Freedman’s Savings Bank echoes in crypto report

In highlighting risks associated with crypto, the Biden administration drew particular attention to how the hype surrounding digital currency could harm underserved and minority communities.

The Treasury Department underscored this warning by citing a tragedy that occurred nearly 150 years ago: the collapse in 1874 of the Freedman’s Savings Bank, which was created to help former slaves but ended up destroying the black community.

Crypto’s revolutionary set wants to overturn financial history, not learn from it. But the historic mention stood out to some critics who have grown increasingly concerned about the hype over crypto and welcome the Biden administration’s focus on its impact on poor and minority communities.

Bitcoin and other cryptocurrencies have drawn some evangelists from historically disadvantaged communities. As prices boomed before crypto winter set in, some saw an opportunity to rebuild the generational wealth lost in decades of systematic discrimination. And crypto companies saw opportunities to market their products to new audiences. Block and Jay-Z, who sit on the fintech company’s board, have supported bitcoin education programs intended to serve minority populations.

“The Freedman’s Bank comparison underscores a bit of the ‘There’s nothing new under the sun’ perspective on financial products, regardless of their packaging,” Mark Hays, senior policy analyst at Americans for Financial Reform, told the Protocol. “The current risks and harms that digital assets pose to consumers and investors — especially low-income communities and communities of color — are many, serious and real.”

Brookings Institution fellow Tonantzin Carmona said the Biden administration’s particular focus on poor communities “was very affirming” since the administration “also sees very similar risks.”

The risk is pronounced in the black community.

The Freedman’s Savings Bank building on Pennsylvania Avenue in Washington, DC circa 1890. The bank failed after the Panic of 1873.

Photo: Library of Congress; Wikimedia Commons

Black consumers are more likely than white consumers to own cryptocurrencies, a report from the Federal Reserve Bank of Kansas City said in June. This has raised concerns that a significant number of black households – with median wealth of around $24,000 – are dangerously exposed to a highly volatile market, the report said.

The Kansas Fed warned that crypto holders could “simply lose their investments if the exchange goes bankrupt or is hacked: a 21st century version of the Freedman’s Savings Bank.” This was an analogy the Ministry of Finance would reproduce in its report.

Founded in 1865 with the abolition of slavery, the Freedman’s Savings Bank was created by Congress to provide banking and financial assistance to newly freed black people. But the bank collapsed as a result of poor management and the impact of a battered economy.

The trauma of Freedman’s Bank’s collapse had a huge impact on the black community, the Brookings Institution’s Carmona said. “If you talk to members of the black community, they will tell you that [something] as this happened, she told Protocol. “These stories are passed down across generations.”

But the story of the Freedman’s Bank collapse also made many in the black community more receptive to crypto.

Crypto is seen by many in the black community as “more reliable than traditional assets,” the Kansas Fed report said. Many black consumers “also see cryptocurrencies as a relatively quick way to close the wealth gap with other races, especially white consumers,” the authors added.

Shawn Wilkinson became one of the most successful black entrepreneurs in crypto, which he called an “open terrain” that offers many opportunities “especially for people of color” and entrepreneurs like him “who didn’t necessarily come from money or generational wealth.”

In a 2021 interview with Protocol, Wilkinson, the founder of storage blockchain startup Storj, cited another historical tragedy, the Tulsa Race Massacre, when an Oklahoma community of predominantly black entrepreneurs known as Black Wall Street was destroyed in an anti-Black riot. The crypto and blockchain industry, Wilkinson said, opens up opportunities to build “generational wealth” that cannot be “bombed away and stolen.”

He acknowledged that crypto holders have taken a hit in the market crash. “I’ve definitely seen it,” he told Protocol. “I definitely know people who have gone down quite a bit.”

But downturns are part of crypto, Wilkinson argued. “I’ve been in this area for 10 years – this is normal for me,” he said. “… In the long term, crypto is probably one of the best assets of all time.”

Another black entrepreneur, Edwardo Jackson, creator of Blacks in Bitcoin, agreed, noting that crypto offers a way to raise capital for communities that have “historically, institutionally been shut out of mainstream financial access.”

But Jackson acknowledged a point also raised by the Biden administration: Some communities are clearly vulnerable to crypto fraud. The Treasury Department report warned that “crypto-asset products can be marketed in ways that hide their level of risk, which could amplify the impact of targeted marketing on vulnerable communities.”

Signs advertising short-term loans stand in front of stores in Birmingham, Alabama, USA

Photo: Gary Tramontina/Bloomberg via Getty Images

Jackson pointed to what he called “a disturbing trend” in the black community.

“We are targets,” he told Protocol. “We are the target of all MLMs [multi-level marketing] scam, every scamcoin, shitcoin, whatever it is. Many of them have recently come home to rest.”

Carmona said the crypto crash underscores important lessons for underserved communities, especially black and Latinx people.

While many minorities still struggle with access to capital and traditional banking services, she said, “it doesn’t necessarily mean that crypto is automatically the solution.” Despite all the talk of decentralization, “the growing concentration of the wealthy in these areas shows that not all cryptocurrency owners are created equal.”

The crypto crash also serves as a powerful reminder of other past financial services trends that promised financial inclusion and access, such as payday loans and subprime loans, that turned out to be disastrous for those communities.

The Treasury Department report actually cited “the proliferation of crypto-asset ATMs in low-income neighborhoods that lack bank branches,” which Hays said “reminds me very much of the payday lending storefronts that are proliferating in low-income areas.”

Carmona also cited a point she said “was brought up again and again” in the Treasury report: “While crypto may offer new opportunities, it may also present a new set of risks.”