SENATE BANKING HOUSING, & URBAN AFFAIRS HEARING
Overview
For questions on the note below, please contact Scott Parsons, Edmund Perry, or Ruth Lunsford.
On February 5, the Senate Committee on Banking, Housing, and Urban Affairs held a hearing entitled “Investigating the Real Impacts of Debanking in America.” Witnesses in the hearing were:
- Nathan McCauley, Co-Founder and CEO of Anchorage Digital
- Stephen Gannon, Partner at Davis Wright Tremaine LLP
- Mike Ring, CEO and Co-Founder of Old Glory Bank
- Aaron Klein, Senior Fellow in Economic Studies at Brookings Institution
Below is a summary of the hearing prepared by Delta Strategy Group. It includes several high-level takeaways, followed by summaries of opening statements and witness testimonies and a summary of the Q&A portion of the hearing in the Discussion section.
Key Takeaways
- Chairman Scott (R-SC) and Senator Rounds (R-SD) emphasized concerns over fair access to the financial system, particularly for cryptocurrency firms. Nathan McCauley testified that banks were willing to work with crypto companies but withdrew due to pressure from the Federal Reserve (Fed), Federal Deposit Insurance Corporation (FDIC), and Office of the Comptroller of the Currency (OCC) that discourage financial institutions from working with legal crypto businesses. Senators emphasized that regulatory actions should not extend beyond their intended scope in ways that could harm financial innovation, particularly in the cryptocurrency sector.
- Republicans questioned and criticized role of federal financial regulators in limiting access to crypto-related services under the Biden Administration. Chairman Scott and Senator Tillis (R-NC) raised concerns about the use of “reputational risk” as a factor in banking decisions, which they argued has led banks to preemptively sever ties with entire industries. Republican members also pointed to the FDIC’s release of 175 documents related to “Operation Choke Point 2.0,” citing these as evidence of government influence in financial institutions’ risk assessments and decision-making.
- McCauley testified that businesses, particularly in the cryptocurrency sector, face difficulties securing banking services due to regulatory uncertainty and financial institutions’ concerns about maintaining compliance. Gannon highlighted how regulatory discretion, and vague supervisory expectations contribute to banks’ hesitancy in serving certain industries while Mike Ring emphasized that financial institutions fear regulatory consequences for engaging with businesses deemed high-risk, even if they operate legally.
- Klein discussed how compliance burdens and outdated regulatory frameworks exacerbate challenges for businesses seeking financial services, noting that the Currency Transaction Report (CTR) threshold was set over fifty years ago and has not been adjusted for inflation. Senator Kim (D-NJ) and Klein raised issues with inefficiencies in the Anti-Money Laundering (AML) and Bank Secrecy Act (BSA), arguing that financial institutions are evaluated on the volume rather than the quality of Suspicious Activity Reports (SARs), leading to excessive and ineffective filings.
Opening Statements and Testimony
Chairman Tim Scott (R-SC)
We have seen the rise of “Operation Chokepoint 2.0,” in which federal regulators exploit their power by pressuring banks to cut off services from digital asset firms, political figures, and conservatives aligned with digital assets. We need to examine regulatory practices and investigate regulatory abuses to stop financial discrimination. No regulator is above the principles of fairness and market access. The FDIC recently released supervisory documents proving that Operation Chokepoint 2.0 is real and exposing a pattern of regulatory abuse. While I commend the new FDIC leadership for their commitment to transparency, it should not have taken an election for that to happen.
Ranking Member Elizabeth Warren (D-MA)
In reviewing the CFPB complaint database and focusing on cases where consumers reported being unable to open accounts or having their accounts wrongfully closed, my staff identified 11,955 complaints over the past three years. These cases share common themes: no warning, no explanation, and sudden exclusion from the banking system. Bank of America, JP Morgan, Wells Fargo, and Citibank, accounted for half of all complaints filed at the CFPB. Instead of conducting thorough risk assessments, big banks rely on black-box algorithms and middlemen companies to shut down accounts arbitrarily, with these shortcuts leading to wrongful account closures without proper due diligence. Additional work is needed from the Treasury Department, the Federal Reserve, the FDIC, and other regulators to establish clear AML rules and banking guidance. Debanking is a real problem, and I am eager to work with you and President Trump to support the CFPB’s efforts to ensure fair banking access.
Nathan McCauley, Co-Founder and CEO of Anchorage Digital
Regulators have pressured banks into shutting an entire industry out of the federal banking system, with a long list of anti-crypto regulatory actions that led to the mass debanking of our industry. The turning point was the January 2023 joint statement from the Fed, FDIC, and OCC discouraging banks from serving crypto clients. We are a federally chartered bank that cannot access the federal banking system. Congress must investigate what happened to us and other crypto businesses to protect fair and open banking access.
Stephen Gannon, Partner at Davis Wright Tremaine LLP
Debanking is not new, and the Committee is familiar with the unfortunate history of Operation Chokepoint 1.0, with numerous examples of debanking and the challenges posed directly to banks by virtually unbound supervisory discretion, with affected financial participants being subject to a special horizontal review. The building blocks used by regulators to engage in debanking activities rely on broad, vague, and malleable terms, which are always subject to reinterpretation by supervisors, with this strategic ambiguity creating uncertainty and excessive regulatory control. The digital asset industry has felt the impact of this unchecked regulatory power, with banking agencies issuing interpretive letters in 2021 and 2022 that imposed an unusual prior restraint requirement, known as a “supervisory non-objection,” before any bank could engage in permissible crypto-related activities. These letters met the definition of a rule under the Congressional Review Act but were never submitted for Congressional review. As a result, no bank has dared to disobey these restrictions. This exercise of nearly limitless regulatory discretion creates a fundamental problem and distorts the relationship between regulatory agencies and Congress. Under Article I of the Constitution, all agency power is delegated by Congress, so if an agency wishes to make a legal business illegal, it must seek Congressional approval for that authority. Debanking legal businesses ignores this fundamental principle and also contravenes this administration’s recent executive order, which directs regulatory agencies to uphold principles of fairness and due process.
Michael Ring, CEO and Co-Founder of Old Glory Bank
I define debanking in two forms: regulatory debanking, and participant debanking, where large banks intentionally exclude individuals or businesses from banking services. It cannot be a coincidence that in April 2022, the FDIC issued FIL 1622, and the Securities and Exchange Commission (SEC) issued SAB 121. There was a coordinated effort to choke off not just banks acting as custodians for crypto businesses, but also the ability of those businesses to provide basic demand deposit services. If a crypto company loses its on-and-off ramp to the banking system, it cannot function and this is exactly what has happened in the U.S. We are a domestic, community-focused institution, not an offshore service, with a market solution that requires a 360-degree approach to services. We have lost seventy-three percent of our banks in the last four years and this is not sustainable. We must make it easier to start and run banks. We all know that debanking is wrong, and the solution is a market-based approach, not more regulation.
Aaron Klein, Senior Fellow in Economic Studies at Brookings Institution
To combat debanking, all banks and credit unions should be required to offer “Bank On” style accounts, which are low-fee, non-overdraft accounts recognized as a best practice by the American Bankers Association. If these are the standard, no federally insured institution should be allowed to refuse them. Eliminating surprise fees and predatory overdraft practices is crucial. Faster payments would save Americans over $100 billion in fees, with The Fed ignoring legal mandates to reduce check-processing delays. The Payments Modernization Act, introduced by Senators Warren and Van Hollen, would fix this by forcing real-time payments into law. AML rules also need reform because when Congress set the $10,000 currency transaction report (CTR) limit in 1972, SARs have since increased tenfold, fueling unnecessary financial surveillance. The SAFE Banking Act was a step forward but does not go far enough. “Do-not-bank” lists, like ChexSystems, unfairly debank people for poverty, not fraud. The Bank On program has helped, but its solutions must be expanded system wide. Debanking is a systemic issue harming millions, reinforcing poverty and financial exclusion. Fixing it requires regulatory action and banking reforms to ensure equal access to financial services for all.
Discussion
Chairman Scott (R-SC): The Biden Administration took numerous actions that contributed to the debanking of crypto firms and creating a climate where banks feared regulatory backlash. Can you share your interactions with federal banking regulators? Ring: FIL 1622 was not unreasonable on its face regarding safety and soundness, but examiners used it to block banks from being on- and off-ramps for legal crypto businesses. The real issue was preventing legal businesses from even having bank accounts, but that has been rescinded. Similarly, SAB 121, requiring crypto holdings to be booked as liabilities with capital against them, was absurd. The biggest issue is the betrayal of trust in the reliability of the banking, legal, and justice systems. That trust is foundational to the American experiment, and its erosion has been devastating for the crypto industry.
Senator Warren (D-MA): Did you have an opportunity to appeal debanking decisions made by your banks? How would the CFPB’s rules help prevent unfair debanking? McCauley: There was no opportunity for discussion or appeal. It would be helpful to have a database to track consumer complaints. Many individuals in the cryptocurrency industry were debanked, and I wish agencies had assisted them. The CFPB is at the forefront of protecting consumers and ensuring fair banking practices, unlike bank regulators who are too often focused on the banks themselves. There are five key rules the bureau has that would help with preventing unfair banking practices: the contract rule; the UDAP (unfair discriminatory practices) rule; the larger participant rule, which would grant oversight authority over platforms such as Venmo and PayPal; the data broker rule, which includes credit reporting agencies that maintain de facto “do not bank” lists with limited appeal processes; and Overdraft rules, which contribute to individuals leaving the banking system.
Senator Rounds (R-SD): Do you perform AML/KYC checks and other normal functions required by banks? Did banks want to stop working with you? McCauley: As a condition of our charter, we hold cash for our clients at partner banks. None of our activities are illegal or would discourage individuals from using our services, aside from the fact that we hold cryptocurrency in trust for others. The bank that debanked us was actively trying to work with us more. However, they were concerned about regulatory risks, despite the fact that we are not involved in any illegal activity. Banks are looking for business, but due to the current regulatory environment, they are forced to decide whether they want to engage with certain industries. Regulators have identified certain legal businesses as problematic, and banks face pressure when they attempt to work with them.
Senator Rounds (R-SD): Are banks unwilling to do business with cryptocurrency companies without legitimate grounds? McCauley: We have always followed the rules and regulations. The bank that debanked us was actively trying to work with us more and this was consistent across the board. Banks did want to work with us and were not discriminating against us, but they were concerned about regulatory risks, even though we are not associated with any illegal activity.
Senator Reed (D-RI): Can you elaborate on the importance of maintaining reputational risk as an evaluation factor and the necessary safeguards? Does the frequent use of cryptocurrency to finance illicit activities put additional pressure on you to be more stringent in regulation? Klein: Reputational risk is a legitimate concern and an important component of banking regulations. However, it can be abused, which is why guardrails are necessary. The Bank Secrecy Act (BSA), which governs AML regulations, does not pertain to customer data but strictly to money laundering. I do not support the extent to which law enforcement has delegated its responsibilities to banks. This has become a Trojan horse for regulators to impose restrictions, such as prohibiting cryptocurrency activity under the guise of AML concerns. AML regulations should be a small component of the overall regulatory framework for cryptocurrency, and it should not take ten years to implement cryptocurrency regulations.
Senator Tillis (R-NC): Overregulation and inconsistent application of reputational risk have led to widespread debanking, but banks should manage risk freely without undue regulatory interference. Is debanking largely due to regulatory pressure? Gannon: Yes, regulators have broadened the definition of reputational risk to the point that it is entirely subjective and not linked to objective criteria. Having worked with large banks on planning, I can say that it is nearly impossible to plan when regulatory expectations are unclear.
Senator Kennedy (R-LA): Why are banks engaging in debanking? Is it due to regulatory pressure, or are bank executives enforcing their own political views? Ring: I do not believe regulators forced large banks to do this. It was an internal decision, similar to how Big Tech companies choose winners and losers. Banks are exercising their own discretion and attempting to regulate this could lead to unintended consequences, such as excessive compliance burdens when processing customer applications; Gannon: I disagree, I believe it is due to regulatory pressure; McCauley: It is absolutely the regulators. Banks want to work with cryptocurrency businesses but have been discouraged by the regulatory environment.
Senator Britt (R-AL): What happened to first Trump administration rules’ on implementing fair access regulations to prevent regulatory politicization rules? Gannon: They were revoked on January 20, 2021, when President Biden took office.
Senator Britt (R-AL): Does reputational risk have a real connection to the safety and soundness of a bank? Gannon: Congress has directed banking agencies to conduct supervisory activities, but the details of these activities are subjective and largely defined by regulatory agencies themselves. There is little to no evidence linking reputational risk to fundamental banking concerns such as capital, liquidity, or operations.
Senator Britt (R-AL): Can you elaborate on the management rating system and why you believe it is not always reflective of actual bank management? Gannon: Banks today are more resilient, have higher capital reserves, and greater liquidity than ever before. They have made significant investments in technology and compliance. While no bank is perfect, reputational risk has little to do with these core banking fundamentals.
Senator Ricketts (R-NE): Did regulators exceed their statutory authority in Operation Chokepoint 1.0 and 2.0 by focusing on vague metrics and reputational risk instead of safety and soundness? Gannon: The effect of both operations was the closure of many small, legally operating businesses. Regulators effectively made these businesses illegal without Congressional approval, which is a distortion of the proper relationship between regulators and Congress. Regulators derive their authority from Congress, not the other way around. Regulators clearly avoided notice-and-comment rulemaking and proper cost-benefit analysis. While their intent is unclear, the effect was significant.
Senator Banks (R-IN): Was there an opportunity to recover losses after being debanked? McCauley: No, there was no recourse and no direct recovery mechanism for the bank account. We appealed to the OCC, notifying them of the situation, but they could not intervene or provide support in securing a new account. This resulted in the shutdown of our trading business, which had been processing hundreds of millions in monthly volume. Many of our institutional investors, who play a key role in retail financial products like ETFs, were affected as a result. Many of the largest banks in the country were in active discussions with Anchorage about expanding their crypto services, including becoming crypto custodians. They saw business opportunities in cryptocurrency, and some were preparing to integrate it into their service offerings. The decision to reverse course was not their own; it was due to regulatory pressure. Instead of merely pausing expansion, they were forced to close accounts and exit the sector entirely, showing that this was not a business-driven choice but one imposed upon them. By pushing crypto out of the banking system, regulators have made it harder to track and regulate the industry. If the goal was to increase transparency, forcing crypto businesses outside the regulated banking system would be counterproductive. The best way to ensure oversight and compliance is to integrate crypto within traditional financial institutions, not push it into unregulated spaces.
Senator Warnock (D-GA): Do you agree FDIC is understaffed and that this understaffing has consequences for bank examiner’s ability to communicate with banks provide regulatory clarity, especially when banks are dealing with newer businesses that offer complicated or potentially risky financial products or services? Klein: Absolutely. The current hiring freeze is a blunt instrument that prevents regulators from providing much-needed guidance. Without enough examiners, banks struggle to receive timely responses on compliance issues, particularly when dealing with new industries or complex financial products. The FDIC also plays a critical role in responding to bank failures, with recent bank collapses stretching already thin resources, and as well as threatening the agency’s ability to handle and stabilize future crises for consumers.
Senator Hagerty (R-TN): Are American businesses relocating due to regulatory hostility? Are BSA and AML rules being weaponized for political purposes? McCauley: Yes. The FDIC forced many crypto businesses to move their operations to jurisdictions where they felt they would be treated fairly. Countries with clear and supportive regulatory frameworks have benefited at the expense of American innovation. We should want crypto exchanges and stablecoin businesses to operate in the United States under our regulatory oversight, rather than driving them abroad. The current system relies too heavily on generating massive amounts of data through SAR filings without clear priorities. Instead of carefully analyzing risks, banks are incentivized to over-report, which makes it difficult to distinguish between real threats and politically motivated de-banking. The partnership between regulators and banks needs to be modernized, using better data to ensure legitimate enforcement rather than arbitrary or politically driven account closures.
Senator Gallego (D-AZ): How does your institution monitor suspicious activity, how often would you say you detect potentially suspicious activity among your base clients, and have you declined clients due to risk concerns? How can we address inefficiencies while maintaining regulatory oversight? McCauley: We use blockchain analysis tools that go beyond traditional banking methods, with traditional banks relying on point-to-point transaction monitoring that provides limited visibility. Blockchain’s transparency allows us to track fund movements more comprehensively. Since our client base consists mainly of institutional investors, we do not encounter many high-risk customers, but when we do detect suspicious activity, we follow regulatory protocols to report it properly; Ring: The process requires three hundred pages of submissions, three rounds of additional information requests, and an all-hands call with the FDIC, Federal Reserve, and CFTC. Regulators focus on minor compliance details rather than core risks like liquidity, which contributed to bank failures in 2023; Klein: I disagree, Silicon Valley Bank failed due to poor investment decisions, not just liquidity issues, holding ninety-three percent uninsured deposits. Regulators bailed out SVB and indirectly stabilized crypto stablecoins tied to it, showing the interconnection between crypto and banking. Selective intervention raises concerns about regulatory consistency.
Senator Cramer (R-ND): What do you think of the Fair Access to Banking Act, which prohibits discrimination but does not force banks to serve specific industries? Should banks that discriminate with politicized agendas against legal, large industries still receive federal insurance? Ring: While the bill is well-intentioned, it could lead to excessive reporting requirements for every declined banking relationship. The free market is always the best way to solve these problems; let banks choose their customers freely; Gannon: What needs to be done, in alignment with the act you have introduced, is to ensure greater transparency and provide more notice when these types of decisions are made. One of the key steps would be reviving Executive Order 13892, which was issued in 2019 and provided more due process to folks who wish to contest the actions of regulators. Then, the due process clause itself allows for greater fairness. A law that puts that in statute would be better.
Senator Lummis (R-WY): A confidential Fed implementation handbook instructs staff to consider whether a person has made a controversial comment and is clear evidence of Operation Chokepoint 2.0. Gannon: That is deeply concerning. The Fed Bank of Kansas City has complete and unfettered discretion over access to the payment systems. Reputational risk assessments are subjective and entirely within the eye of the beholder; Klein: I completely agree. I have been deeply concerned by the Kansas City Fed’s actions in blocking institutions, such as a credit union in Colorado, from accessing the payment system. That kind of policy is alarming; Ring: I would consider this a clear example of reputational risk being misused; McCauley: This is a tacit attempt to suppress speech that regulators find undesirable.