The crypto industry is poised to clash with the government over crackdowns

The $1 trillion crypto industry is on the offensive against what executives say is an existential threat to “de-bank” digital asset firms, launching a lobbying campaign to oppose efforts to discourage lenders from taking them on as customers.

“The concern is very real,” Sen. Bill Hagerty (R-Tenn.), one of several GOP lawmakers allied with the industry, said in an interview. “We’ve seen this kind of regulatory abuse before with Operation Choke Point,” the Obama-era program that pushed banks away from financing arms dealers and payday lenders. “Many of the facts stand the same way here, right now.”

The clash marks the latest front in what is already an all-out battle between the once high-flying industry and officials in Washington who could shape the future of crypto in the US. European lawmakers are trying to legalize crypto companies, raising concerns among Republicans that the U.S. could see its reputation as a home for financial innovation tarnished.

The Blockchain Association, a leading advocacy group, promises to investigate concerns that regulators are removing banks with crypto firms. Ryan Selkis, CEO of Messari, a major research firm, is pushing lawmakers to scrutinize agencies like the FDIC over claims that the downfalls of both Silvergate Capital and Signature Bank were linked to their crypto ties. And lawmakers like Hagerty and Rep. Tom Emmer of Minnesota, the No. 3 Republican in the House, are joins the fight.

The FDIC – which, along with the Fed and the Office of the Comptroller of the Currency, is warning banks against allowing crypto risk to migrate into the financial system – declined to comment. A spokesperson for the OCC, a national regulator, said it did not supervise Silvergate, Silicon Valley Bank or Signature. The Fed did not respond to a request for comment.

Much of Washington has long been skeptical—if not hostile—to crypto, seeing little real value in digital assets and worrying about investor protection. But the industry’s problems multiplied with the collapse of FTX, the one-time exchange giant whose founder, Sam Bankman-Fried, has been charged with massive fraud and is alleged to have orchestrated an extensive political lobbying campaign to push for lighter regulation.

In the wake of FTX, legislators and regulators have become particularly skeptical of the market. SEC Chairman Gary Gensler, for one, is ramping up enforcement after months of urging crypto companies to comply with securities laws. Non-compliance, he told POLITICO in January, is “part of the business model.”

As the SEC cracks down, banking regulators have put lenders on notice about crypto — prompting some experts to offer scathing assessments of their intentions.

Regulators are “taking steps to shadow-ban crypto,” said John Rizzo, a former Treasury Department official who is now senior vice president of public affairs at Clyde Group. “If you can’t access the banking system, how can you exist?”

Little concrete evidence has emerged to suggest there is a coordinated campaign to force banks to reject crypto depositors. Still, the regulators’ warnings — as well as the risk itself — appear to be weighing heavily among bank executives.

Messari has had conversations with banks where “they say anything that even touches crypto is a no-go from on high,” Selkis said. Swan Bitcoin CEO Cory Klippsten said Citigroup closed both the company’s and his personal accounts late last year without explanation. And several banks have scaled back on exposure to the asset class.

Even executives at the since-failed Signature Bank said last year they planned to cut the concentration of crypto-linked deposits to below 20 percent. Others such as Metropolitan Commercial Bank fled the market altogether.

“We’re seeing a lot of smoke,” Blockchain Association CEO Kristin Smith said. – We are not sure where the fire is, but we want to find out.

The Blockchain Association recently submitted information requests to the FDIC, Fed and OCC regarding de-banking allegations such as account closures and firms struggling to open new accounts. The group’s members include crypto exchange Kraken, broker eToro and decentralized financial platform Uniswap.

Neither agency has indicated that there is anything preventing banks from dealing with crypto customers, as long as they operate within the law and manage the risks appropriately. The effort, former FDIC official Todd Phillips said, is instead about alerting banks to growing and lurking risks — basic banking oversight.

“These are banking regulators doing their job, and it just so happens that the regulators have identified risks with crypto customers,” said Phillips, who is now a financial regulatory consultant. Crypto firms are “clearly trying to get the banking agencies to back off by calling it something it’s not.”

The regulators’ warnings proved prescient. Just weeks after informing banks that crypto deposits can be volatile, Silvergate, one of the industry’s leading lenders, announced it would voluntarily liquidate after suffering billions in withdrawals. Both Silicon Valley Bank and Signature failed days later.

But concerns about de-banking have persisted — fueled in part by former Representative Barney Frank, a Democrat from Massachusetts.

Frank, an architect of the landmark Dodd-Frank reform and a Signature board member since 2015, said New York regulators’ decision to shut down the bank was linked to its crypto exposure.

“The only explanation is that they just wanted to send a message that banks should not be heavily or marginally involved in crypto,” he told POLITICO.

Frank, who says he has “always been skeptical of crypto,” argued that Signature was simply doing what banks do: act as a middleman for their customers.

“To the extent that people voluntarily choose to migrate to crypto from traditional finance, you accommodate that,” he said. “For a bank, it’s the business you’re in.”

The FDIC took over Signature as the federal government tried to cut off any contagion in the banking system. New York regulators have pushed back on Frank’s claim that crypto played a role in Signature’s failure. In an earlier statement, a spokesperson for the Department of Financial Services said the decision had “nothing to do with crypto” but was about “a crisis of confidence in the bank’s management.”

Even some executives don’t buy the idea that the crypto industry is being unfairly targeted.

While Swan’s Klippsten also questioned the Signature shutdown, he dismissed the idea of ​​a coordinated conspiracy to debank crypto.

Klippsten, which deals only in Bitcoin, points to a less mysterious theory behind why banks would cut off crypto depositors: Risk. After the string of bankruptcies and frauds that rocked the market last year, including Voyager, Celsius and FTX, Klippsten said banks were naturally going to reduce the risk from the sector.

In Swan’s case, Klippsten said the Bitcoin financial services company was likely caught in Citigroup’s “dragnet” when the bank pulled out. But Swan has had little trouble since, and with thousands of banks out there, Klippsten said as long as a company has a “solid business,” there will be a lender willing to take it on.

“It can hurt to get rid of Citibank without any warning like we were,” Klippsten said. “But you can literally walk next door to Chase or Wells if there’s nothing wrong with your business.