From Diem's Demise to Crypto Firms Losing Bank Access: How "De-banking" Has Become a Bottleneck for Web3 Development
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From Diem's Demise to Crypto Firms Losing Bank Access: How "De-banking" Has Become a Bottleneck for Web3 Development
Governments often do not directly introduce laws to ban cryptocurrencies, but instead use the financial system to "contain" the industry.
Navigating Web3 tides with focused insightsBy: Aiying
As the cryptocurrency industry rapidly evolves, the phenomenon of "debanking" in the Web3 world has increasingly drawn attention. This reflects an ongoing clash between the traditional financial system and the crypto sector. The failure of Meta's stablecoin project Diem, obstacles faced by Custodia Bank, and widespread cases of crypto firms being cut off from banking services all highlight the strong resistance traditional finance has toward the crypto industry. This resistance is not merely a matter of policy conflict—it represents a complex power struggle among multiple stakeholders. In my years of serving clients, Aiying has also witnessed firsthand the numerous barriers enterprises face when trying to access financial services—bank account closures, lack of payment processing, and more. This article explores the deeper causes behind these challenges.
I. The Hidden Mechanisms of Debanking
"Debanking" is not simply about banks closing individual corporate accounts; it often involves intricate political and financial calculations behind the scenes. Meta’s Diem project serves as a prime example. According to former head David Marcus, although Diem was fully compliant with regulatory requirements by 2021 and planned a limited rollout, U.S. Treasury Secretary Janet Yellen reportedly told Federal Reserve Chair Jerome Powell that approving the project would be “political suicide.” This was clearly a cold suppression of technological innovation by political forces, with pressure directly channeled through the Federal Reserve and banking system to sever cooperation with Diem.
The Diem project originally aimed to enable faster, cheaper global payments using blockchain technology. However, due to government pressure, banks withdrew their support one after another, ultimately dooming the project. These indirect suppression tactics mean that for the crypto industry, compliance is no longer just a regulatory issue—it has become a matter of survival. Account closures and revoked service access have left many businesses and individuals unable to obtain basic financial services, a trend especially evident in what some now call "debanking 2.0."
Caitlin Long, CEO of Custodia Bank, revealed that her institution has long sought to provide legitimate banking services to the crypto industry, yet its application for a banking charter has been repeatedly delayed or denied. Custodia even faced pressure from the Federal Reserve System to terminate its crypto-related services. Long further pointed out that this targeted suppression not only hindered Custodia’s development but also prompted other banks to follow suit in refusing services to crypto firms, pushing many companies into operational crises.
II. Erosion of Freedom: How Debanking Undermines Fundamental Rights in Crypto
Another critical consequence of debanking is the infringement on fundamental rights. The crypto world champions decentralization and freedom, yet debanking strikes at the very foundation of that freedom. David Schwartz, CTO of Ripple, emphasized that such targeted debanking doesn't just harm industry growth—it erodes core constitutional rights, including due process, freedom of speech, and protection against unreasonable searches and seizures.
Schwartz elaborated on how governments exert pressure on banks and financial institutions to indirectly suppress specific industries. He noted that governments rarely pass direct laws banning cryptocurrencies; instead, they use the financial system to "choke off" the industry. Banks are pressured to cease collaboration with crypto firms, effectively paralyzing their operations. This behavior is essentially government interference in market freedom—an end-run around due process by leveraging third parties.
This pattern is far from isolated across the crypto industry. Sam Kazemian, founder of Frax Finance, stated that in December 2022, his account at JPMorgan Chase was abruptly closed without clear explanation—though clearly linked to his involvement in cryptocurrency. Brian Armstrong, co-founder and CEO of Coinbase, has filed requests under the Freedom of Information Act (FOIA) to obtain government records related to so-called "Operation Choke Point 2.0," aiming to expose the true motivations behind this systemic suppression.
III. Operation Choke Point Lives On
The phenomenon of "debanking" did not emerge out of thin air. Its roots trace back to the U.S. government’s earlier initiative known as “Operation Choke Point.” As Aiying learned, the government targeted financial institutions and payment processors, viewing them as bottlenecks—or “choke points”—for fraudulent activities. By pressuring these key intermediaries, authorities aimed to block illegitimate merchants from accessing the banking system. However, this broad-based exclusion ended up affecting numerous legitimate industries, including ammunition sales, payday lending, and tobacco retail.
Operation Choke Point led not only to widespread account closures among lawful businesses but also triggered lawsuits and federal investigations. It was harshly criticized in 2018 by Frank Keating, former governor of Oklahoma, who described it as resembling “an ideological purge of disfavored groups.” Although the Trump administration officially terminated Operation Choke Point in 2017, and the FDIC pledged to limit its staff’s authority to terminate accounts, many believe that governmental control and interference in banking services never truly ended.
Today, the informal term “Operation Choke Point 2.0” is used by critics to describe the U.S. government’s continued pressure on the cryptocurrency industry, which is often perceived as high-risk and controversial. While there is no formal “Operation Choke Point 2.0” program, coordinated actions by regulators—including the Department of Justice (DOJ), FDIC, Office of the Comptroller of the Currency (OCC), Financial Crimes Enforcement Network (FinCEN), and Securities and Exchange Commission (SEC)—have made bank access extremely difficult for crypto firms.
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For instance, the collapses of Signature Bank and Silicon Valley Bank (SVB) in 2023 were widely believed to have been exacerbated by regulatory scrutiny tied to their relationships with the crypto industry.
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Similarly, the SEC sued Ripple Labs in 2020, claiming its XRP token was an unregistered security; in 2023, the SEC brought charges against Binance and Coinbase for alleged securities law violations. The existence of these cases reinforces the perception that “Operation Choke Point 2.0” functions as a systematic tool to restrict financial access for crypto and curb the advancement of decentralized technologies.
IV. Banking Crises and Regulatory Bias
Debanking did not end with the official termination of Operation Choke Point—in fact, it has resurged amid the growth of the crypto industry. On March 8, 2023, Silvergate Bank—a financial institution dedicated to crypto clients since 2013—announced voluntary liquidation. Its stock had plummeted due to ties with Meta’s Diem project, volatility in the crypto market, and the collapse of client FTX. At the same time, mounting pressure from U.S. Senators Elizabeth Warren, Roger Marshall, and John Kennedy—who demanded disclosure of Silvergate’s financial ties to FTX—further increased the bank’s regulatory exposure.
Just two days later, California’s Department of Financial Protection and Innovation took over Silicon Valley Bank (SVB), marking one of the largest bank failures in U.S. history. SVB’s downfall stemmed from declining market values of long-term securities and massive customer withdrawals. On March 12, Signature Bank was also shut down by the New York State Department of Financial Services and placed under FDIC receivership due to large-scale withdrawals. Thirty percent of Signature Bank’s deposits came from the crypto industry, while cash reserves accounted for only 5% of total assets—far below industry norms—making it highly vulnerable during the bank run triggered by SVB’s troubles.
While the U.S. Treasury, Federal Reserve, and FDIC claimed that taking over SVB and Signature Bank was necessary to “protect the American economy and restore public confidence in the banking system,” many—including Barney Frank, a member of Signature Bank’s board—believe these actions reveal clear bias against the crypto industry. Frank stated: “We became the poster child, because this wasn’t a fundamental insolvency.” Subsequently, the FDIC announced that Flagstar Bank would assume Signature Bank’s cash deposits—but explicitly excluded any digital asset-related operations. This decision was criticized by the editorial board of *The Wall Street Journal* as a clear sign of prejudice, confirming Frank’s suspicions of unfair treatment toward the crypto sector.
V. With Trump’s Return to the White House, the Worst May Be Over
Despite the intensifying trend of debanking, Marc Andreessen revealed in a podcast that over 30 tech founders were cut off from banking services in the past four years alone. Rather than staying silent, many of these crypto entrepreneurs have bravely come forward to share their stories. Caitlin Long of Custodia Bank has openly stated that her company is suing the Federal Reserve, with oral arguments scheduled for January next year. Such legal battles represent a crucial step for crypto firms fighting for legitimate space within the financial system.
Jered Kenna, founder of Tradehill, shared his experience of being denied banking services. He once maintained a lengthy list—dozens of pages long—of banks that refused to serve him solely because of his work in cryptocurrency, including global giants like HSBC, Bank of America (BofA), JPMorgan Chase, Citibank, and Wells Fargo. He stressed that this “debanking” phenomenon spans virtually every major financial institution.
Jesse Powell, founder of Kraken, also disclosed that Kraken operated for years in the U.S. without any banking support—and the only bank willing to cooperate eventually terminated the relationship under government pressure. These founders’ experiences illustrate how the government leverages the banking system to systematically pressure the crypto industry into isolation. But change may be coming. Following Donald Trump’s confirmation as the next president, we’re seeing major crypto firms actively applying public pressure on the Federal Reserve and the broader banking system. Additionally, several long-standing legal disputes are beginning to resolve, bringing clarity where ambiguity once reigned. For example: Legal Boundaries of Smart Contracts: Tornado Cash Ruling Reshapes Legitimacy Framework for Web3 Privacy Tools and Decentralized Protocols, and [Revelation] Court Rules Lido DAO is a Partnership: Legal Challenges and Compliance Pathways for Web3 Decentralized Governance. The legal landscape is shifting from vague and uncertain toward greater clarity. Likewise, the current state of arbitrary, unexplained denials of banking services to crypto entities should gradually improve in the future.
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