Following recent regulatory achievements and greater acceptance in the mainstream, the cryptocurrency industry continues to face an acute challenge: debanking or service denial. The widespread practice of financial institutions refusing to extend, or terminating existing, banking services to crypto businesses remains an extremely high hurdle for many companies.
The Debanking Dilemma: A Barrier to Growth
The source material highlights strong digital currency businesses attempts to obtain and retain traditional bank accounts. Most financial institutions have shied away from providing accounts or services for businesses involving digital assets for multifaceted reasons: fiduciary risk, reporting liabilities, and reputational risk. This reluctance has stifled the development of the peripheral cryptocurrency industry and its assimilation into the traditional financial ecosystem.
A Hopeful Glimmer: Attempted Changes through Legislation
Both the United States and Australia have recently seen some movement to curb the debanking practices. In the U.S., banks will soon be legally barred from refusing to serve crypto businesses due to a reputational risk judgment. Similarly, Australia’s Labor Party is attempting to pass new legal frameworks that would be more accommodating to the cryptocurrency industry. These actions are meant to assure banks that they will be offered more guidance and will not be second-guessed when dealing with crypto companies.
Banking the Industry: Capture by Regulation or Protectionist Discrimination?
The cryptocurrency industry has always blamed the conventional financial sector for their business discrimination. The ‘Operation Chokepoint 2.0,’ which aimed to fight money laundering, is an example of the narrative crippling crypto’s operational capacity because it was branded as suspicious for no valid reason.
Like any controversial issue, the debanking argument has its critics. Molly White, who authored Web3 is going just Great, believes that the narrative of debanking is a ploy used by crypto actors for promotion purposes. The author states that there is no real discrimination; rather, the narrative diverts legitimate scrutiny into compliance efforts and replaces them with a conviction that regulation is the real problem.
Legitimacy versus Risk Mitigation: A Balancing Act
The crux of the problem rests in the balancing act between the crypto industry’s attempt to gain legitimacy and the need of the financial industry to mitigate risks. On the one hand, banks are looking for ways to crypto-profit, while on the other hand, they are trying to navigate through the waters of potential money laundering, fraud, and lack of regulation.
Alternative Banking and the Search for Solutions
In lieu of these problems, some crypto firms are diversifying while others are heavily relying on stablecoins to manage their finances. Other firms are seeking partnerships with small to mid-sized regional banks and trust companies that have more willingness to deal with the digital asset space. Unfortunately, such workarounds are not very satisfactory because they raise operational risks and costs and add complexity.
The Path Forward: A Call for Clear Regulation
In essence, the source material proposes that the fundamental answer to debanking lies in defining particular and complete regulations for the cryptocurrency industry. Such regulations will enable banks to engage with crypto businesses, operate securely, and mitigate risks associated with providing guidance necessary to foster stability in the system.
