During a high-profile appearance on the Joe Rogan podcast in late November 2024, Marc Andreessen, general partner at venture capital firm a16z, revealed that more than 30 of his U.S. portfolio companies had been “debanked” in the past year [1].
Marc explained debanking as a product of “Operation Chokepoint 2.0”, first coined and investigated by Nic Carter, as an extension of Obama-era policies that resulted in banks cutting off unfavorable, yet legal, companies from their services.
Recent debanking has led to widespread complaints, ranging from the former head of strategy for Solana Foundation [2], the CEO of DeFi platform Frax [3], members of Silvergate Bank [4], and the CEOs of crypto companies Eco and Blockdaemon [5]. Debanking is not just affecting crypto companies; in September 2024, Revolut stated that it no longer needed “a good reason” to deny its customers banking services, just “a reason” [6].
Background
This research report analyzes the realities of debanking and quantifies its costs. We focus on the negative externalities of increased banking regulations, especially anti-money laundering (AML) laws, and show that the costs of such AML enforcement outweigh the amount of bad actors caught. Furthermore, we’ll illustrate how blockchain technologies—such as smart accounts—are increasingly becoming an alternative to traditional banking, offering viable options for those who have been debanked.
Operation Choke Point 1.0
In the wake of the 2008 financial crisis, the Obama administration created the interagency Financial Fraud Enforcement Task Force (FFETF), which spearheaded Operation Choke Point (OCP1) efforts and was overseen by the DOJ [7]. OCP1 was a U.S. Department of Justice (DOJ) initiative spearheaded by the Obama administration to reduce fraud by pressuring banks to cut ties with high-risk businesses, such as payday lenders and firearms dealers [7] [8] [9]. While these businesses were not illegal, OCP1 was designed to enhance scrutiny of their operations, especially to discover legitimate instances of consumer fraud.
The FFETF led the DOJ and other federal agencies to issue over 50 subpoenas to financial institutions, resulting in multiple multimillion-dollar settlements for consumer fraud, mainly from payday lenders [7] [9]. As such, the FFETF began directly recommending that banks enhance their scrutiny of such customers.
Most banks capitulated under FFETF inquiries [10], often choosing to cut ties with payday lenders entirely instead of conducting enhanced due diligence on them. This wave of debanking sparked fears in other industries, such as arms and cannabis, even though the FFETF did not reach out to banks to investigate customers in these sectors [9] [10].
These fears led to lobbyists claiming a governmental conspiracy to end businesses they deem not conducive. However, according to evidence from the US government, the facts have revealed minimal enforcement of OCP1 beyond obvious fraudsters [7] [8]. As a result, many argue that OCP1 was routinely overstated and sensationalized by groups like gun lobbyists to pass laws such as Texas Senate Bill 19, which penalizes banks for not serving gun-related businesses [7].
Unfortunately, mounting evidence suggests that OCP 2.0 may not be benign and specifically targets fintech and crypto businesses.
Operation Choke Point 2.0
A decade after OCP1 sparked controversy in traditional banking circles, a similar pattern has emerged in the digital finance sector.
There is mounting evidence that concerted governmental efforts were made to target banks that serviced crypto companies during the Biden administration. Such efforts appear unique to the Biden administration and have thus been dubbed “Operation Choke Point 2.0” (OCP2).
OCP2 gained public attention when banks emailed crypto companies, stating, “Your account is being closed due to compliance-related issues. Please transfer all funds immediately” [11]. According to Coinbase and a16z, over 50 of their portfolio companies have been debanked in the last year despite best efforts to comply with existing regulations [12].
Others outside the crypto industry agree that the federal government is overextending its reach. According to the Cato Institute, the FDIC “increasingly wants discretion in deciding where and under what circumstances consumers can obtain loans, financial products, and other banking services. Arrogating such power to itself disregards the rule of law, innovation, and consumer choice [13].”
Additionally, a series of letters show that the FDIC has asked several banks to halt all crypto-related activity, including holding assets for crypto companies [14].
The reasons the FDIC and similar bodies pressured banks to stop working with crypto companies may not be solely political. Some have argued that before 2022, federal and state regulators had created a permissible environment for banks to serve and legitimize crypto companies. From the perception of regulators, this may have contributed to the spectacular failures of companies like FTX and Celsius [15].
The Fall Of Signature And Silvergate
In 2023, rising interest rates led to a depreciation in the value of long-term US Treasuries, setting off a banking crisis in the US. Banks across the country held significant amounts of money in long-term US Treasuries, collectively suffering over $640B in unrealized losses as a result [10]. As a result, many banks were forced to sell Treasuries at a loss to meet liquidity needs, exposing a mismatch between short-term liabilities (withdrawals) and long-term assets (bonds) [10].
Following this, fear and loss of confidence among clients triggered a bank run, further straining the banks’ ability to maintain liquidity. Signature and Silvergate were among the affected banks that subsequently became reliant on federal funding from institutions like the Federal Home Loan Banks (FHLB) or FDIC to meet their depositors' needs. Both banks had positioned themselves as key banking partners for crypto companies, leading to a high concentration of deposits from the crypto industry [10].
The US government and regulators intensified scrutiny of Signature and Silvergate, compounding reputational and operational risks for both institutions. Market participants and investors lost confidence in the banks' ability to sustain operations, accelerating the withdrawal of funds and deterring new capital inflows.
During this banking crisis, the FHLB loaned over $30B to banks that serviced crypto companies so that they could continue to meet the liquidity needs of their depositors [16]. According to the FHLB Council President, this “bailout” proved that the FHLB was operating “exactly like Congress intended it to operate,” providing crucial funds to these banks at a time of distress [16].
Regardless, this bailout raised eyebrows from many Senators and policymakers. Perhaps due to their pressures, the FHLB chose to stop supporting Silvergate, citing risks associated with the collapse of FTX [10]. Unable to recover from liquidity issues and with mounting losses from forced Treasury sales, Silvergate voluntarily liquidated in March 2023, while Signature Bank was seized by regulators shortly after, wiping out over $4 billion in public shareholder value [10] [12].
Interestingly, Silvergate’s official bankruptcy documents indicate that the bank was always solvent; it had the money, but could no longer afford its business model of serving crypto companies because of increased “supervisory pressure [17].”
Moreover, the FDIC began dissuading banks from issuing stablecoins on public blockchains, holding custody for digital assets, and servicing clients that worked in the crypto industry in late 2022 [10] [11]. The Board of Governors of the Federal Reserve System later released a statement interpreting Section 9(13) of the Federal Reserve Act to “presumptively prohibit” member banks from holding crypto assets or issuing stablecoins [18].
While it is not illegal to serve crypto companies as a bank, it has become prohibitively expensive. Any bank that continues to serve crypto clients is buried under paperwork and regulatory scrutiny. Much like OCP1, banks targeted by the FDIC appear to let scrutinized clients go rather than deal with the trouble of investigating them further [10]. According to Nic Carter, bank executives must reportedly clear all new crypto-related customers directly with the FDIC before accepting their deposits [10].
It appears that debanking isn’t limited to traditional financial institutions—other platforms seem to be engaging in it as well. There are increasing reports of Coinbase customers losing access to their accounts and funds [19] [20] [21], which highlights the risks of depositing money into any custodian.
Fintech companies also face enhanced regulatory scrutiny; 25% of the 2023 FDIC’s investigations targeted fintech companies or payment service providers (PSPs) [22]. 95% of PSPs have been debanked or restricted at some point, with 75% receiving no explanation. Only 2% of PSPs that have been debanked have been able to open a new bank account within 6 months [22].
Existing regulations do not prohibit banks from serving clients who are fully compliant with the law; as such, this new era of scrutiny operates outside the bounds of judicial processes. The overextension of regulatory scrutiny doesn’t just affect crypto companies or fintechs; in certain instances, the FDIC, or Financial Crimes Enforcement Network (FinCEN), has requested banks to disclose their depositors' religion and political affiliation [23] [24].
Facts vs. Fiction
The seizure of Signature Bank, a compliant and public bank in the US, indicates that governmental fears of crypto may matter more than the realities of banks' capacity to service crypto clients.
The data, however, suggests that such regulatory fear against crypto companies appears irrational.
According to TRM, only 0.63%, or $34.9B, of crypto transactions in 2023 were illicit [25]. Furthermore, illegal onchain activity steadily decreases yearly on an absolute basis. This may be because regulators, blockchains, stablecoin issuers, and centralized exchanges continue collaborating to combat bad actors. For instance, stablecoin issuer Tether now collaborates with over 180 law enforcement agencies across 45 countries [26] and provides information directly to the FBI and Secret Service to combat crypto crime [27].
Comparatively, over $3 trillion of illicit funds were deposited into regulated banks in 2024 [28].
Therefore, U.S. regulators' scrutiny of crypto companies reveals a stark imbalance compared to the significant amount of illicit money flowing through traditional banks. Additionally, data on countries most associated with crypto-related illicit activities highlights that illegal crypto activities in the US are miniscule [29].
The Realities Of AML Regulation
In 2020, the International Consortium of Investigative Journalists (ICIJ) released the “FinCEN Files,” secret US government documents that “reveal that JPMorgan Chase, HSBC, and other big banks have defied money laundering crackdowns by moving staggering sums of illicit cash for shadowy characters and criminal networks that have spread chaos and undermined democracy around the world [30].” Remarkably, the FinCEN Files “represent less than 0.02% of the more than 12 million suspicious activity reports that financial institutions filed with FinCEN between 2011 and 2017” [31].
According to the Institute of Economic Affairs, “certain kinds of customers present a relatively high prima facie risk of being involved in money laundering. However, the cost of discovering whether they are criminals would exceed the value of their business. So, banks close their accounts—even though most people are innocent [32].”
Current AML systems flag only 0.1% of illicit transactions successfully [33], making AML laws largely ineffective at preventing banks from facilitating money laundering [33] [34]. Despite having such a low success rate, AML laws have enabled governments to impose fines on banks caught processing transactions for bad actors [34].
Notable penalties include [35]:
These fines are minuscule compared to the trillions of dollars laundered through banks each year and the actual costs of complying with AML regulations. Recent estimates place the global cost of AML compliance for banks at over $274B yearly [35], which are ultimately borne by bank depositors, who would otherwise gain more interest [34].
The Blockchain Opportunity
Conducting financial crimes on blockchains is much harder than through traditional banking. All illicit transactions are detectable, even when “mixers” like Tornado Cash are used [36]. Blockchain providers, stablecoin issuers, centralized exchanges, data firms, and regulators have evolved to detect increasing amounts of illicit transactions before they can be withdrawn into the formal banking system.
Regulators should rely on data to assess the true scale of illicit blockchain transactions before pressuring banks to sever ties with crypto businesses and individuals operating in the onchain economy. AML efforts must target actual fraud and money laundering perpetrators rather than penalizing law-abiding crypto companies and employees. Additionally, AML compliance must become significantly more cost-effective to save depositors billions annually [37].
Integrating decentralized ledgers into the banking system presents a promising solution for regulators and banks. Decentralized ledgers are immutable, making them ideal for record-keeping and ensuring compliance. Blockchain transactions are inherently transparent and visible via block explorers, and advancements in AI-powered monitoring tools [38] offer a robust framework for transaction surveillance.
The crypto industry provides banks and regulators with valuable tools to monitor transactions and combat financial crime more effectively. Instead of discouraging banks from engaging with blockchain services or crypto businesses, regulators should promote blockchain integration within the traditional banking system. By modernizing AML regulations to accommodate this technology, regulators can significantly enhance their ability to detect and prevent illicit activities.
Navigating Debanking
Fortunately, we aren’t stuck with this broken system.
The first step toward change is awareness. In the past, issues like OCP2 could remain hidden, suppressing innovation and financial freedom without scrutiny. Today, these issues are exposed and cannot be ignored thanks to the internet, social media, and direct communication channels.
But awareness is only part of the equation. For the first time, individuals and businesses have the tools to take control—to become their own bank. Whether you're a large enterprise, startup, or entrepreneur, stablecoins and the onchain economy unlock a financial ecosystem that is globally accessible, programmable, and rooted in self-sovereignty.
It’s finance built for the internet.
At Squads Labs, we invite you to explore how smart accounts empower teams and individuals to access this financial ecosystem. Smart accounts provide the foundational layer for an onchain bank account—enabling users to store, earn, trade, and spend their funds via programmable, self-custodial infrastructure. With smart account self-custody, you retain complete control over your assets, removing the risks of being arbitrarily debanked or having your funds frozen.
Our partnerships with forward-thinking companies expand the reach of stablecoins and self-banking solutions beyond the onchain economy, making them accessible and practical for multiple use cases.
We’ve seamlessly integrated our smart accounts with the best of traditional finance, offering on/off ramps, virtual bank accounts, and soon, a Visa card for direct spending of digital assets. Financial platforms and applications, teams, and individuals can easily access smart accounts through our intuitive interface or integrate them programmatically via our API.
Whether you’ve experienced debanking or want to explore this new onchain paradigm, we encourage you to contact our team.
The next era of finance won’t be defined by restricting access, but by democratizing it.
If you found this research valuable, follow us on 𝕏 to stay updated on our latest research and insights.
References
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