🟪 Debanking, debunked?

Why the industry is maybe not the target of a coordinated debanking campaign

Author

Byron Gilliam
December 02, 2024

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“The tendency of adolescents to falsely assume that their appearance or behavior is the focus of other people's attention.”

— Encylopedia.com definition of “imaginary audience”

Debanking, debunked?

We humans like to put ourselves at the center of the story, but we usually don’t belong there.

The psychologist David Elkind coined the term “imaginary audience” to describe the tendency among adolescents to incorrectly assume that their behavior and appearance is the focus of others’ attention. 

This mindset isn’t limited to teenagers, however. I’d argue that people of all ages tend to overestimate how much others take notice of them.

As evidence, I'll cite this weekend’s trend of crypto people posting stories on X about being debanked. 

I take these stories at face value, I’m sure they’re all true. 

But I’m not sure about the implication that crypto people are being debanked because banks or governments are out to get them.

Crypto people have been telling this story for a long time, and part of the reason why it’s become received wisdom is because no one’s really pushed back on it — perhaps because no one outside of crypto has been paying attention.

That changed after Marc Andreessen discussed the issue on Joe Rogan last week: “We have had 30 founders in the last four years debanked. This is why we supported Trump.” 

Assigning political intent to those debankings makes for a good David and Goliath story, especially for a crypto industry that got its start as an alternative to government-issued money — if said government is out to get us, then we really must be on to something!

But the truth may be more prosaic.

Andreessen’s Rogan appearance was high-profile enough to elicit pushback from people outside of the crypto echo chamber, many of whom seem much better informed on banking law and KYC practices. 

The finance blogger Jason Mikula, for example, posted a persuasive refutation of Andreessen’s claim that the crypto industry has been targeted for political reasons.

Mikula argues instead that debanking is less about banks hating crypto and more about banks loving profits: “When evaluating whether or not to begin or continue working with a given customer, banks typically apply the lens any business in a capitalist society would: Is this a profitable customer to serve?”

Many crypto customers, as Mikula details, are simply unprofitable to serve because of the extra KYC risk involved. 

It’s not only TradFi types that think so: “If a bank is discovered to be banking ‘risky’ businesses, that [gives] Federal regulators the authority to dig deeper and audit the bank to see if anything else they are doing is ‘risky,’” the Bitcoiner Dennis Porter explains. “Banks don’t like to be audited. It’s expensive and time-consuming. So banks ‘voluntarily’ began to debank their ‘risky’ customer[s].” 

This is how the policy activist John Arnold sees it, as well: “Banks respond rationally by refusing to deal with certain people, companies and industries. The business isn't worth the risk.”

Unless, that is, the business is highly profitable — banks are more than happy to process crypto-related business for the likes of Coinbase, Apple, PayPal and BlackRock because those are low-risk, high-profit customers.

A recent Treasury report, commissioned to understand why less prominent customers are being debanked, reached the same conclusion: “Profitability [is] the primary factor in financial institutions’ de-risking decisions.”

You don’t have to be an expert on KYC to understand why crypto would be particularly exposed to these “de-risking” decisions — even the most innocuous crypto transaction is probably not many steps removed from a North Korean hacker, Cambodian money launderer or Bahamian fraudster.

If you're a bank compliance officer, why take the immense monetary and reputational risk of inadvertently facilitating a payment for one of those types?

When TD Bank agreed to pay a $1.8 billion fine for having lax KYC practices, the US attorney general accused the bank of choosing “profits over compliance.”

I imagine that settlement prompted other banks to hire many more compliance officers and encourage them to say “no” a lot more often.

Consider as well the executives of Silvergate Bank, who appear to have done everything right (losing 70% of their deposits without losing anyone’s money is a genuine achievement) and nevertheless face personal legal jeopardy for having moved stablecoins (not even crypto, really) on behalf of FTX.

If serving crypto customers requires a level of KYC that would have recognized FTX as a fraud before anyone else did, why would any bank take the risk of serving crypto customers?

Instructively, this is not just a US problem — or just a crypto one.

In a report issued by the UK government earlier this year, the biggest UK banks were found to have closed the accounts of 141,000 small business customers (2.7% of the total), mostly due to reasons related to “risk appetite” or “reputational risk.”

Crypto did not get a mention in the report because the problem is far more widespread than that. 

This suggests (to me, at least) that the industry is maybe not the target of a coordinated debanking campaign, as everyone assumes.

Instead, the debankings may just be collateral damage in governments’ ever-tightening KYC regimes. 

That will be no consolation for the crypto entrepreneurs who have lost access to the banking system, of course — “debanking” and “de-risking” will sound like a distinction without a difference to them, and rightly so.

But to stop further debankings, we should first determine if crypto really is at the center of the story — or if we’ve only just imagined ourselves there.

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