Crypto can’t get banked because of a ‘deep state’ conspiracy? Time for a reality check

This holiday season, spare some pity for crypto.

To listen to many industry leaders, they are victims, a persecuted class of well-meaning innovators who are being iced out of the US banking system because they pose a disruptive threat to the status quo.

Taking on the man, of course, has animated crypto since the early days when the industry vibed like a rebel alliance challenging the empire.

These days, though, with the crypto market worth $3.6 trillion and Bitcoin embraced by Wall Street, and, as it happens, the incoming US president, the industry’s persecution complex feels rather shrill. It’s like listening to Hollywood superstars complain about fame.

Last week, crypto’s victimhood reached a fever pitch yet again after Marc Andreessen, the billionaire venture capitalist, appeared on the Joe Rogan Experience podcast and inveighed against a “super-pernicious” conspiracy wrought by the Biden administration, and apparently US financial institutions, to secretly debank “30 founders” in tech and crypto.

Choke point

Andreessen was referring to a hot theory called Operation Choke Point 2.0, a ‘deep state’ plot to thwart crypto enterprises by blocking them from accessing the very financial system they hope to disrupt and replace. (Operation Choke Point was an Obama-era initiative targeting fraud across a swathe of industries including payday loans, porn, and tobacco.)

Andreessen’s comments triggered a chorus of complaints from kindred spirits.

Jesse Powell, the co-founder of Kraken, grumbled that the crypto exchange had suffered for years with no US banking.

Sam Kazemian, the founder of Frax Finance, a stablecoin issuer, shared a story of how JPMorgan Chase dumped him as a client because his money stemmed from crypto.

And Brian Armstrong, the CEO of Coinbase, did them one better by using the moment to attack Senator Elizabeth Warren, the Massachusetts Democrat who has taken a hard line on crypto.

Affirming Andreessen’s comments, Armstrong said debanking “was one of the most unethical and un-American things that happened in the Biden administration, and my guess is we’ll find Elizabeth Warren’s fingerprints all over it (Biden himself was probably unaware).”

Get a grip.

Banks have long been choosy when it comes to who they do business with. This isn’t a conspiracy — it’s basic risk management.

Unforeseen risks

Lenders maintain their licences as deposit-taking institutions by complying with rules and enduring annual “stress tests” conducted by regulators. The idea is this will help prevent them from going bust, and in the case of the big guys, requiring taxpayer-funded bailouts.

It’s not a foolproof system of course, but it is designed to safeguard depositors from unforeseen risks.

And let’s be honest: Crypto isn’t exactly a low-risk sector.

Rife with hacks, rug pulls, and all manner of skullduggery, more than $24 billion in illicit money flooded the space in 2023, according to Chainalysis.

Lest we forget, it was only 12 months ago that Binance, the top global crypto exchange, paid $4.3 billion in penalties after pleading guilty to violating US banking law for accommodating criminals who used its platform to launder billions in dirty money.

If that wasn’t enough, Tornado Cash, the crypto mixer, allegedly laundered $7 billion worth of cryptocurrencies, including $455 million from the Lazarus Group, the North Korean hacking outfit that is allegedly funding the pariah nation’s nuclear weapons programme.

Elite banks

You can’t exactly blame lenders for being wary. After all, a who’s who of elite banks — HSBC, Citigroup, Deutsche Bank, BNP Paribas, among others — paid their own multibillion-dollar penalties in years past for committing the same type of infractions as Binance.

The bottom line is that banks don’t need a baroque government plot to give crypto firms a thumbs down. Good old-fashioned risk aversion will do just nicely.

Acceptance

The curious thing about this debanking jag is just how much acceptance crypto has won in the last year.

Even as a new generation of retail investors pile into Bitcoin ETFs — BlackRock’s IBIT fund is rocking a cool $48 billion in net assets — Wall Street asset managers are falling over themselves to roll out new products.

In 2021, JPMorgan, led by crypto sceptic Jamie Dimon, was the first big bank to help retail wealth management clients invest in cryptocurrency funds.

So maybe it’s time to quit the whining and build the businesses that banks will want to bank.

In the end, all lenders care about is a simple ratio — is the reward worth the risk?

The rest is just noise.

Correction: Updated on December 3 to correct when JPMorgan offered its retail wealth management service. It was 2021, not 2024.

Edward Robinson is the story editor for DL News. The opinions expressed in this op-ed column are his own. Contact the author at ed@dlnews.com.