation in a relatively orderly manner, unlike Signature's blow-up. Signature's cryptocurrency exposure was much smaller, but still ran into trouble. (Signature also has a similar account transfer API product called Signet, but this is a smaller part of its story.)

Carter has lodged multiple complaints regarding regulatory activities related to Silvergate Bank. One of these is his claim that the Office of the Comptroller of the Currency (OCC) does not permit Silvergate to sell its SEN (Silvergate Exchange Network). I find this accusation highly credible, even without concrete evidence to support it. Silvergate has operated a "money laundering machine" worth trillions of dollars, which has long necessitated corrective action, but the bank has failed to take proactive corrective measures, subsequently leading to significant consumer harm and causing much embarrassment to many policymakers. When the bank's Chief Risk Officer predicted the "challenges ahead," these were the very issues she was referring to.

Carter further alleges (I find this to be quite a groundbreaking report, worthy of praise) that the Federal Deposit Insurance Corporation (FDIC) and other bank regulatory agencies provided verbal guidance requiring banks to lower their cryptocurrency deposit ratio to below 15% to be considered "safe and sound." If bank regulatory agencies used such language, it was not a mere suggestion. Carter complains that there is no legal basis supporting this arbitrary number, which effectively makes it impossible for banks to engage in cryptocurrency business and is deliberately designed to target specific banks.

Some regulatory agencies are information disclosure regulators, such as the Securities and Exchange Commission (SEC). Others are prudential regulators. Prudential regulators typically translate their broad legal mandates into specific requirements through rulemaking processes or more informal guidance (even the FDIC calls it "moral suasion"). This process yields both specific requirements and more ambiguous spaces that require ongoing negotiation between regulators and the regulated entities.

Does the FDIC have the statutory authority to set a "magic number"? The answer is yes. Under the U.S. political system, the FDIC does indeed possess such authority and can provide you with a lengthy list of legal bases. For example, the Federal Aviation Administration (FAA) has the statutory authority to set a "magic number" for bolt torque, and the Food and Drug Administration (FDA) has the statutory authority to set a "magic number" for ketchup's allowable flow rate.

So, did the regulatory agencies overstep their bounds in this case? Clearly not! Just look at the description of the previous "Operation Choke Point" and the regulatory power theory behind it. Connecting bank operations supporting payday lenders with reputational risk, bank runs, and threats to the deposit insurance fund does indeed require some "magical thinking." However, deeming cryptocurrency deposits as unstable, highly correlated, and potentially run-triggering risks does not necessitate such "magical thinking"! We have actually already experienced a bank run triggered by cryptocurrency.

A reasonable viewpoint is that the issue with regulatory agencies is not abusing discretion, but rather having to overcorrect for significant consumer harm due to past regulatory failures and/or missed opportunities. It is shocking that regulators failed to notice that Silvergate's business model had undergone a substantial transformation—a model that formed the basis of its IPO and was completely different from its previous existence as a two-branch real estate bank! This reasonable viewpoint has even been mentioned by the Federal Reserve. See "Discovery Report" page 2.

Does the 15% threshold make it nearly impossible for banks to engage in cryptocurrency business? From experience, this is not the case. The cryptocurrency business ratio of other banks is far below this threshold, which may have also been the basis for choosing this number. For example, Metropolitan Bank's peak cryptocurrency deposits accounted for about 25%, then dropped to 6%. It was quite convincing in demonstrating to stakeholders that its risk management was sound. It is also worth noting that Metropolitan Bank is still in existence. Therefore, regulatory agencies can reasonably state: "Alright! 6% is a 'green light,' 14% is a 'yellow light,' we don't want to see you surge back to 25%, and 96% is a 'deep red alert,' don't even think about it."

You can make similar observations about many banks engaged in cryptocurrency business. Coinbase does not stuff customers' money under the mattress. The primary partner banks for their cryptocurrency risk exposure are... <Jamie Dimon grabs the keyboard> "an impregnable balance sheet" </Dimon actually did not grab the keyboard>.

Carter further accuses or implies (sometimes it's not very clear what he's specifically trying to convey) Senator Warren and/or regulatory agencies of colluding with short sellers to deliberately choke Silvergate by triggering a liquidity crisis.

He specifically mentioned a letter signed by Warren and others, which included a statement: "If additional liquidity is needed, your bank can access taxpayer funds through the Federal Reserve Bank of San Francisco and the Federal Home Loan Bank of San Francisco."

Carter believes that this statement was intentionally included to pressure the Federal Home Loan Bank of San Francisco to demand repayment of advances. This would force Silvergate to seek liquidity in an extremely difficult situation. After this letter was sent, Silvergate did indeed repay these advances and stated in securities filings that this forced them to accelerate securities sales, leading to industry rumors that this was one of the reasons for their eventual closure. The Federal Home Loan Bank of San Francisco vehemently denies ever pressuring them to accelerate repayment.

Short sellers made a fortune from Silvergate's collapse, that is undeniable. I fully believe that short sellers did indeed communicate with Senator Warren and regulatory agencies, and one can further speculate that they strategically used this communication to exert pressure on the bank. The evidence supporting this claim is: they themselves claim so and boast about it, as if they had nailed Silvergate to the wall.

However, the main reason why short sellers were able to earn billions of dollars by shorting Silvergate was that their judgment was correct and forward-looking.

Famous short seller Marc Cohodes (who had a deep short position on Silvergate) and cryptocurrency investor Ram Ahluwalia, who had a deep understanding of banking regulations, had a debate about Silvergate before its collapse. I won't review this debate word for word, but after listening to it when it was released, my feeling was, "Cohodes was clearly ahead in this debate, although Ahluwalia had a more accurate judgment on the question of 'whether providing banking services to a single money launderer would endanger compliance procedures in the eyes of regulators.'" (At the time, I was actually restricted from trading bank stocks, but after listening to this podcast, I took action that had a significant impact on my career.)

I think some criticisms can be made of Cohodes or short sellers in general, but the claim that "their logic for shorting Silvergate was fundamentally wrong and required government intervention to profit" clearly ignores a lot of facts. You can review what Cohodes said in that speech and judge its accuracy in hindsight.

A judgment method I have used for a long time, stemming from my experience in debate competitions, is this: if one side impresses with control of details, randomly chosen details hold up to scrutiny, while the other side fails to provide specific details and only aggressively pounds the table, bet on the former.

Alternatively, if you wish, you can also bet on their former executives. Silvergate's former Chief Technology Officer (who also served as COO) is the son of the current CEO, and he has a Twitter account where he shares his views. For a bank executive, he is extremely casual in describing the contents of regulatory communications.

For example, he wrote: "On the Sunday after Thanksgiving 2022, regulators took action against 5 banks simultaneously. Before this, regulators did not object, and Silvergate had been cooperating with them all along, but everything suddenly changed."

In fact, as early as April 2022, Silvergate received a "Matter Requiring Immediate Attention" (MRIA) from the Federal Reserve regarding deficiencies in its Bank Secrecy Act (BSA)/Anti-Money Laundering (AML) monitoring program. They received a similar MRIA in November, but by then, the situation was irreparable. See paragraph 80 of the SEC's complaint, which substantially confirms the MRIA mentioned by "Former Employee 5" (a compliance officer) in his testimony in this case. These MRIAs clearly indicate that the MRIA is different from a "Matter Requiring Attention" (MRA, different from MRIA, MRA is a formal regulatory directive requiring the regulated entity to take significant action in its day-to-day business), MRIA is a 'drop everything, correct it immediately' command.

The Federal Reserve uses fixed language when issuing a "Matter Requiring Immediate Attention" (MRIA) to banks (see page 3). The Federal Reserve supervises banks of various sizes and levels of complexity, including some small-town community banks whose board members are typically local real estate developers. In order to ensure that these banks' executives or board members lacking expertise do not overlook the nature of MRIA as both a command and a warning and can correctly understand its significance, the fixed language is: "The board of directors (or the board's executive committee) must immediately..." (original text bolded).

The SEC subsequently accused Silvergate's executives of making false statements to investors about the severity of its liquidity issues following the FTX collapse.

Assuming we temporarily believe Silvergate's management's explanation that they are still prepared to continue operating as normal despite the collapse of their largest client and a 70% loss of deposits.

In such a scenario, if regulatory agencies were to make requests such as, "We support providing banking services to the legal industry, but it is necessary to have a robust control environment. However, you must reduce the concentration of cryptocurrency deposits to below 15%," would it be compatible with Silvergate's continued operation after early November 2022?

At this point, I agree with Carter and cryptocurrency supporters: any meaningful restriction on cryptocurrency concentration would be incompatible with Silvergate's continued operation after early November 2022. Even a 50% concentration limit would be difficult to achieve, let alone 15% which would be even more challenging.

Simple mathematical logic: for every dollar decrease in deposit outflow (in fact, after a run, you can hardly reduce outflow much further), you would need to find people willing to deposit around $5. Even with the most compelling sales pitch, this task is nearly impossible. Silvergate has no way to swiftly attract billions of dollars in deposits from non-cryptocurrency clients.

The way Silvergate attracted its existing deposits, most generously put, only paid significant attention to the demand from the cryptocurrency industry. It does not have any advantage in providing banking services to other individuals or industries and, in fact, has many disadvantages. Due to the disclosed facts about its conduct in recent years, Silvergate's reputation has been tarnished. From a corporate perspective, it is clearly on shaky ground.

Most deposits were attracted through offering traditional banking services (in this regard, Silvergate is not competitive with non-cryptocurrency clients). In the industry, this is known as the "deposit franchise." Banks have an immediately available option to attract deposits in times of need without spending years sponsoring a little league team, participating in annual community festivals, or discussing your holiday plans over coffee. They can bypass this "sweat and smile" work and directly attract funds from professional financiers by offering high-interest rates, who will deposit money into the bank with the highest bid. This approach is known as "deposit brokering."

Regardless of the interest rate Silvergate offers to attract deposits, there is always a regional bank that can match or even surpass it. This is because, unlike Silvergate, many regional banks have substantial first-party loan books (along with ongoing loan origination mechanisms), and they have good reason to believe that these businesses can continue to exist, with deposits being the source of funds for these loan books (and mechanisms).

When conducting analysis, deposit brokers reasonably prioritize such hypothetical alternative banks as recipients of unconventional support (if such support were to become necessary). If a deposit broker were to attempt to place, for example, a $200 million time deposit with a bank where almost all deposits are uninsured (hence directly exposed to bank credit risk unless unconventional government support is provided), this aspect would significantly affect their credit analysis of the alternative bank.

It is worth noting that many cryptocurrency advocates are not interested in non-crypto banking business and seem unable to grasp why non-crypto regional banks were heavily shorted at the end of 2022 and the beginning of 2023. In my opinion, for many cryptocurrency advocates, including some well-educated financial services professionals and even some professionals with many financial services companies in their portfolios, they are not deliberately choosing to overlook background information that does not fit their narrative but rather truly do not understand how a sudden rise in interest rates would impact a bank's balance sheet. Just like many software engineers do not understand how a sudden rise in interest rates would affect their stock value. I am also willing to admit that some cryptocurrency advocates may indeed understand the impact of interest rate changes on a bank's balance sheet but choose not to publicly contradict industry thought leaders.

I do not fully believe that deposit concentration limits were the direct cause of Silvergate's collapse, although I am open to being convinced of this view.

My basic view is that even if all government employees were furloughed on Thanksgiving, Silvergate might still have closed its doors. Its regulators had indeed completely lost confidence in it, but its customers had equally lost confidence in it, largely because: a) they were aware that they had transferred funds into Silvergate; b) they were aware that these funds are now irretrievable. This is undeniably a very bad fact for maintaining a long-term good bank-client relationship.

Furthermore, I believe that even though advocates supporting Silvergate may not be willing to admit it, a Silvergate that barely survives after an investigation will not be able to continue offering its customers the products they truly desire. It was the "Schelling point" for the entire cryptocurrency industry, which is why SEN (Silvergate Exchange Network) was successful. But under any conceivable circumstance, a Silvergate under the regulatory magnifying glass will not be able to retain Binance as a customer. And a cryptocurrency "Schelling point" that Binance cannot touch is no longer a true cryptocurrency "Schelling point." Losing this "Schelling point," if Silvergate is just a bank that can hold $3 million in seed round funds and pay salaries while developing Solidity code... such a Silvergate has no business. And at the end of 2022 and the beginning of 2023, in the midst of holding a large amount of mortgage-backed securities (MBS), such a Silvergate was destined not to survive.

But let's take a step back and argue: What if the government indeed intended to create conditions unfavorable for Silvergate to continue operating, and this was the direct cause of its collapse? So what?

Would this be considered a disruption of industry norms? Should we allow the government to shut down a bank?

If you have ever worked in the financial industry, you must have participated in mandatory compliance training. Training attendance is a must, and usually, there is a refresher course once a year. During training, people go in with a bit of mockery and jokes, while your trainer will say very seriously, "Pay attention, this is important. If we mess up, regulatory agencies can do anything to us, most likely hefty fines, but the worst-case scenario is they can shut down the company directly. You personally might even go to jail because of this."

Most people in the financial industry will always remember this lesson. Every year, there are always a few who overlook it, and then they will personally experience why this training is mandatory.

Should we allow the government to shut down a bank? The answer is: Yes.

However, reasonable people may disagree on the threshold required for taking such an extreme measure and the form of procedures to follow.

If we were still in a debate, you might ask me to concede, "The government needs to explicitly acknowledge that Silvergate was intentionally shut down." And I would counter, "Sure, but as an exchange, the opposing side needs to acknowledge that Silvergate, including its executive team, was well aware that Alameda and North Dimension intentionally received funds from FTX customers." About fifteen minutes later, I think both sides are not entirely satisfied, but have both learned something beneficial. Ultimately, both sides may reach a consensus: either Silvergate must exit the market, or without government intervention, Silvergate is doomed to collapse after the FTX incident.

Questioning the Non-Receivership Treatment of Signature Bank

Carter believes that Signature Bank also faced similar targeted treatment. Some of his basis comes from statements made by board member Barney Frank. This director asserted in media interviews during and after the bank's collapse that Signature Bank still had the ability to pay and sufficient liquidity during the weekend of the bank run.

Perhaps some have forgotten the context of that week. On March 8th (Wednesday), Silvergate announced its closure. On March 10th (Friday), Silicon Valley Bank (SVB) was taken over after experiencing the most intense bank run in history. Also on March 10th, within a few hours, Signature Bank encountered a $18.6 billion deposit run.

In this context, let's review how Signature perceived its business situation on the weekend of March 11th and 12th.

Signature struggled to provide a credible and digitally reconcilable story over that weekend (see Report page 35). Quoting from the post-event investigation report:

Signature needed to provide reliable and real-time data, especially regarding immediate liquidity availability and ongoing withdrawal situations, to support regulatory scrutiny and banking analysis of its liquidity position. However, once Signature started providing this pertinent data, regulators found inconsistencies in the data and continued to experience substantial changes.

Signature's executives and other relevant personnel engaged in continuous conference calls with regulators throughout the weekend. These meetings began with regulators' concerns about a potential bank run on the institution and candidly pointed out that the bank was on the brink of collapse. However, to regulators, Signature either appeared to fabricate discussions on liquidity sources, asset composition and quality, and pending withdrawal requests deliberately or demonstrated severely untimely technological incompetence. At this critical juncture, regulators deemed Signature's performance dangerously divorced from reality, with one executive even characterizing the weekend as "nothing particularly eventful thus far" (verbatim).

Accusing Signature of fabricating facts is a grave allegation. Bank regulators are typically (in most cases) meticulous individuals.

Quoting from the post-event investigation report again:

For instance, by Sunday afternoon, Signature informed regulators that it was "highly likely" to provide nearly $6 billion in liquidity from its commercial real estate investment portfolio on Monday. However, regulators were well aware that the Federal Reserve Bank of New York would need several weeks to complete a review and valuation of that portfolio.

Did Signature know that its commercial real estate investment portfolio could not feasibly become valid collateral on Monday? Apparently, it did.

To aid readers unfamiliar with Commercial Real Estate (CRE) bank business, here is a brief explanation:

Signature's plan was to use a portion of its commercial real estate loan portfolio as collateral to be submitted to the Federal Reserve Bank of New York immediately after that critical weekend for consideration on Monday. They believed the Fed would extend them a credit line based on the portfolio's value at a certain discount. Signature planned to transfer the credited amount promptly to clients requesting withdrawals, as straightforward as that.

However, commercial real estate loans are not interchangeable and easily analyzable assets like treasuries or even mortgage-backed securities. They are complex and bespoke legal agreements at best. And 2023 is far from the "best case scenario" for the New York commercial real estate market, as anyone reading the papers knows. Therefore, valuing these loans is not simply a matter of copying the outstanding balance into Excel and doing some math. You have to carefully read the agreements, build models (if you are a direct stakeholder, you will likely end up re-underwriting these loans almost entirely because New York's commercial real estate market is really in a bad state), and then come up with impairment valuations, followed by haircutting.

While Signature Bank dabbles in crypto, its core is the New York commercial real estate market. This is a bank whose livelihood is grounded in New York real estate. They actually believed they could classify their loan portfolio as "highly likely" quality collateral in a matter of hours, which is simply unbelievable.

You know what this reminds me of? This reminds me of Sam Bankman-Fried. When he found himself in a liquidity crisis he thought he could ride out, he started frantically jotting down some emblematic numbers on a napkin or Google sheet. SBF still doesn't understand why nobody believed him. Just look at those napkins!

Signature, we are under no obligation to believe your "napkins," especially when the contents are clearly untrue, or when these "napkins" contradict each other and keep changing within the same meeting.

For Signature's liquidity position, the most critical question is, "How much will customers wire out on Monday?" This is actually very simple banking, and regulators have been urging them all weekend to do the following:

a) Aggregate the amounts customers have applied to wire out on Monday, covering the current hundreds of pending wire requests;

b) Predict how this number could change in a worst-case scenario, i.e., how many more customer wire requests may come in before Monday morning.

Below is a time series of repeated questioning of these two issues within 48 hours (excerpt from the relevant report, page 40). Note how every few hours, Signature's latest "worst-case" prediction has already been surpassed by the actual known amounts of wire requests.

Subsequently, Signature presents a new "worst-case" prediction, and coincidentally, the gap between this prediction and the known wire request amounts is almost identical to the gap from their previous "worst-case" prediction — as if they are making the same mistake over and over again without learning anything from it.

This situation has repeated itself many times.

Signature believed they had a clear understanding of the weekend's events, but the aforementioned facts almost definitively prove that they did not truly understand. They also believed that the weekend’s experience indicated that the worst-case scenario was already behind them.

Quote from the post-event analysis report (page 6):

Throughout the weekend, Signature's estimates for processing deposit withdrawals continued to rise, from an anticipated $20 billion on Saturday night to $40 billion on Sunday morning, and further to $74 billion to $79 billion on Sunday night. These figures represent known deposit withdrawal amounts. Despite the bank run on March 10 (Friday) and negative news over the weekend, Signature still insisted that Monday’s additional withdrawals would be minimal. Regulators deemed this forecast unrealistic and felt the bank needed to prepare for another significant deposit run. (Emphasis added from original text)

Signature was confident that they could weather the storm and make a successful breakout on Monday. They even predicted that liquidity would suddenly and miraculously become abundant on the following Tuesday, Wednesday, Thursday, and Friday. Then, the real challenge would begin: they planned to redouble their efforts to serve the remaining clients, seek buyers for their valuable assets in the coming months, and try to turn the tide. Because they believed they had the ability to pay!

Signature faced severe liquidity issues, had no viable solutions, and lost the regulators’ trust amid a deteriorating bank run. In this scenario, entering receivership was almost an inevitable outcome, requiring no conspiracy theories to explain what had happened.

The rest of the post-event analysis report is also worth reading, as its content is full of professionalism and appeal to banking enthusiasts. Where else can you find such a fascinating discussion about which capital call loans the Fed's emergency window can accept as collateral?

Strong Interest from Cryptocurrency Industry in New “Crypto-fied” Banking Products

In 2022, the Federal Deposit Insurance Corporation (FDIC) sent a series of letters to several banks in the United States. The process of obtaining these letters was quite convoluted, with stakeholders like Coinbase having to use all their wits and strategies to obtain partial documents. Even the letters that have been made public have mostly been heavily redacted.

A brief comment on transparency: Democratic governance requires both full transparency and allowances for private government discussions. However, the veil of secrecy is often used as an excuse to cover up abuses of power. For example, one might claim, “That protest was controlled by foreign forces! But for national security reasons, I cannot disclose the evidence! Therefore, you should help me suppress this protest!” (Spoiler alert, we'll come back to this topic later on.)

In the culture of bank supervision, in the day-to-day communication with banks, there is often a strong emphasis on confidentiality privilege. This is because regulatory agencies are institutionally very cautious, fearing that releasing certain signals to the market or depositors may lead them to believe that the bank has lost the trust of the regulatory agency, thereby triggering potential risks. Bank regulators are extremely fearful of a "self-fulfilling prophecy."

In order to have candid conversations with regulated entities, just as colleagues need honest communication, privacy plays a facilitating role in this process. Even if these conversations involve a third party, even if the third party is very eager to "listen in," privacy can still enhance the candor of communication.

Therefore, I do believe that a reasonable balance needs to be found in this regard. But I also sympathize with supporters of the crypto industry, whose view can be summarized as: "This is a backstage operation aimed at doing things we don't like. You don't even admit to what you're doing! And when you are eventually forced to admit to what you have done, you may shamelessly claim that this is a good thing! Just like what they did after 'Operation Choke Point!'"

Conversely, when the government is able to release detailed position papers or indictments with extensive commentary, this should give people more confidence in the legality and non-arbitrariness of their actions. Of course, this confidence is not unlimited, but it is at least favorable evidence.

Carter speculates that these redacted regulatory letters may be related to a new product proposed by NYDIG. This product will allow banks and credit unions to offer direct access to Bitcoin for customers. You can think of it as a feature in Cash App: users can buy Bitcoin but cannot transfer it, except this feature will appear in your banking app.

I believe Carter's assessment of the intended recipients of these letters is very likely to be correct (90%+). Many of the letters are dated shortly before the FDIC issued public guidance on banks directly providing cryptocurrency products. NYDIG is the most prominent company to progress on this opportunity (source: industry-wide awareness), which aligns with the content we can read in the letters.

So, is this a stunning upheaval of our democratic norms? No. Bank regulatory agencies have the right to comment on proposed bank products, which is at the core of their work. In this situation, regulatory agencies usually say something similar to the common content in the letters: "We will consider this carefully and provide feedback, but in the meantime, please do not widely launch this product." (In the end, they did conduct an evaluation, and the results have also been disclosed. Many cryptocurrency supporters are dissatisfied with these results, thus claiming procedural irregularities.)

Does this substantively prohibit the cryptocurrency industry from providing financial services to retail users? Not really. Users can purchase Bitcoin exposure on many platforms such as Cash App, Venmo, Robinhood, Coinbase, Fidelity, Interactive Brokers, and any brokerage account that supports trading U.S. ETFs. Additionally, there are many other avenues. Cryptocurrency enthusiasts are eager to publish press releases, promoting how many new ways go live each week to help users acquire tokens at very reasonable prices, preparing for the future "moonshot."

Is there a seemingly valid reason to attempt to implement a consistency policy in regulated banks, which did not exist in Operation Choke Point? The answer is yes. One of the FDIC's core concerns is to prevent unsophisticated customers from mistakenly believing their risk assets are FDIC-insured. Customers naturally assume that the content provided by their banking app is all FDIC-protected. For those banking apps that include non-FDIC-insured products (such as insurance products or affiliated brokerage accounts), their disclosures are usually customized and quite detailed.

Some cryptocurrency supporters may wish to occupy screen space in community banking apps. I dare say FanDuel has the same idea. But their disappointment does not equate to a so-called "threat to democracy."

Some Politicians Exerted Extrajudicial Influence

Some readers may still remember Libra, which was a (nearly) global economic network that Facebook attempted to create, with its token described as a U.S. dollar stablecoin or some kind of currency basket. Libra was a joint project led by Facebook and had multiple industry partners involved. (Stripe—my former employer—was once part of the consortium. Again, I reiterate that the above statements are my own and do not represent Stripe's position.)

However, Libra never came to fruition. Shortly thereafter, Facebook abandoned the project and sold off the related technology. The ultimate buyer was Silvergate, who at the time believed that despite rapid core business growth, management still had the bandwidth for M&A. After all, can bank management have more important things to fill their time with?

David Marcus, who was in charge of the Libra project, recently wrote that Libra was killed due to extrajudicial influence against consortium members. He explicitly stated that U.S. Treasury Secretary Janet Yellen had instructed Federal Reserve Chair Jerome Powell to shut down the project. He then claimed that the Fed organized conference calls with all participating banks, where their general counsel read a prepared statement at every meeting, indicating, "We cannot stop you from progressing and launching this project, but we are not comfortable with it." And that was the end of that project.

I have never worked in a bank, so I have never had the opportunity to quietly listen in on a conversation involving the General Counsel of the Federal Reserve. However, I do read. In my life, I have read many letters written by high-ranking, serious individuals. Among them, I once stumbled upon a letter that was poorly crafted and bluntly threatening to the recipient.

The letter was sent to all members of the Libra Alliance. The main point of the letter was not aimed at Libra, but at Facebook. Here is a representative excerpt:

“Facebook is currently struggling with a series of serious issues such as privacy violations, misinformation, election interference, discrimination, and fraud, and has not yet demonstrated the ability to control these failures. What you should be concerned about is that any weakness in Facebook's risk management system will become a weakness in your system, and may be a risk that you cannot effectively mitigate.”

This letter was written after the "Cambridge Analytica" incident, during which the security establishment and the New York media reinforced the belief that with a copy of a social network and an advertising budget of about $180,000, it was possible to steal victory in the U.S. presidential election. They seemed to have unwavering faith that Russia had already validated this concept.

Of course, only after 2020 did we learn that only enemies of democracy would baselessly accuse the U.S. election of fraud. The rapid rule changes in Washington sometimes make even a poor technologist like me struggle to adapt.

This letter was written in 2019, a time when democracy was still as precarious as a hanging chad (apologies to young readers: your association with the word "chad" may be very different from that of older millennials). Therefore, the authors of this letter, Senators Brian Schatz and Sherrod Brown (the latter being a member of the Senate Banking Committee), pointed out in the letter that the recipients were running a very good business, and it would be regrettable if something went wrong. And if they continued to advance the Libra project, problems would obviously arise.

I realize this sounds like paranoid speculation. So, please consider this crucial original passage:

“If you continue to advance this plan, regulators will not only scrutinize Libra-related payment activities, but will conduct a comprehensive review of all your payment activities.”

I do not have the right to disclose a particular payment company's specific interpretation of this statement, but as your friendly “neighborhood financial infrastructure commentator,” I predict that any CEO in the financial industry, after receiving such a threat from two senators, would feel appropriately shocked and vigilant.

Threatening core business with Libra puts partners under pressure of "reverse operational leverage." This is a concept that should be better understood by more people in the startup and finance fields. The reason for the existence of the "innovator's dilemma" lies not only in innovation itself, nor solely in traditional enterprises becoming complacent, enjoying existing profits, and being unwilling to self-disrupt. The real reason is that innovation may require taking risks, and once it fails, it not only destroys that small, marginalized innovation but also jeopardizes the vast existing business incubating it.

Google invented Transformer technology - something more remarkable than anything they have done since their search engine. Yet, you are using ChatGPT and Claude because no Google executive was willing to take the risk of using this group of geeks' new toys to disrupt their own search or AdWords business. This was the biggest missed opportunity in the history of capitalism, and it was entirely Google's doing. Part of the reason is their concern about Washington's reaction, but I suspect that even the most pessimistic government relations team could not have foreseen "two U.S. senators clearly threatening us to break up our business block by block before the project reaches the alpha stage."

Some say that the dictionary definition of "audacity" is "killing one's parents and then asking the judge for leniency because one has become an orphan." And the runner-up for that definition is undoubtedly: threatening alliance members to exit the alliance, then threatening the entire alliance citing the reduction in alliance members.

Quoting a congressional aide's perspective, he believed (through a fairly balanced rephrasing) that Facebook at the time was simply entirely unprepared for real-world politics, with no wrongdoing:

[The extreme cold shoulder encountered by Libra] may have been due to its association with Facebook, or it may have been due to the continued attrition of alliance members (each member exit triggers coverage in The New York Times or The Wall Street Journal, and every congressman reads those articles).

So, yes, this is what naked power play looks like. And indeed, it happened. As for whether the Fed really made those calls, I do not have a strong opinion, but such claims seem to align with the content of that letter, don't they?

I would like to say a few good words for the senators who wrote this letter: they are proud enough of their work to have released a press release containing the full contents of the letter at the time. Transparency may not be the definitive evidence of virtue, but that kind of threat beyond procedure is clearly evident in the letter. However, in a democratic system, we should lean more towards transparency, with political decisions made by elected officials rather than by those who can keep their positions, pensions, and power even in the event of serious dereliction of duty.

Consumer Financial Protection Bureau (CFPB)

During an interview with Logan, Andreessen mentioned that Senator Warren created the Consumer Financial Protection Bureau and claimed that the agency's authority is to enforce "anything she wants to do".

...Well, I pretty much share the same opinion.

I agree with some of their substantive positions and disagree with others. But it seems more like an organization made up of a group of young, ambitious followers who deeply understand the founder's vision and are eager to implement it. I have been active in Silicon Valley circles for a long time and am familiar with this type of organization. But I didn't expect to see a similar presence in an official Washington agency. I am not knowledgeable about politics enough to point out another Washington agency that so clearly reflects the founder's influence.

As for the intersection of CFPB with the issue of "debanking"? It's almost negligible.

CFPB has drafted a position paper against "debanking". I expect those favorably disposed towards CFPB to use this position paper as a political or PR shield to counter opponents who strongly sound the alarm on the "debanking" issue.

However, the practical effect of this position paper can probably be described in one sentence: "Add $5, enough for you to buy a cup of coffee at Starbucks." Because the content about "debanking" is buried beneath the issues CFPB truly cares about, such as taking a tough stance on big tech companies. Have you ever thought about how Apple Pay might harm consumers? If you care about this issue, you'll be pleased to know they have started to address it.

Politically Motivated Individual Targeting "Debanking" Directive

It has been alleged that senior officials have made decisions to "debank" individuals based on political views. There is ample evidence that this behavior has systematically occurred under formal directives from certain national-level political authorities in some countries... such as Canada.

In brief retrospect, there were several disruptive political protest activities in 2020 and 2021. One of them was primarily directed against pandemic lockdown measures, initiated by Canadian truckers. This protest action was unusually efficient, partly because the so-called "Freedom Convoy" blocked roads in the capital, Ottawa, and at least one border crossing to the United States.

Blocking roads is a common protest tactic usually used by various (mostly left-wing) activists. Although this tactic is highly disruptive, its effectiveness is often questioned and sometimes results in punishment. In democratic countries, punishment is usually carried out through the normal operation of the judicial process. In the classic legal process, punishment requires formal specific charges, trial, and conviction, and only after these steps are completed will punishment be imposed.

However, sometimes roadblocks may not face actual sanctions, as even annoying and ineffective leftist protesters have the right to express themselves. At times, prosecutors may prioritize protecting protesters' rights over the free passage and economic activity rights of other members of society due to considerations of freedom of expression.

Therefore, the above are the two usual outcomes of such situations: either punishment according to the law or no punishment at all. However, this time the situation is entirely different.

Prime Minister Trudeau's response to this protest seemed as if it were an urgent national crisis or state-supported terrorism (this notion was subtly implied through official remarks at the time). He invoked the Emergencies Act, granting the government temporary and special administrative powers. Subsequently, the government instructed both banks and non-bank financial platforms to immediately freeze the financial accounts of anyone associated with the protest activities, platforms that Canada believed had previously supported protest activities financially. Additionally, some ancillary actions were taken, such as instructing the insurance companies of truck drivers to suspend their driving insurance.

Canadian officials claim that their actions were limited to the core leaders or organizers of the protest activities and did not intend to punish anyone for protected political speech. However, these claims are lies.

In reality, these directives were not narrowly drafted.

During an investigation, an Assistant Deputy Minister of Finance admitted that the government was aware at the time that some of the account holders named had not been involved in the protest activities but chose to disregard this in order to expedite the process. She further stated, in her exact words, "We did not intend to target these families." When a democratic government starts a sentence in such a way, it means that things have already spun out of control. Canada claims to have frozen over 200 accounts, and this "selective operation" clearly extended well beyond the so-called protest activity "core leaders" or "organizers" (as I understand it, Canada's so-called core leaders number only a few hundred at most).

The actual number of frozen accounts is almost certainly underestimated. If one cannot grasp this mechanism, one is not qualified to work in or regulate the financial industry.

Next is a little quiz to see if you have paid attention during compliance training: Abel transfers $25 to Bob, ostensibly for charity or political purposes. Later that week, Bob is explicitly identified by the government as a terrorist, and his charity fundraising system is flagged for heightened scrutiny, with the government instructing you to immediately block all of Bob's financial activities in the most urgent manner possible, regardless of form. At this point, the government did not mention Abel's name. The question is:

a) This has no impact on your relationship with Abel;

b) This should immediately have a profound impact on your relationship with Abe;

c) I don't know.

When asked whether any individuals not explicitly named by the government were affected, the government's response (paraphrased) was: "I don't know." I don't know if any donors were affected. I certainly don't think anyone would understand our intent to apply the text of the order to someone who donated $25. I don't know if anyone was actually affected by this.

I don't know whether shooting someone would hurt them. It might miss. But I do know that my estimate of the severity of the injury to the person shot that day increased significantly compared to those who were not shot. That is probably why they were chosen to be shot.

Citing the national state of emergency is just an excuse. In a parliamentary inquiry, the Deputy Minister of Finance stated that these protest activities were a "tier-one issue," to quote verbatim, because they... threatened the negotiations between the US and Canada on electric vehicle subsidies.

Therefore, when someone says that even in a democratic country, "canceling a bank account" for a specific individual could also be used to impose arbitrary and whimsical punishment on individuals deemed unwelcome due to political speech, through the operation of the banking system, without substantive procedural recourse, I agree with their point, this is indeed a risk.

We have just witnessed it firsthand.

Politically Motivated "Canceling of Bank Accounts" Implemented by Companies

Some claim that politically motivated "canceling of bank accounts" is not just a risk but a standard practice in the United States.

That is not the case.

Some claim that in the US, it is commonplace to cancel the bank accounts of political conservatives domestically, leading them to be unable to buy food and even obstructing child support payments (as happened in Canada).

This situation has not become the norm in the US. Some firmly believe that unarmed Black men are often shot by the police. This claim is untrue—no matter how strong the belief, no matter how important this narrative is in certain political movements, and no matter whether people support the broader goals of these political movements. It needs to be clear that this does not mean such things have never happened.

Michael Jordan once had a brilliant quote explaining his politically neutral stance: "Republicans buy sneakers too." Imagine living in a country where Republicans face a real and serious risk of being "canceled" from their bank accounts for their political views; it would be quite a sight.

Republicans are famously known for only buying sneakers with cash. Next to the elegant tablecloth at a fundraising dinner, you might often find a couple of large burlap sacks. And you, possibly due to having at least one conservative friend, have had an awkward moment at some point, like suggesting splitting the dinner bill through Venmo or attempting to exchange investment advice, then realizing it's a big taboo because conservatives are commonly known to be shut out from the financial system.

But this is not the world you live in. All you need to do is trust your eyes and common sense to easily dismiss such claims.

There are indeed a few individuals at certain private institutions who engage in abuse for political reasons, and there are indeed some private institutions that, due to the company's policies (sometimes unintentional, sometimes due to internal factions or certain influential groups), structurally disadvantage certain relatively narrow parts of the political spectrum.

In such a more limited context, people can gather a few data points to construct a narrative about a larger issue. However, understanding what the actual facts are is crucial because we aim to collectively work on preventing abusive behavior, which requires us to understand how these behaviors actually occur.

Politically Exposed Persons (PEPs)

Andreessen said in an interview with Joe Rogan:

「There's this very interesting thing. In the existing banking system, anymore, no matter what, after 20 years of all the reforms now, there's now this classification called 'Politically Exposed Person' (PEP). If you're a PEP, the financial regulators require the bank to kick you out, require you to leave the bank. The bank isn't allowed to provide you services...」

Rogan interjected:

「What if you're a left-wing political figure?」

Andreessen replied:

「Oh, that's fine. No problem because they're not considered politically exposed persons.」

I've had some troubles in life where one of them was that sometimes I couldn't tell if someone was describing the situation in our reality or just chit-chatting with friends. These troubles have led to many embarrassing moments for me over the years. Apparently, you don't want to suddenly interject with "That's not true!" when someone is just chit-chatting because the focus of chit-chat is not the facts. And if someone tries to describe reality, you don't want to offhandedly say, "And then a monkey flew out of my butt!" because that won't elicit laughs; it will only make you feel awkward.

Therefore, I choose not to comment on the above conversation as I have absolutely no clue. However, I have decided to take this opportunity to enlighten the internet about PEP.

A Politically Exposed Person (PEP) is a term in the compliance field originating from reporting requirements in the Bank Secrecy Act (BSA). This term refers to senior national officials, typically in the U.S. usage, specifically officials connected to foreign governments. Quoting a passage: "Institutions should not interpret the term 'politically exposed person' to include U.S. public officials." (Similar to many financial regulations, the U.S. intentionally expands its focus on PEPs to be consistent with countries of interest. In these countries, financial institutions are typically required to consider senior political figures in their own country as PEPs.)

PEP status also extends to the immediate family members and close associates of PEPs. What is a "close associate"? Please document your understanding of this concept, adjust transactions based on written understandings following confirmation with regulatory agencies. This approach is widely applicable in bank regulation: reviewing the implementation of these policies through cautious, repeated internal policy formulation and periodic bank examinations.

PEPs are considered to pose a higher risk of money laundering. Some of them have direct control over national resources, while others may face risks such as bribery.

Currently, there is no officially recognized list of PEP positions by regulatory authorities. Banks need to explicitly define these positions in their procedures and then submit them for regulatory review. Regulators may say, "Sounds good! Be sure to conduct enhanced due diligence (EDD) on these PEPs!" Or they may say, "I'm not sure; this might be a bit cumbersome, but you may need to broaden the scope of PEPs."

A typical PEP list may include: heads of state, heads of government, members of national legislatures, cabinet officials, senior judicial figures, central bank governors, ministers with cabinet-level status, and more.

Banks are allowed to serve PEPs, much like they serve high-risk businesses. However, you need to conduct enhanced due diligence (EDD) on them. Some banks, especially those large-scale, globally operating currency-center banks, dedicate specific efforts to address these issues. This is because (no insinuation here of any impropriety!) private banking benefits from providing attentive services to wealthy and influential individuals, which in turn allows them to recommend you to other wealthy and influential friends.

However, some private bankers may be tempted to offer more than "attentive services." Regulatory agencies strongly disapprove of this, which is why PEP status and PEP screening tools exist.

What is a PEP Screening Tool? I'm glad you asked. Every day, many people open accounts. If your policy and regulators allow, you can ask each new customer: "Excuse me, are you the President of a foreign country? Please answer quickly, as I have 15 similar questions to ask." But the vast majority of new customers will think you are very foolish. However, banks can't be clueless either. It is highly unlikely that you expect a randomly selected 22-year-old employee to have detailed information about the spouse of a current member of the Supreme Court of Poland (Sąd Najwyższy).

As software continues to change the world, you can purchase products from many companies that address these issues through software. You input an identity, and the software replies: "Elected to the Japanese National Diet's House of Councillors in 2022, may be a PEP" or "probably not a PEP."

This will help you reduce friction among many product lines' customers and employees. Additionally, when a bank examiner asks about your PEP program, you can provide a quick answer. Other parts of your PEP plan may be very dull. For example, you need to establish a set of procedures that outline the review of the account relationship when news reports or facts obtained by the bank indicate that an existing customer has become a new PEP (or a previously overlooked PEP) and record the related process. Subsequently, you need to incorporate them into the PEP's Enhanced Due Diligence (EDD) process.

EDD for PEPs (conclusion here) typically requires someone to write a quarterly memo, for example: "No exceptions this quarter. The $1.2 million incoming wire transfer was from the sale of a private residence. We commissioned a valuation (see attachment), which appears reasonable based on similar property prices. Ownership of the property by the account holder was confirmed through a title search (see attachment), predating the most recent election. No other matters of note."

Above is all you need to know about PEP.

Contrary to popular belief, PEPs are actually quite rare globally compared to the general population or companies. My only encounter with this concept professionally was when a bank claimed that a Mayor of a small European town was classified as a PEP due to being a political figure and therefore required Enhanced Due Diligence (EDD) to open an account. I raised objections for this user, but the compliance department was impatient with my attempts to "explain PEP" to them.

Account Blocking for Political Reasons Revisited

As mentioned earlier, when a system possesses a single culture and an explicit or implicit policy orientation simultaneously, even without direct orders, it can prompt some ambitious or brown-nosing individuals to take action voluntarily, which indeed poses a risk.

If you are concerned about the issue of account banning, then compared to the focus on "Politically Exposed Persons" (PEP), you should pay more attention to the impact of this mechanism.

Let me briefly shift from the banking industry topic to the internet companies that have had a huge impact on our modern world.

Those familiar with the tech industry mostly understand that the "Trust & Safety" team has been a core part of micro-political activities for many years, with some activities originating from unrelated Twitter users and others coming from within the company.

What is the mainstream political culture of the "Trust & Safety" team? To be honest, imagine gathering a group of twenty-something-year-old, college-educated individuals from San Francisco, then filtering out those who can find high-paying engineering jobs or have the ability to secure funding, and finally selecting those willing to spend years in a position responsible for overseeing all human speech transmitted electronically, this is the background of the group that dominates this culture.

I believe that regardless of political leanings, fair-minded people will understand that among this group of selective individuals, the proportion of those who mock "free speech" as "freeze peach" is much higher than that of the average American.

Members of the "Trust & Safety" team, and sometimes even the entire team structure, may engage in some minor actions at different times and places. This is not the central argument of the relevance of the account banning issue, but it is indeed a fact, and I would feel remiss not to mention it.

Without close supervision—and senior management at companies like AppAmaGooFaceSoft usually do not closely follow the decisions of low-wage operational staff unless these decisions trigger significant PR or government relations issues—the "Trust & Safety" team often bans people they politically dislike for quite mild reasons, while enthusiastically supporting those they politically favor.

This is a recurring game, where people gradually realize that all you need to do is ask the "Trust & Safety" team to ban someone. The product team has even developed some processes to expedite this process. You can use these automated tools for "mass reporting" (for example, joining friends to mass report a social media post), create public opinion on Twitter (waiting for the company to feel brand risk), or even make requests directly to a "Trust & Safety" team member at a gathering.

As a result, various "minor actions" abound.

Further exacerbating the situation is that government officials have realized that by having monthly meetings with the "Trust & Safety" team and some "prominent figures," they can make them feel very important. Gradually, at these meetings, attendees begin to subtly request the "Trust & Safety" team, "Isn't there anyone who can solve this troublemaking priest for me?" After a period of time, we eventually slid into a situation where there was actually a "Rogue Order Czar" in the White House. He not only meticulously pursued platforms like Facebook and Twitter post by post but also exerted strong pressure at the platform's overall policy level. Although I have never met this official, I can imagine that he may consider himself a good person and very competent in his job.

We have had many government officials who believed that achieving policy intent through "borrowing a knife to kill" was more effective than through normal government operations. However, it is particularly noteworthy that one of them was in the White House. He had explicitly mentioned in writing, on behalf of the President himself, pressuring YouTube to strengthen its review process. (See page 19 for details)

Andreessen, as a member of Facebook's board of directors, has discussed various mechanisms of the "turbulent times" and the transformation process in which governments attempt to clearly exert pressure. Interested readers can refer to his statements elsewhere, as I still want to return to the topic of banking regulation.

I have only learned relevant information based on court documents, hearsay, and a very small number of firsthand witnessed situations. And this information has been enough to make me agree with Justice Alito's view: "If the lower court's assessment of the voluminous records is correct, this will be one of the most important free speech cases submitted to [the Supreme Court] in recent years."

The phenomenon of "Trust and Safety" being weaponized by the "misinformation" industry/academia/non-governmental organization complex and government partners is a scandal. And did tech companies conspire in this? I think that description is fair. We did indeed conspire for several years. Later, we found our footing and expressed some regret for some of the decisions we made at the time to comply with external demands.

A significant example of this shift is: Mark Zuckerberg stated in a letter to Congress: "I believe that pressure from the government was inappropriate, and I also regret that we did not more bluntly oppose it at the time. I also believe that we made some choices that, in hindsight and with the new information we have, we would not make today."

So, what is the connection between the decisions of the "Trust and Safety" team in handling issues such as misinformation or hate speech and banning accounts? Unfortunately, the connection between these two is much greater than people imagine.

Compliance is also an area of single culture.

The good news is: Compliance teams in the banking industry and related companies are far superior in political diversity compared to San Francisco's "Trust and Safety" team. Compliance decisions also make much more direct business sense than "Trust and Safety" decisions. Compliance requires sacrificing a paying customer, while "Trust and Safety" only requires sacrificing ad inventory. Acquiring customers is very difficult, while increasing ad inventory is relatively simple: you just need to adjust product decisions such as ad loading.

The bad news is: Compliance is inherently designed for a single culture. If you work in compliance, the first requirement is that you must be good at being a "good employee" who complies with the rules. The term "compliant" here is not pejorative but a description of a behavioral trait. You must demonstrate compliance in behavior to work in this field. If you do not possess this trait, display a rebellious tendency, or try to be confrontational in meetings with regulatory bodies, you will quickly be replaced by someone better suited for the role — that is, those who can fulfill their duties.

Especially senior compliance personnel (those who make policy decisions, not just click alerts) are core members of the American Professional-Managerial Class (PMC). And this PMC culture has some unique aspects.

The "Current Thing" Is Over; Long Live the New "Current Thing"

The American Professional-Managerial Class (PMC) periodically falls into a kind of... manic ethical frenzy. Andreessen once referred to this phenomenon as the "Current Thing." Academia sometimes uses the term "moral panic," but usually that is used to describe the behavior of the general public. I prefer Andreessen's formulation because it accurately captures the characteristics of the PMC—his class, my class, and (likely) your class—displaying its unique way of being. (After all, you are willing to voluntarily read thousands of words about bank regulation.)

If you are concerned about unusual account closures, instead of worrying about formal guidance, pay more attention to the "Current Thing." Because the compliance department can catch the "Current Thing" without needing to receive an email from a regulatory agency or read a position paper. The morning's New York Times is already talking about it, it is all over Twitter, it even permeates the air we breathe. Who would be so dull as not to understand the "Current Thing"? Certainly not qualified compliance professionals at banks or financial technology companies.

Our understanding of a conspiracy usually assumes some central controller behind it. But the "Current Thing" has no central controller. When it is no longer the "Current Thing" and rationality regains dominance, we will look for evidence, trying to prove this is the consequence of the CIA, Russia, the Soros network, the Koch brothers, or the repercussions of "misinformation," or a thousand other excuses to absolve ourselves. We might even pull out a scanning tunneling microscope to carefully inspect the audit log.

We will find that, in the worst-case scenario, there was merely a minor, perfunctory attempt at collaboration, which is totally inadequate to explain this storm—the speed of its outbreak, the synchronization, even exceeding what we could achieve in the best-case scenario with all our efforts.

Oh my, imagine if we could simply declare a "Current Thing," what achievements our company could make? How efficient would government execution be? How much money could be earned?

There was once a "Current Thing."

America has been through some challenging years, marked by disruptive and sometimes deadly political protests. And the "Current Thing" demands that you make very fine distinctions about these protests.

For example, sometimes fervent political expression around an apparently nationally significant issue can evolve into disruptive political protests and sometimes even result in fatalities. So, should you fund protesters' legal fees or amplify their voices? What would you do if you were a national-level American politician? What would be the specific decision-making process in this scenario?

Some may wonder: "Would the compliance department strip your bank account for such a thing? Of course not. This is mainstream political speech; we do not cancel someone's account over mainstream political speech. And especially if it's a national-level American politician?! Oh my, can you imagine the PR risk this maneuver would bring? Can you envision the risk to government relations?"

While others may think: "An American politician is actually endorsing political violence?! This is a stunning violation of societal norms, and all righteous people must oppose it! Yes, there will definitely be PR risks in doing so, especially given the deep divisions in our country, but we must swiftly retract all financial services! And tech services, social media services, and even laundry services if they wash their underwear, should all be canceled!"

These two models have vastly different expectations of corporate behavior.

So, which one will yield the correct result? The answer is: neither. In practice, behavior is highly context-dependent.

Sometimes, fundraising for those arrested in a riot is unquestionably permissible. Sometimes, even if it may seem uncomfortable, if you participated in or funded the storming of the Capitol, society will eventually accept your return to the mainstream fold. And sometimes, even after a disruptive political protest resulting in fatalities (including police officers), tech companies will still donate to the organizers because this political cause clearly has ongoing importance, and clearly no one wishes for deaths in political protests.

But sometimes, after those fatal disruptive political protests, the "current zeitgeist" will shift in the opposite direction. This situation will prompt figures of authority in society and compliance officials to immediately pull every lever of power at their disposal.

The "current zeitgeist" does not need top-down command. The White House does not need to issue directives. By the time a senator's letter arrives, it is usually too late.

Some still ardently believe in the "current zeitgeist" from four years ago. But it seems that in many professional domains, the kind of consensus that was once automatically reached is silently changing.

What is the current consensus in Washington? I consider myself quite adept at interpreting Japanese tea leaf divination, but my understanding of "Washington speak" is limited. Regarding the new consensus, my current understanding is: "Of course, a death is always regrettable, and political protests probably shouldn't be disruptive. Of course, America's political leadership is accepted in the mainstream fold. Of course, supporting a coup is extremely irresponsible behavior because every U.S. president has been duly elected. Of course, the U.S. has never seen any attempted coups, of course, if someone ever said otherwise, it's just because political speech can sometimes get heated, of course."

The term "Current Hot Topic" is not always politically left-leaning. For example, the phrase "Russian sympathizers have infiltrated the highest levels of the U.S. government! We must..." could have a completely opposite political leaning depending on the tone.

The "Current Hot Topic" may not even fit neatly into a left-right axis, although at times it is forcibly categorized as such. Before it became a "Current Hot Topic," no one on the American political spectrum cared about straw usage. And now, ostentatiously using a plastic straw may be considered a right-wing symbol in certain circles. Think about that phrase — "ostentatiously using a plastic straw."

Sometimes, during the formation of a new "Current Hot Topic," the positions of the two parties can rapidly shift. This phenomenon's existence is one of the key contributions to the concept of the "Current Hot Topic."

One of the few benefits of middle age is experiencing many "Current Hot Topics." Upon reflection, even a person with a fairly strong and stable belief, even if they remember vehemently supporting a position that aligns perfectly with a certain "Current Hot Topic," will have some clear and vivid memories. They remember when those around them were unwavering in their beliefs, passionately supporting a certain viewpoint, and now they hold the exact opposite view with the same fervor. And yet they seem to have no recollection of their past views, yet do not seem crazy.

For any work-related issue that is not a "Current Hot Topic," one can easily form their own opinion. They can demonstrate object constancy in other discussions (i.e., remember past viewpoints).

I will leave the debate about specific examples to those who make a living by writing political articles or those who derive pleasure from team sports-like activities.

As for the phenomenon of the "Current Hot Topic," I am generally unsure of how to handle it. I just want to go back to writing about bank wire transfer compliance. But if the next "Current Hot Topic" happens to be... squirrels, then the compliance department is likely to take a keen interest in this. And for the next fifteen years starting that day, the compliance department may annually set aside time to review whether the "squirrel interception policy" needs updating.

Strategies for Addressing "Debanking"

Some readers may be deeply concerned about the issue of "debanking" and have sincere worries.

Let me offer you some tactical advice to advance your cause: Invest as much effort as possible in designing countermeasures to address rapid, arbitrary actions by the compliance department (primarily) targeting existing accounts triggered by the current hot topic. You may not be able to abolish the compliance department as an institution, or convince banks to bear the enormous losses associated with having to open accounts for all customers. However, you can slow down the compliance department's pace of closing accounts by increasing paperwork and delays. You can tell your friends (or foes), "This is as serious as an eviction, so it should be handled diligently like a reputable city (such as Chicago or New York) deals with an eviction, meticulously documenting every step of the process."

If you take this approach, there will be trade-offs. The direct consequence is that banks' willingness to onboard edge customers will decrease; the indirect consequence is that the phenomenon of underbanked or unbanked individuals in the group you care about may worsen. However, this measure can be very effective in reducing the specific disruption caused by account closure notices.

Of course, some may argue that there is a "free lunch" scenario: you just have to uphold moral justice and stand firm. I partly agree with this view; some virtues are indeed free, and we hope to see more of these virtues.

However, these virtues are still insufficient empirically to guarantee behavior change. The "hot topic of the moment" has tremendous power and may even align with your inclinations. Looking back at history—whether it's the long history of humankind, the recent history of a country or industry, or your own social media record—see how many times people who have stood by their morals and principles in the face of a "hot topic of the moment" have ultimately said, "...this is not the battleground I am willing to fight on."

How the Crypto Industry Uses the Accusation of "Debanking" to Drive Policy Agendas

Sometimes, wealthy and powerful individuals just tweet casually. (I can relate; I often tweet offhandedly, too.)

But sometimes, there is an agenda behind it. In politics, "you have an agenda!" is sometimes used as a cynical attack, but democratic governance fundamentally requires at least some people to have a clear agenda.

Agendas are often open, much more common than secret dealings in back rooms. Telling others about your demands is a necessary step in achieving goals. Discussing agendas is also very useful for coordinating support.

Just like any industry, the crypto industry has a variety of viewpoints. But without becoming part of this industry, it is impossible to describe it perfectly; and some detrimental information models still have their uses.

To help readers who may not be very familiar with these topics, I have deliberately written a condensed version of the "Crypto Industry Demands." If you are concerned that I may not be fair enough and prefer to hear directly from them, you can refer to this tweet thread. Alternatively, you can read the works of the advocates already mentioned or take a few days to study the policy papers they have released as lobbyists.

The crypto industry hopes that all banks will be required to serve "all legitimate businesses," mainly referring to crypto companies and crypto founders. First, they hope that banks will no longer have the choice when providing "basic" deposit products to clients. They will argue that this should be universally applicable but with exceptions, such as Hamas. Their goal is: companies can open corporate accounts, all companies can open corporate accounts, everyone can open corporate accounts.

After breaking through with basic low-risk products, they seek less resistance, such as enabling financial services firms to facilitate fund flows more efficiently, as long as these firms are willing to "play along with the rules," even if these companies are crypto-native. They are currently most concerned about the exchange platforms but also hope that banks will reduce resistance to new product and use cases.

The crypto industry wants its banks back. They don't care what name is on the bank's door, but they hope that a bank can support instant ledger transfers and accept almost all customers. Of course, excluding Hamas, but if a bank refuses to accept entities controlled by CZ, Justin Sun, or anyone seen as Tether's latest ally, then obviously, it does not understand the needs of the crypto industry.

They want banks to only raise minimal issues required to meet U.S. regulatory requirements and be able to efficiently handle large-scale business. Second, they want banks to cover as wide a market range as possible without jeopardizing U.S. business. Because the U.S. is the core of funds, they are very clear about this.

Nominally, the crypto industry will be satisfied with reforming the U.S. financial system, such as allowing a product similar to the Silvergate Exchange Network (SEN) to be stitched together through other banks. But they believe that ultimately, a dedicated bank will still be needed, and if this bank is merely a rapidly growing startup within a large bank, it is likely not the bank they want. What they need is a bank with almost 100% of its deposits concentrated in the crypto industry, which will focus on meeting their needs and advocating for them at critical moments.

Regarding Russia, the crypto industry is willing to compromise (or give up the opportunity to do business directly with Russian companies or individuals) without making overt objections. But when it comes to China... it is well known that, in the past policy environment, many financial innovations have been forced to move to East Asian countries, including some of our most sincere allies. If sacrificing U.S. competitiveness and national security due to refusing to bring these funds back into the U.S. regulatory view resulted in regrettable consequences.

The crypto industry will strongly support U.S. national interests in its relationship with China. Some crypto investors have proposed various suggestions on how to narrow the technological capability gap through "National Security Technology" (NatSecTech), such as in manufacturing drone components. They already have some portfolio companies ready to recommend to Washington and plan to introduce more soon.

If you are a regulator and do not want the crypto industry to have a bank, they hope you will soon be "promoted" to an ordinary citizen. At the same time, they want to clearly convey information to junior staff: if you overstep, you will face the same fate.

If you're in Washington and engaging with the crypto industry, demonstrating an understanding of relevant affairs, such as saying, "You mentioned earlier those innovations that left the U.S. due to the previous administration's policies, aren't they all now housed at Cantor Fitzgerald in New York?" the crypto industry would respond, "Yes, glad you brought that up. Stablecoins are among the largest users of U.S. Treasuries globally. We have a position paper on this. It is crucial to maintain U.S. leadership in the stablecoin space. We believe stablecoins should be custodied domestically in the U.S., and we have viable solutions to enable these operations to run within a regulated framework."

As for the "elephant in the room" that everyone is focused on?

"Is this a Republican joke?!"

The crypto industry hopes to completely and unequivocally overturn all implications that cryptocurrency is high risk. Cease and desist letters, position papers, informal guidance, regulatory concerns—they hope all of it will be swept away. They are not particularly concerned about the specific actions of banking regulatory agencies afterward, but if advice is needed, it is to inquire about the bank's crypto strategy, listen carefully, and then exert moral pressure when the bank has no strategy. If banks point out obstacles to adopting blockchain technology, crypto advocates hope regulatory agencies will respond quickly, as they would in an emergency.

The crypto industry hopes that banks can custody crypto assets. This involves a highly technical accounting standard (which you may not care too much about) that dictates the capital support ratio required when banks custody assets. Under current rules, banks need $1 of equity capital to custody $1 of digital assets. This makes it nearly impossible to operate crypto custody businesses within the banking regulatory scope.

Currently, the crypto industry has custody products, but these services are mainly provided by companies like Coinbase, not traditional banks like State Street. The crypto industry hopes that custody services can fall within the banking regulatory scope because they believe this is crucial to institutional adoption. Their minimum demand is that they hope custody of crypto assets will be treated on par with traditional risk assets, such as stocks. If this goal is achieved, they will further demand some policy favoritism. In fact, the crypto industry is not wrong; capital requirements do have policy bias towards certain politically favored assets (e.g., mortgage-backed securities, MBS).

The crypto industry hopes to rewrite the official history of the 2023 banking crisis. Several regulatory reports have already proposed related narratives, some links of which are mentioned above. They hope these reports will be superseded and overturned. The new reports will claim that bank failures were directly caused by politically motivated actions explicitly instructed by the previous administration. The new narrative will emphasize that such regulatory actions were contrary to U.S. policy. The relevant authorities will need to face the camera and solemnly state: any bank that defies this directive will face the full force of the federal government's tough response.

As for Silicon Valley Bank (SVB) or First Republic Bank, the cryptocurrency industry is not particularly concerned.

The cryptocurrency industry hopes that state-chartered cryptocurrency-native financial services companies can obtain a master account at the Federal Reserve. The request is straightforward; they want to be automatically approved like a community bank: we show our license, you approve us directly.

The cryptocurrency industry hopes that the SEC can provide a repeatable, predictable path for issuers to reasonably sell tokens to ordinary Americans in the early stages of a project's lifecycle. The registration and exemption regimes followed by non-crypto startups are well-known to cryptocurrency/tech investors. They do not want mere "equal treatment" within the existing system but rather seek more targeted support.

They want to be able to sell tokens to retail investors as the retail market is the true source of funds.

In fact, as long as you allow them to sell tokens to retail investors, they are more than willing to operate according to the procedures you set. Spending $1 million on compliance to achieve unrestricted issuance is completely acceptable to them. This cost can also be offset by filtering out projects reminiscent of the ICO frenzy of 2017, reducing reputational risk, with venture capital firms willing to foot the bill for these early costs.

Once you open up this path, the cryptocurrency industry will rapidly industrialize and scale massively, presenting cryptocurrency investment opportunities as investment opportunities to all Americans currently investing in any form, even covering those who have not yet invested. They are very confident (without a doubt) that if conditions allow, they can sell related products worth hundreds of billions of dollars. However, this is far from enough, as the cryptocurrency industry has already invested heavily in infrastructure. Their goal is higher: they believe that tens of trillions of dollars are not out of reach. Only reaching the trillion-dollar level is considered truly successful.

However, the cryptocurrency industry is starting to get impatient about when they can achieve their "trillion-dollar goal." Some cryptocurrency investors are feeling the time pressure set by their capital partners. For them, Bitcoin reaching $100,000 is certainly good news, but this is far from enough to meet the conditions of victory. What they need is a clear path to token sales reaching trillions of dollars.

The cryptocurrency industry hopes for lenient guidance policies on innovative cryptocurrency-related banking products. Banks should be able to issue loans collateralized by cryptocurrency assets under conditions equivalent to publicly traded stock-backed loans, at least applying to mainstream cryptocurrency assets (such as BTC/ETH). Stablecoins should also receive treatment similar to loans collateralized by certificates of deposit (CDs) or money market funds. (These are very niche products, but isn't the essence of finance about envisioning scenarios where these niche products are needed?)

Other Services Offered by Banks? The Crypto Industry Also Aims for Equal Access.

The crypto industry also hopes to set some institutional precedents. They hope that at least one regulator will be thoroughly replaced and permanently removed, to make it clear to the world that this is a result of the crypto industry's advocacy. They do not expect the target to be the Federal Reserve (unrealistic) or the Federal Deposit Insurance Corporation (FDIC) (as essential infrastructure related to retail satisfaction). But the Consumer Financial Protection Bureau (CFPB)? They would be willing to see action against the CFPB.

Now, you understand why we suddenly started discussing "debanking."

Original article link: Link to the original article

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