Crypto Debanking: What Really Happened | Patrick McKenzie

Hey, Upstream listeners. Today we're releasing a conversation from Turpentine's show Complex Systems with Patrick McKenzie. Patrick does a deep dive on Operation Chokepoint and the origins of debanking, and explains how debanking has been applied to the crypto industry. Please enjoy the episode.

I'm excited to do this. It's a bit overdue. There was this sort of brouhaha a month ago when Marc Andreessen went on Joe Rogan's podcast and talked about what he saw as sort of politically motivated debanking. And as we've covered on this podcast, and as you've discussed at length and written about, banking is a thing that is very complex and people may not understand. And so you were the guy that many people were looking towards to make sense of Hey, is this actually happening? Did this actually happen? What does this mean and how do we make sense of it? So I wanted to have a dedicated conversation with you on the debanking that Mark was speaking about and maybe more debanking more just at large.

Sure. Happy to talk about this. For those of you who haven't seen it, I wrote a piece called Debanking and Debunking, which went through this in quite a bit of detail. I almost felt like I wanted to apologize to the audience for how long it was, but it's a A complicated topic with a lot of facets to it. I, I think Mark Andreessen et al. have one, they make a lot of points. Among the points they make, there are some points that I'm like relatively sympathetic to. And given that I'm somewhat notorious as not being the most crypto enthusiastic person in the world, I wanted to be fair to advocates where I felt like they had a point. And then I also wanted to go into some of the places where confabulation of which actor was ordering what, or whether something was truly a private decision of a, you know, an individual or entity versus a motivated decision based on government action versus, you know, a long and complicated procedural history. So, yeah, happy to start this wherever you would like to start it.

Sure. Well, maybe for those who missed it, why don't you characterize Marc's claims and then we can respond to them?

One thing I'll say at the outset, I have enormous respect for Marc Andreessen and a16z broadly. I also think that there's a number of people that are making claims like this, and I'll broadly characterize them as crypto enthusiasts. And Nick Carter has done a lot of work. He's another crypto VC and has Published quite a bit about this in PirateWire's own Castle Island Ventures podcast and a few other places. So let's say not that this is a me versus them match, but the, the set of public intellectuals who I'm responding to in this discourse is like that set versus any individual within it. Okay, so claims that have been made.

Uh, uh.

Let's start with the word debanking. So debanking is an advocacy term. And what I mean by an advocacy term is that it is intentionally chosen to kind of like smuggle in a little bit about one's worldview and like preferred policy preferences into the words that one uses to describe in the same fashion that like death tax versus inheritance tax is an advocacy term. And so the central claim of debanking is that there are is a legitimate user, whether it's an individual or corporation out there who has a bank account, and then the bank terminates their usage of the account and/or all their accounts for reasons that are not facially legitimate. Then a bit of conflation happens. So, like, why is that an effective lens for this? First off, the, As you know, almost everyone listening to this podcast has a bank account. You, you know, pay your rent and/or mortgage out of it, you pay your employees out of it, et cetera, et cetera. And you understand that like losing access to your bank account on a very short timeline when you weren't planning to have that happen to you is an emergency. And so like, this establishes a certain amount of like automatic regard for the person who has been consequenced by this debanking decision. And it's the conflation of that kind of debanking and a second kind of debanking, which is, okay, again, it is a, it is a person or firm out in the world. Again, they are a benign intent actor. They attempt to get new bank account at a new bank, and they are told no for a reason that they do not enjoy. Now, getting told no by a bank is, generally speaking, not an emergency. It's an emergency if every bank tells you no. But the, like, our moral intuitions for what is happening here are different in the same fashion that, like, if you tell me you've been, you got divorced this week, I would want to be extremely sympathetic because obviously, like, your life is in a total uproar right now. And if you told me you got turned down for a date this week, I would not be that level of sympathetic and not feel like it, that, you know, factoid, even if it was greatly disappointing to you, deserved the same level of, like, immediate emotional support from everyone around you. And now, having started with a very, like, user-centric view onto banking, the crypto advocates smuggled in another thing, which is like, there is this— there are a couple of, like, crypto-friendly banks that are, largely speaking, no longer with us, that had a variety of supervisory actions against them, which in some cases are correlated with them no longer being with us. And we do not like those supervisory actions. And we're going to make people think we are talking about the greatly disruptive to an individual person for no good reason, like case 1 to banking, and instead talk a lot about like supervisory actions. And I think I'm being fair in the following characterization, even though it is a negative characterization. The crypto advocates who are describing those supervisory actions are not familiar with the supervisory actions. Like, they are not familiar with the procedural history, and they do not have good mental models for how bank supervision, generally speaking, works. And so anyhow, that, that is the, like, the swath of activities that are, you know, coming in under this debanking moniker. Now, characterizing the claims made of advocates, let's say, one, there's been rampant debanking for any one of those 3 definitions of crypto-using individuals and crypto-focused firms. Specifically because they use crypto. 2, this is being, in some cases, intentionally coordinated by the federal government in, under the auspices of what they describe as Operation Chokepoint 2.0. And we should probably discuss Operation Chokepoint by itself, but we'll just identify that as a claim that has been made. 3, the federal government is— Has Intentionally closed banks that were crypto-friendly. And then let's see, another claim is that while there are many federal regulators that are acting in concert under this Operation Chokepoint 2.0 umbrella, one particular federal regulator, the Consumer Finance Protection Bureau, CFPB, has been taking a particular whack at crypto firms and/or fintech companies and/or tech companies generally. So there is like a menu of claims there and there is a menu of subclaims within all of them, but identifying the constellation of claims that has been made under this debunking heading, that's like most of the constellation.

Yeah.

Let's get into Operation Chokepoint just because it's valuable context to, to have here.

Back during the Obama administration, there was, you know, society has many complicated goals. Presidential administrations have many complicated goals. And one of the goals of the Obama administration originating in Washington, whether it originated in the White House is like kind of beside the point because, you know, administrations are larger than the White House. Like, that's a kind of basic feature of the American government. Anyhow, there are more than 10 people involved in it. Be that as it may, a priority of the Obama administration was consumer protection in a couple of areas that are of kind of like longstanding interest to consumer advocates with respect to finance. One specific subarea there is that many consumer advocates don't like the institution of payday loans. And I don't know if I have to give disclaimers of my own point of view here. I also think payday loans are kind of like a burn-it-with-fire sort of industry. But be that as it may, so the Obama administration decides payday lenders are abusing people. There's this rapid spike in online payday lending, which we think is particularly abusive, and we would certainly like to turn the screws to payday lenders. Now, consumer lending is regulated on a state-by-state basis, and in the United States system of government, does not naturally roll up to the feds. But that doesn't mean that the feds have no preferences about it and they have no levers available. And one lever that they had available was saying, okay, Well, we're not really in the consumer lending regulation business per se. We're in the bank regulation business, and payday lenders need bank accounts. And if we were to make it more difficult for them to get bank accounts, then there would be less payday lending. And since we think payday lending is like basically straight-up evil, less of it in the world would be a wonderful thing. How did they accomplish this? So it starts in the Department of Justice, and the Department of Justice pulls out this law from the late 1980s. That was passed in response to the savings and loan crisis. And that law, the name escapes me at the moment, essentially federalizes the crime of defrauding a bank. One of the things that blew up these savings and loan— savings and loan trusts in the savings and loan crisis was, oh man, there, there was a whole lot of craziness that was involved in that crisis. But let's say there were control frauds with savings and loan trusts where A bad actor essentially puppets the trust and gives the depositors' money to themselves under fraudulent pretenses. Those frauds blew up some of the trusts. This caused a gigantic loss to the entire industry and then a bailout. In, in part, that was some of the stuff that was motivating this crisis. There was an awful lot of crisis to go around, but okay. So Congress passes a law. The law federalizes prosecution of frauds that affect— this is going to be a really important word in a moment, so I'm going to say it with like air quotes— affect A financial institution that is federally insured. And as you've seen from the FDIC logos slapped all over your bank and credit union websites, like all the financial institutions that are doing anything interesting are federally insured. The Department of Justice comes up with a novel theory. And that novel theory is that if you are a bank and you have offered services to a less than salubrious entity, And that less than salubrious entity does things that could reflect upon your social standing in your community or in your social standing with your regulator, then you have just affected a financial institution, to wit yourself. And so they read this law as federally criminalizing the act of providing services to someone who. Who then turns out to be a fraudster. And they start going after banks for this. And this works for a while. They have a few successful prosecutions. They have a few successful, you know, as, as is often the case when the feds come knocking, people settle rather than choose to fight it, particularly when, you know, keeping one's relationship with one's regulator is like kind of important to you. And so they, there is a bit of a 2-step during those prosecutions slash settlement agreements where, okay. There's this like one particular payday loan company which we think is fraud, fraud, fraudy fraud. You banked them. That's bad. You promise not to bank them again, and also you promise in the settlement agreement never to bank another payday lender. Now, payday lenders are legal. You know that not the I L illegal. They they are allowed under the laws of the United States, and there is no authority in statute to just. Disrupt Congress's ability to regulate what is and is not legal in the, in the country. But the Department of Justice conjured this authority for itself out of the combination of a 30-year-old statute and a few court cases that they thought gave them some colorable authority here. I think they were being extremely creative in pursuing a policy goal that they had. And then they talked to their buddies at the FDIC. who do not report to them, but, you know, same presidential administration, same, like, broad set of policy priorities. And they said, hey, FDIC, we've been trying to go after this, you know, payday lending business. And we're having some success here with bringing court cases against banks instead of, you know, trying to interdict the payday lenders directly because there's fewer banks than there are payday lenders. This is more efficient. But you talk to a lot more banks than we do. Can you help us like accelerate this process? And the FDIC said, well, sure. So there's these third-party payment processors that need banking rails to them, and we should call third-party payment processing sort of a high-risk activity because, you know, we are in the regulating bank risk business. And so we'll tell banks like, you know, to do high-risk activities, you need a built-out process for doing this. And this will cause some of the banks to cease to do these things that we put at the high-risk activities. And we'll put out a circular of, You know, all the industries that we think are high risk and maybe there'll be 30 of them or so. And like, let's, you know, make a list of everything that we don't like in the world. And all of those things are now high risk. And are they high risk because they're going to like cause a bank to have a bank run on it? That magical thinking did appear in some documents about this, but to be clear, it is magical thinking that like the only form of risk that these businesses consistently represented was we don't like them. They're 30 industries get added to the list. Some of them are like outright evil scams. Some of them are— someone familiar with the financial industry could say, yes, that is a challenging industry to bank, but is frequently banked, such as adult entertainment. And some of them are just sort of bizarre, like fireworks was on the list. If you're a fireworks seller, that was high risk. Gun sellers were high risk, which became extremely politically salient. And then some of them were just a grab bag of There's like really no connection with banking here whatsoever. It's just something that a Democratic administration wouldn't like. Like racist materials was on the list. You know, you can, you cannot like that kind of stuff, but there is no obvious reason by which it causes banks to fail. Anyhow, this came to light, and it came to light largely because the banks, having received a list of high-risk businesses, started to send those businesses letters saying, There's been recent regulatory scrutiny on your industry. This isn't, you know, we have no individualized sudden hatred for you specifically, but your industry is no longer within the risk appetite of this bank, and hence we are closing your accounts effective either immediately or in 30 days. And many companies got variants of the same letter. And unlike the usual way debanking letters are written, those letters were pretty explicit on a like, hey, this is our regulators leaning on us. And eventually industries that had trade groups and similar, like, collated sufficient examples of these letters to say, wait, this sounds like the federal government is, like, taking a whack at us. And they went to Congress and said, you know, members of Congress who are a bit more sympathetic, it seems like the federal government has decided our industry shouldn't exist. Do you have a point of view on that one? And the gun industry in specific was very loud about it. And then members of Congress started asking pointed questions of the FDIC and the Department of Justice. And the FDIC started lying to Congress and saying there is absolutely nothing to this, et cetera, et cetera. And this was complicated by like contemporaneous reporting of the aim, intent, and mechanism of Operation Chokepoint being in the Wall Street Journal. And the higher-ups at the FDIC had like forwarded that article around the office with, I am so glad that our important work on disrupting these industries' access to banking is finally being recognized. And great job for getting this placed in the Wall Street Journal. And so Congress found that email because of course it has subpoena power, and then went back to the FDIC and said, you know, we're a little pissed off that you lied to us earlier. What exactly is the full extent of this? And they did a bit of a postmortem process. And long story short, Operation Chokepoint, which it, it was like, this was in no way an informal thing. This was like an official project. They picked their own code name. There was, there were status meetings, there were, you know, kickoff emails. Extensively documented all over the place, and the emails about it said what they said. Like Congress said, "We hate this, and you should stop because you have no legal authority for doing this." And if you don't listen to this instruction, we will pass new legal authority to like hold your feet over the fire over directly. Presidential administration changed. The new administration pretty much immediately threw it very further under the bus than it already was because again, you know, the FDIC slash DOJ slash administration's point of view on the matter. I don't know if it was their point of view. Their public message was that, okay, so Operation Chokepoint is a thing. We can't dissimulate about that because the emails say what they say, but it's being mischaracterized and perhaps some mistakes were made. We're certainly not attempting to debank legal businesses, which they were. This was mostly forgotten for a number of years, except by people who like really geek out about banking infrastructure.

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Do you want me to fast forward to the present day or? Okay. So Operation Chokepoint 2.0. There was no kickoff meeting for Operation Chokepoint 2.0. There was not a bunch of lawyers at the Department of Justice saying, you know, it would be really great to resurrect That number, that name worked so well the first time. What actually happened was, I believe Nick Carter was the one who coined it because, you know, in addition to being a crypto VC, he also reads the news and could remember this thing back from the Obama administration, was like, huh, if I brand this like constellation of activities with regards to crypto banking that I do not like with the name of a, you know, shocking abuse of power from about 10 years ago. It will make it very difficult for people to, like, continue doing the things I don't like. And so he, like, popularized that branding for it. I believe that's disingenuous. Eh, not really. Like, you know, if you're an advocate, I can, I can see the parallels between the thing that you think is happening and the thing that definitely happened. It's certainly motivated in that, like, there is a communication strategy here for achieving a political objective. And, you know, As a sometimes communicator myself, it seems like a pretty effective communication strategy to associate things you don't like with things that nobody will waste breath defending. But it's important to, to say that, like, there probably is not a vast conspiracy happening right now in a way that they're, like, manifestly— again, you know, it's not a conspiracy if you, you are, like, a bunch of Department of Justice employees and you have a kickoff meeting and, like, a 6-week after-action report where you say this probably debunked legal businesses in addition to the scams that we were targeting. But we're cool with that, which is almost a direct quote from that report, by the way. Okay. What is Chokepoint 2.0? Well, again, it's whatever the crypto guys think has happened to banks recently that they don't like. So they point to the failure of Silvergate and say that Silvergate Bank was the first national bank of crypto. It was technically state chartered, but it's funnier if you say first national because there's so many first nationals in American banking. It's kind of like, like the first check into a company. There's always 100 angels who say they were their first check. Okay. So First National Bank of Crypto, Silvergate Bank failed. Yeah, they didn't fail. That's an important thing to point out. They wound down in a relatively controlled manner after the collapse of FTX. Some people believe that there was a future even after the collapse of FTX where Silvergate Bank would've survived as an institution. Those people are probably wrong, but people can say things that are probably wrong. So people who believe that there was a future for Silvergate Bank say that in some cases, they say that there was a thumb put on the scale by federal regulators where federal regulators started giving verbal advice to banks that they needed to decrease their concentration of deposits within the crypto industry. So again, the bunch of dominoes had dropped all in a row, but the FTX implosion happened. There was a, there were runs on several U.S. banks, about plus or minus 15 of them in total, but the runs were essentially fatal at 3: SVB, First Republic, and Signature. And Signature had a materially sized crypto practice. Silvergate was essentially a crypto specialist bank. SVB had like some amount of touching of the crypto industry, but it wasn't very material to the business. And First Republic was less exposed than that. But anyhow, regulators felt like there were crypto, crypto cost runs happening. And then when a crypto run happened, all the crypto people would like stampede outta the market together. And so they, it has been alleged that the regulators went to a bunch of banks and said, hey, We want your crypto deposit concentration to be below a magic number. We're going to say that magic number is 15%. And if your crypto deposit, deposit concentration is presently above that, manage it down effective immediately. If it is below that, don't do any like expansion of your crypto banking practice that would cause it to cross the 15% threshold. And people say that given that Silvergate's concentration was like somewhere on the order of 96% or so, That the 15% target is incompatible with the current, with the like further existence of Silvergate. And there are some other claims like, sort of like throw all the spaghetti at the wall and see, see what sticks with respect to the demise of Silvergate. They're, they were having obvious liquidity problems as all deposits left. And so they needed to take out advances against the Federal Home Loan bank system in San Francisco, and then the repayment of those advances was accelerated. And some people have claimed at various times that a letter from Elizabeth Warren and 2 other senators caused the acceleration of that, mostly without evidence. But long story short, they say part of this, like, Operation Chokepoint 2.0 is you, you decided to kill Silvergate for being the crypto bank. I spend a rather substantial amount of time on, in the piece about this discussing the rise to stardom and then failure of Silvergate Bank. Or again, failure is sort of a reserved word with respect to discussing banks winding up, the voluntary dissolution of Silvergate Bank. Silvergate Bank was not a competently run institution. The collapse of FTX brought that to very painfully obvious light. Silvergate had been I'm going to say the following is only my point of view on it, but I believe it is an extremely well-evidenced point of view. And Silvergate had been complicit in trillions of dollars of money laundering because they had implemented something called the Silvergate Exchange Network, was essentially a real-time settlement API for crypto companies. And their anti-money laundering software, which all banks are kind of required— not kind of, they are required to have running all the time— was was just turned off with respect to all the send transfers due to essentially technical incompetence reasons. Silvergate was extremely aware of their own technical incompetence for a period of about a year, but did not rectify it. That's a bad set of facts for a regulated financial institution, to put it mildly, particularly when sometimes people have compliance failures or sometimes they fail to configure their software incorrectly, and your regulator will be pretty cross with you on that. But when it directly enables a bad actor siphoning billions of dollars from, you know, investors, users, etc., etc., and you as the bank don't catch that because you were blind to it, that's a bad set of facts. It has been persuasively alleged by people who are complicit in the FTX fraud scheme, including Ryan Salame, who was essentially like their chief bank guy, in addition to also being SBF's cutout for giving donations to politicians on the red side of the aisle. Brian Salame said, yeah, like Silvergate— this is not a direct quote, but it's substantially accurate to things he said— Silvergate orchestrated with me the bank fraud that we needed to make the stench work. And specifically, they helped me open accounts for a paper corporation, North Dimension, to receive FTX customer funds flow, where North Dimension had no real business. Everyone understood that. Had a website which falsely claimed that they sold, like, cheap cell phones, but there were no cell phones actually being sold. This was just to launder money in from FTX customers who would wire money into North Dimension and put, like, in the memo for the wire, deposit to my FTX account. And of course, the bank was aware of this as it was happening. The bank executives swear blind that they were not aware. Yeah. Now, Okay, Ryan Salame is a confessed money launderer who was, you know, approximately in the room while billions of dollars were stolen from people. That is perhaps a bit of evidence against whether he always tells the truth with respect to his activities with regards to banks. However, he's not an idiot about how banks work. I am also not an idiot about how banks work. And a thing that I unreservedly agree with Ryan is that you can't not know. Like the FTX constellation was at one point their biggest customer, including, you know, senior execs, et cetera, et cetera. You just can't not know. Like the legal system might say you either knew or were reckless in not knowing that the hinkiness was going on. And so after that has happened, the bank is going to die. Like I've worked in the financial industry before. Everyone has to take mandatory compliance training. And a thing that is said early enough in mandatory compliance training is It's very important that you listen to this. We consider this to be very important because if we do not like actually comply with all the laws that regulate our behavior, the regulators can do anything to us. The most likely anything that will happen is very, very large fines. Here are several billion-dollar fines that have been assessed in the recent past for failing to do KYC or AML up to the regulator standards. However, when we say they could do anything, They could do anything up to and including closing this firm. Of basically any financial institution in history, I think there's a reasonable case to, to make that, like, Silvergate was most the poster child for getting that extraordinary remedy applied to it. But crypto really likes having, you know, a bank that everybody at crypto can bank at. It's extremely operationally helpful. And so many crypto advocates have kind of reckoned their understanding of Silvergate Bank to be Oh, you know, they were great and they had this like very useful product. And did they have some failures with regards to regulations? Well, I don't know. I'm not a bank regulation expert or anything, but it certainly seems like the federal government killed them because they were the first bank of crypto. And I think there is some motivated reasoning going on about how people suddenly, you know, simultaneously profess to have a great understanding of obscure decisions made by at the Department of Justice during the Obama administration, but have never heard of what anti-money laundering regulation means when it actually applies to a bank that they care about. I'm being— am I being a bit unfair there? I think I'm being mostly fair there.

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And so say more about what you think that the Nick Carters or the Marc Andreessens or that group more broadly is missing, or that someone who just hears that story doesn't fully understand to get the full picture. What have we not yet covered that's important for them to know?

So the letter that you get, if a bank chooses to close all your accounts, will sometimes use words like, this is a commercial decision of the bank. And It will sometimes say words like, this will not be reversed, and similar. And I think that crypto advocates, generally speaking, don't have a good mental model of why a legal business could get this letter in a way that is not a mistake. And there are a variety of ways you can get this letter in a way that is not a mistake. Like, to use a business that is unambiguous, unambiguously legal. It is perfectly okay to operate a bodega in the United States of America. Like, you know, your friendly corner store that sells delicious sandwiches is, you know, upstanding member of the community. Everybody loves them. That's fine. You can bank bodegas. However, many bodegas have a sideline in alternate financial services. For example, they might sell money orders. If you sell money orders, of $1 or more, you are a money services business, and there are a panoply of regulatory requirements that are necessary to compliantly operate a money services business. Now, I think many listeners have been in a bodega before, and you might have a point of view about the types of entrepreneurs who are likely to run bodegas. And you might reasonably understand that the types of entrepreneurs who are likely to run bodegas are not exactly equivalent to the kind of people who staff bank department banking compliance departments. And so they will frequently not live up to all of the criteria that the government requires from money services businesses. Several suborganizations within the federal government are extremely pissed off at specifically bodegas, specifically regarding them being money services businesses. And so if you look at the Financial Crime Enforcement Network's webpage where they list enforcement actions they have done, about half of those enforcement actions are at bodegas specifically, or like not exactly a bodega, but a business that has the same shape in society as a bodega, like somebody who sells cheap cell phones. And FinCEN doesn't allege in those enforcement actions that, well, it said it was a bodega on the outside, but it was actually a front for the, you know, Russian intelligence services or, or et cetera. No, when you read the enforcement actions, it's pretty clear, like, this is actually a bodega. But they didn't file all the paperwork. They didn't check all the, check all the boxes. So they were running a non-compliant MSB. And so FinCEN fined them. And banking regulators, extremely aware that FinCEN, which is also a banking regulator, is on the hunt for, you know, these rogue bodegas, not the sandwich-selling bodegas, just the ones that have ever sold a money order and not been fully compliant in all the things you need to do to sell a money order. Like, be on the lookout for rogue bodegas. And, and so if you, as like, you open an account at your local bank and say, I am a responsible business owner in my community, I want a bank account for the usual things, to take money from customers and then to pay out my employees and to, you know, pay for electricity and et cetera. And you open a bank account and a couple months later, in the course of their routine monitoring of the bank account, the bank sees a a debit from Western Union for money, they're going to come to the conclusion that you are probably a Western Union agent, which means you're a money services business. And the bank could, in theory, ask whether, like, okay, come back to the bank, bring all your paperwork about being a money service business. We need to have an unscheduled private audit of whether you are a fully compliant money services business. But that takes a whole lot of work, and it implies the existence of a whole lot of structure within that bank specifically that can adjudicate whether someone is a compliant money services business. Most banks don't have that structure. What they will instead say is like, money services businesses are on our high-risk list, and as we don't have an extent enhanced due diligence process that can satisfy us that a particular money services business is compliant, we will decline the business of money services businesses. And so when the bank comes to the conclusion in month 6 or et cetera of your bodega being an MSB, They will say, okay, we don't have anything against you. We, you know, this is not an accusation of crime. This is not an accusation that you're a bad person, but we can't bank your business anymore. So take your money back as quickly as you can arrange it and find another bank that will bank you. That sort of thing has certainly happened to at least some crypto enthusiasts, either at the individual level or at the firm level. Crypto enthusiasts also don't understand that the standard, you know, banking checking account, which is the The product they profess to be most concerned about, because every business needs a checking account. They don't, don't demonstrate understanding that a checking account is a credit product and has credit risk associated with it. And most people who are not banking specialists don't understand that an American bank account is a check, is a credit product. They think, oh, you know, that's a deposit product. Like if you get a line of credit from a bank, or if you have a credit card or a mortgage, that's a credit product. Like obviously there's credit risk involved in a mortgage. But there's not credit risk involved in just having a checking account. That point of view is understandable and wrong, that there is no way to have a, a checking account in the United States of America that is fit for the usual purposes you want to use a checking account and not have credit risk. And indeed, there have been like legal, relatively professionally operated, relatively well-loved, backed by legitimate investors, indeed publicly traded crypto companies that have caused their banks huge amounts of credit losses due to, one, the business fails, and then two, like all the recent payments that were made into that company by the customers who are now theoretically claimants against the bankruptcy estate start to get disputed with their banks. So an explicit example of this was Voyager, Voyager Digital, which was publicly traded in Canada, but primarily served US users. This was a firm, you know, there were adults at the helm, et cetera, et cetera. They, they had risk procedures. Those risk procedures were extremely inadequate, but, but they had them and they failed as a proximate result of making bad risk decisions. And when they failed, there were many people who had, who had had the experience of, so I just sent money into this app on my phone to buy Bitcoin. I now don't have my money. And I also don't have my Bitcoin. I think I just got defrauded by these bastards on the internet. And they called their bank and said exactly that. And the bank said, oh, that sounds like you were defrauded. Well, we'll give you your money back. And they pulled money from Voyager. Voyager didn't have the money to distribute because Voyager was in bankruptcy at the time. And one of the downstream consequences of filing for bankruptcy is that money doesn't like vanish from your bank accounts anymore. But there is no bankruptcy exception to reversing an ACH in the United States. If the ACH is going to come back, whether the rest of the world wants it to or not. And so what happens was their Voyager Digital's bank, Metropolitan, sent back the money but was not able to recover it from Voyager Digital because Voyager was in bankruptcy. They, you know, essentially paid for it out of their own shareholders' pockets. It's a credit loss, and it was a pretty materially sized credit loss. In fact, it was materially sized enough that, you know, Voyager made a A series of urgent pleas to the bankruptcy judge to please allow them to do a variety of procedural things to allow them to contest these, these reversals on behalf of Voyager Digital because they thought it would otherwise cause damage to both the bankruptcy estate and their bank directly. A judge gave them permission to do that. Long story short, but this was like a very real thing. So, you know, from the bank's perspective, like crypto people have said, You know, crypto businesses are legitimate and no reasonable person says that Voyager Digital is not legitimate, but it's also a very risky business. And it single-handedly sunk Metropolitan's crypto practice, which is a risk when you are banking fast-growing financial services firms. And so if, you know, this has more than zero relevance to why banks might not want to bank Like legitimate crypto startups, because that, you know, the story you tell your investor if you are a legitimate crypto startup is we're going to be doing some things. We will swiftly convince lots and lots of users to use us. They will swiftly send us all of the money and you'll make a great return on your investment. That's great news for investors because they have capped downside. They can only lose as much as they invest in you and uncapped upside. Your bank, on the other hand, has uncapped downside, which increases every day as your business gets larger, and capped upside. They can only charge you, you know, X percent of whatever they're doing for payment services or make money on the net interest margin, et cetera, et cetera. But the, the, the physics of money are unfavorable to this arrangement, which is why banks are extremely careful about banking financial services firms. And as crypto, you know, grows up a little bit and stops like LARPing in financial services as financial services firms and turns into actual financial services firms, Frankly, they need to like start understanding this math and understanding that simply walking into a bank and saying, so I think I'm going to start a financial services firm, will you give me, you know, all of the things I want to get from you? Like, they're not going to say yes to that by default. They, like, they're going to be extremely skeptical. And crypto is also like running up against many years of history at this point. It was difficult to get bank accounts for crypto businesses back in, say, 2011. Like, that's a historical fact. And many, you know, early crypto firms that are now household names, at least if you listen to this podcast, will tell you somewhat quietly about like various shenanigans that they had to do back in those days that unlocked their growth path to today. And back in 2011, you could be forgiven as a crypto advocate for saying like, banks don't want to bank us because they are like Stodgy, overly conservative, and don't understand the potential of Bitcoin or blockchain technology to revolutionize the world. Fast forward like almost 15 years now, banks have definitely heard the pitch at this point, and they have observed what happens to other banks that have like bought that pitch, and they don't like the outcomes that those banks got. And so in part, crypto is having difficulty gaining access to banking services because banks are making rational decisions that It seems like this particular community of entrepreneurs has kind of cowboyish risk controls, like frequently leaves the banks holding the bag and, you know, ends up on like front page of the New York Times after having swindled customers of many billions of dollars and drags every bank they banked with into that maelstrom for the next like 12 months. And so like it is not in their rational decision by banks to like avoid having crypto practices. And it also isn't a decision that has to be, you know, like shouted down from the White House to be accepted in a variety of places. That is a thing that I think advocates either don't understand or are a little bit cagey with respect to saying that they understand. I think they, there is a bit of a point here that advocates have where They say, well, you know, to the extent that like banks are a policy arm of the government, and there is a very real way in which banks are a policy arm of the government. That is, I think, one of the things that the crypto advocates are most right about, which is the thing that the, the quote unquote TradFi definitely understands about itself and is also like socialized to not say in as many words. And so crypto folks just say it out loud, like banks are a policy arm. I don't speak for the entire banking industry, but by any stretch of the imagination, but as someone who's very crypto skeptical, banks are a policy arm. Extremely important to understand about banks. To the extent that banks are a policy arm, we expect the government to not stereotype people in, you know, for example, law enforcement. We want individualized assessment of the person that is before the court. And we want, you know, if there is an accusation made, it should be particularized and there should be an investigative process. And then, you know, Due process, yada, yada, yada. That stuff doesn't really happen in banking, not in, not to the same degree of rigor that we expect in our court system. Should we expect it to happen in banking? I can understand why that would be attractive to many people, but it's obviously ludicrous to expect for certain banking products. Like, you know, taking the, this point of view at face value, if you walk into a bank and say, I have never not paid you back money. And so you must issue me a loan until you have evidence that I won't pay you, pay that loan back. That's a recipe for every bank going out of business. And, you know, we allow banks to say like, okay, well, we're, we don't need an individualized suspicion about you, the potential borrower. We're going to have you fill out an application for this loan, and then we're going to read things on that application. And then we're going to use our, you know, experience of having banked lots and lots of people over the years and credit scores and et cetera, et cetera, to build a model of whether you will like successfully pay this loan back or not. And if we come to the conclusion that you are 92% likely to pay, pay this loan back, you won't get this loan or it will be very expensive. Phrase I used in my article, 92% was an A- in high school. It is not in banking. And, uh, you know, like again, there are, well, most people who are declined for loans are not declined because they're bad people. They're declined because they are risks that do not fit within the risk envelope of a bank. And that is also a reason why you can get declined for checking accounts. Like, one specific mechanism by which you can get declined for checking accounts is if you have, you know, previously had a checking account, not made great use of it, overdrafted, and then had the account closed on you because you didn't pay for the overdraft fee. If a bank, you know, gets a record from check systems that said that you did that, you will probably not successfully open a checking account for a while. We allow banks to do that. We probably You know, like different societies get to make policy choices with regards to, to what degree they allow banks to make decisions. But we have, you know, broadly in the United States allowed banks to make those kind of decisions as long as banks don't use factors that the United States policy considers invidious with respect to making the decisions. For example, we definitely don't allow you to discriminate based on race in lending decisions. That's one of a long list of things. But we do allow you to, you know, make decisions based on like the apparent likelihood of success of a business. And there are crypto advocates who say banks don't understand enough that like if a crypto startup comes to them, it is extremely likely to succeed. And banks are like, show us the research, bro. We— this is not what our impression of watching your industry for 15 years looks like. And, you know, and banks have like basically carte blanche to make that sort of decision and probably should. Although the people of goodwill can have differences of opinion on it.

That all makes sense as a helpful overview and context. And so what have we not discussed related to this topic in terms of someone getting a full picture of what's appropriate as it relates to the—

and we talk a lot about the crypto side, but the political If I can zoom out from crypto for a moment, many people get debanked in the world. I've been debanked twice. You can read the anecdotes in the article if you care about it. Substantially, nobody likes the experience of it. And very many people who are debanked do not understand what is happening because the typical profile for being debanked is to be relatively less resourced, relatively less educated, deal with other axes of disadvantage in society, all the usual ones, and then some which are like kind of weird. Like, you know, the, many people would be able to predict that if you are an immigrant who is less capable of having a professional conversation in language that banking is conducted in your country, you would have a difficult time interfacing with the banking system. Non-specialists are less likely to predict that, like, being a bodega is, like, public enemy number one. Like, the focus on debanking of, you know, crypto entrepreneurs and similar is focusing on the, like, relatively rare case where debanking happens to someone who is extremely well-educated, extremely socially established, likely economically well-off, et cetera, et cetera. And so to the extent that one is like really morally motivated to increase access to the banking system, et cetera, it's helpful to understand that this particular lens on debanking is a very, very small case of a much larger picture. And, you know, you could reasonably ask for things like, we don't have any good stats on this because the The system's general understanding is that debanking is a commercial decision of an, of individual banks. Then we don't specifically ask the banks to keep stats on account closures or by reasons. And maybe we should start aggregating those stats and have a better picture of where the industry is like that. This is a like policy priority that a hypothetical crypto advocate could advance in Washington where I'd be like immediately sticking my hand up and say, yeah, that thing, I, I absolutely want to buy that. So the political ramifications, oh man, we could have an, uh, we could have an entire other podcast on this, but, uh, other people with a better point of view on the matter have already had it. Uh, there was more than a few government actions, uh, explicitly aimed at the tech industry over the last couple of years that the tech industry is kind of annoyed about, uh, because they seem to be arbitrary and lawless or some combination of the two. And Mark Zuckerberg was on Joe Rogan this morning, as of the recording of this podcast, discussing this in some amount of detail. Marc Andreessen has mentioned it himself and kind of tied these, like, 2 threads together, where on the one hand, there were actors at a variety of federal agencies and also at the White House who were— the actors would describe it as jawboning. Other people might describe it as issuing illegal orders to attempt to circumvent First Amendment to get the social media platforms to crack down on speech that the actors did not like for various reasons, such as misinformation, yada yada yada. This became a court case. Blinking on the name of the court case, it went up to the Supreme Court. Supreme Court declined to intervene due to standing problems, but Justice Alito's dissent on it says, you know, if the lower court was right about the factual record in front of it, this is probably one of the most important free speech cases that we've had in a number of years. And I think Justice Alito is substantially right with regards to that. One of the priorities of some people in the tech industry, including some folks who are right-aligned or explicitly backed the Trump campaign, yada, yada, yada. It's like this constellation of anti-tech activities that were also anti-free speech activities were outrageous morally. Mistaken, unconstitutional, illegal, et cetera, et cetera. We, you know, have engaged in the political system to have the political system do less of this in the future. And we want, you know, I don't know, hearings and accounting for what happened, a dismantling of the various mechanisms that was used to enact this thing, et cetera, et cetera. And then debanking kind of rhymed with this and gets tied to it. I try to be nonpartisan in professional spaces for A variety of reasons. One reason including being that the tech industry truly was not exactly accepting of a vast diversity of political opinions for a number of years over the course of recent history. But were there orders sent by the federal government to Facebook ordering Facebook to clamp down on protected political speech? Yes. Like, we have the emails. Those emails say what they said. I think the case is much better that, you know, that specifically directed activity happened, then specifically directed debanking happened. But there's also kind of like an emergent complex systems, if you will, angle to this where the deplatforming decisions at, for example, social media companies kind of bubble up from a portion of the organization that is sometimes called trust and safety. Trust and safety might hypothetically be located in San Francisco and, you know, 20-something employees. Which is a bit of a hand-wavy oversimplification, but let's say young non-engineering professional employees in San Francisco with college degrees who intentionally decide to work as hall monitors judging every human utterance and stick in that position for a number of years. I think people across the American political spectrum can understand, like, the person, the kind of person who gets through all those filters is much more likely to say freeze peach rather than free speech. You know, they, they have a bit more ideological alignment with the ACLU of 2024 and a lot less with the ACLU of, like, 1990. There was coordinated top-down directed action against certain disfavored speech. But you can also imagine kind of through a variety of pathways, bottoms-up action by people who are broadly sympathetic to the administration's aims, That tended to be very, like, due to, again, the politics of the people that were making the decisions. This would cause a slant in the rules as applied, even if the rules were facially neutral, which fair-minded observers of the tech industry who are well-informed would not tell you that the rules were actually facially neutral, nor that they were applied in an even-handed fashion. And this You know, gets conflated with the debanking issue. And you can imagine similar mechanisms for the kind of like bottoms-up approach to inflicting harm on one's political opponents that might happen in, you know, banking or financial services land, even in the absence of directed federal action. And I think that is an important thing to be aware of. There is like a bit of good news here. The good news is that bank compliance departments are not all based in a 7 square miles that has a very like particular political slant to it. The counterbalanced against that, bank compliance departments are intentionally a monoculture in that they select for the most like rule-following, ingratiating with respect to authority, hierarchy worshipers that have ever walked the face of the earth. And I say that as someone who passed his annual compliance training with flying colors. Because of that monoculture, there is a risk of having, you know, politically inflected or otherwise improper actions happen due to instantaneous cultural alignment in a way similar to some of the ways that the tech companies had bottoms-up instantaneous cultural alignment against politically disfavored actors over the course of the last couple of years. Anyhow, I have some degree of sympathy for the, the case that in the course of attempting to clip tech wings, the federal government directed unconscionable amounts of infringements on the rights of ordinary Americans and other users of tech platforms. And, you know, hope that doesn't happen in the future.

Thus vacuously.

Well, there, there, there are polities that make very different decisions based on that. You know, some of our Our friends in Europe have very good tasting bread and very bad taste in political liberty. And I can continue being friends with them and continue consuming the bread and being glad that many of the decisions made are made in a country that has a great degree of regards for individual liberty. Anyhow, oh, one, one thing that we didn't mention, which I will mention as an aside, what would it look like if the federal government came up with a list of names of our enemies who we don't like for political reasons? and told the banking industry, turn off all these people's accounts. It would look like what Canada did with respect to the protests in Ottawa and other places in Canada against the COVID lockdown mandates, which were broadly called the trucker convoy protests because— or freedom convoy protests, but we're not entirely coextensive with that. But, you know, branding thing. Canada invoked the Emergencies Act and basically said, this political protest is the equivalent of a foreign invasion. And so we are going to Give the entire financial industry a list of names and they're going to turn off all economic activity of this list of names immediately with the goal of making it impossible for them to continue their political protest, which we believe is disruptive. Political protests are frequently disruptive and they're frequently like really annoying too. And, you know, things you don't support and political protesting, like not infrequently involves committing crimes in a variety of countries, inclusive of the United States and Canada. And it's the broad understanding of constitutional democracies that when someone commits a crime, you arrest them and then you charge them with a crime and then you convict them of the crime and then you punish them. And, but that's not what Canada did. Canada came up with an enemies list and started, you know, turning off their ability to feed their families. And in the inquiry after this happened, one of the ministers involved said it wasn't our intent to go after the families, but Pause to acknowledge, you know, Canada is a free nation or a mostly free nation. It's a constitutional democracy. The minister got up and said it wasn't our intent to go after the families. But when a democracy needs to say that in the course of like a national level inquiry, something truly effed up has happened. So while I don't agree with advocates that the United States has an official policy of like coming up with an enemies list and passing it out to banks, Because that list actually doesn't exist. There is a risk that a, you know, future incredibly unprincipled American government could use its control of the financial industry to attempt to do something in a way similar to what Canada, like, very definitely did. And, you know, we should not do that. We should, should not consequence people for political speech, even very vexatious political speech. We, you know, even to the extent that you're consequencing people for actions, the consequences should probably follow, like arrest for a crime and then conviction by a jury of their peers, et cetera, et cetera. This feels like a very Civics 101 kind of thing, but like Civics 101 was violated pretty egregiously. And so, to the extent that advocates, they're worried about, you know, slouching into a very anti-democratic system of societal control based on Shelling out to parts of American society which have a lot of power but don't have a lot of institutional constraints with respect to exercising that power. I think those are real risks. And so, you know, disagree with advocates with regards to some things, but can agree that they do have points with respect to some places.

That all makes sense. Is there anything we haven't yet covered? This has been pretty thorough, but you want to make sure to leave our listeners with?

So there's a phrase in politics, somebody has an agenda, and that is often used as a, a bit of a slur in politics. I think it is very important within a democratic society that some people have agendas, because that's how we get things done. And so I don't want to say that, you know, crypto has an agenda is a way to demean the, the crypto folks. But crypto does have a policy agenda. And the reason you are hearing about banking and the reason that it is being tied very very tight administration that was recently trounced in the polls for various reasons, is that crypto thinks that by establishing that political narrative, crypto will get a variety of things that they want out of the government. And some of those things are like relatively tightly tied to the set of grievances that they have with respect to debanking. Some of those things are not. This is politics. I'm not a professional political commentator, but it's, It's important to understand that, like, when gifted communicators put a lot of effort into, like, a political project, they want to get something out of that. And, you know, it's important to understand, like, what is the list of things that they want to get out. And as someone who is a bit crypto-skeptical, perhaps people wouldn't trust me on articulating what those things are. So you can, like, just read their position papers and they will tell you, like, here's our list of asks. But I would encourage people to, to, you know, read those list of asks. If they're involved in the political process, then maybe calibrate whether they want to say yes to them versus saying, like, oh, I'm opposed to the debanking thing, and therefore I will give crypto everything that they ask for.

That sounds good. And it sounds like a good way to— it sounds like a good closer to this episode. Patrick, thank you for giving a thorough explanation of what's been going on and what's important for people to know beyond just what they hear from from, from some of these figures we, we've been discussing.

Always happy to help. And again, you know, there, there is perhaps a bit of an oppositional frame to this, but this was my hobby before it was my job. And I'm, you know, very happy to like point to the cases about like the procedural history where I think they're substantially accurate as regards to it. And then just try to explain like boring banking back, back office stuff to the very large portion of the world that very sensibly has not delved into that topic.

Yeah. And for those who do want to go deeper, do highly recommend the blog post that we'll link to in the show notes.

Yep. And if you are the— if anybody listening is the kind of brain damage that likes hearing about this kind of stuff on a regular basis, bitsaboutmoney.com, you should probably sign up to that newsletter.

Absolutely.

Okay.

Until next time, Patrick. Thanks very much.

Upstream with Erik Torenberg is a show from Turpentine, the podcast network behind Moment of Zen and Cognitive Revolution. If you like the episode, please leave a review in the Apple Store. Hey everyone, Erik here. At Turpentine, we're building the first media outlet for tech people by tech people. We're the network behind the show you're listening to right now. We have a slate of hit shows across a range of topics and industries, from our AI and investing cluster of podcasts to shows that drive the conversation in tech with the most interesting thinkers, founders, investors, and influencers, like Econ 102 with Noah Smith. We're launching new shows every week, and we're looking for industry-leading sponsors. If you think that might be you and your company, email me at erikaterpentino@neutralspace.com. Thank you so much for having me. That's erik@turpentine.co, and let's partner together.