Coinbase CLO shares data on crypto hedge funds debanking, demands for answers

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As a researcher who has been closely following the crypto industry for years, I find the recent statement by Coinbase Chief Legal Officer Paul Grewal to be both alarming and unsurprising. The issue of traditional banking services denial to crypto hedge funds has been circulating in the media for quite some time now, with Operation Choke Point 2.0 being a recurring topic.

The Coinbase Chief Legal Officer Paul Grewal took to X to demand answers after learning from the AIMA survey that 75% of crypto hedge funds face issues with accessing basic banking services. None of the traditional alternative investment managers (e.g., real estate) experienced similar troubles with the banks.

The Grewal’s X post raises questions that have already been circulating in the media for quite a while. You have probably heard of Operation Choke Point 2.0 or read about the redacted documents published by Coinbase in which the Federal Deposit Insurance Corporation openly asks banks to pause all the operations associated with cryptocurrencies. The Alternative Investment Management Association (AIMA) survey report furnishes these concerns with new statistical grounds. Alongside Grewal, AIMA calls for action in the press release.

As a cryptocurrency investor, I’m left wondering: why are three-quarters of crypto hedge funds experiencing problems with essential banking services over the past three years, while no such issues were reported by 20 other alternative investors in a similar survey? It seems odd that most of these crypto funds are being given the cold shoulder by their banks. Kudos to @AIMA_org for shedding light on this data – we need answers, and we need them urgently.

— paulgrewal.eth (@iampaulgrewal) December 20, 2024

In October, I conducted a survey, and the findings are troubling as they primarily impact crypto hedge funds, according to AIMA’s report. Before delving into the main insights from the press release, it is essential to highlight that our investigation uncovered concerns exclusive to this sector. To provide a contrast, we surveyed 20 alternative investors not engaged in cryptocurrencies, and none of them encountered difficulties when accessing basic banking services.

Table of Contents

The key takeaways from the AIMA press release

The key points from the AIMA press release are as follows:

  1. AIMA surveyed 160 crypto hedge funds. Three-fourths of them have contested facing troubles while accessing or growing standard banking services in the last three years. 
  1. The troubles may include complete service denial. Only 2% of the hedge funds whose relationships were about to be terminated received a formal explanation for that. The named reason was that the banks were limiting crypto clients. 
  1. According to AIMA, debanking of crypto businesses (the so-called “Operation Choke Point 2.0”) undermines the operational efficiency of the U.S. crypto sector, negatively impacts investors’ confidence, and harms the acquisition of the skilled professionals.

According to John D’Agostino, a member of the AIMA Digital Assets Group who serves as co-chair, these banking issues are not just minor concerns; rather, they significantly impact the broader progress of the United States economy and technological advancement.

The complete report is available here.

AIMA calls for change, Trump vows to terminate Operation Choke Point 2.0

AIMA advocates for collective action to overcome the obstacles encountered in the crypto business. They believe that effective collaboration with the newly elected government, banking industry leaders, and policy makers is essential to finding a resolution.

In the 2024 Presidential race, Trump, expressing his opposition towards Operation Choke Point which began during Obama’s presidency, promised to close down Operation Choke Point version 2.0 immediately after being elected.

In light of the remarks made by Jerome Powell at the FOMC event, it seems clear that Trump will encounter several critics who are skeptical about cryptocurrencies, some of whom hold significant power and influential positions.

Wait a minute! Isn’t Operation Choke Point 2.0 just a conspiracy theory?

To start off, let’s delve into some background. Operation Choke Point, a clandestine initiative launched during President Obama’s term, was reportedly designed by the Department of Justice to restrict banking services for various types of wrongdoers, including those dealing in controversial items such as ammunition, adult content, drug paraphernalia, and so forth. The concept behind it was straightforward: if we can deny access to financial transactions for these offenders, they won’t be able to commit illegal acts, thereby reducing the number of crimes significantly.

Initially, the operation garnered attention because, with no set boundaries, debanking transformed into a tool for silencing political adversaries rather than safeguarding society from wrongdoings. In 2013, critics began to suspect that Operation Choke Point’s primary objective was targeting political opponents instead of combating fraud and crime. During the 2016 Presidential race, Donald Trump pledged to discontinue this operation.

It’s not yet clear if a contemporary version of Operation Choke Point, known as Operation Choke Point 2.0, actually exists. However, leaked documents and cases like those mentioned in the AIMA press release have led people to suspect that there is an operation similar to Operation Choke Point currently in place, aimed at cryptocurrency companies. This unofficially-named operation appears to be active, even though it doesn’t have an official title. While the FDIC seems to play a significant role in this operation, other institutions seem to also encourage banks to restrict services for clients involved in cryptocurrencies.

Some analysts discussing this matter believe the FDIC’s actions towards cryptocurrency are a reaction to the chaotic occurrences that affected the crypto market in 2022. These events include the failure of FTX, the depegging and collapse of TerraUSD, as well as Celsius and Voyager temporarily halting user access to their accounts.

Let’s take a closer look at the documents Coinbase revealed in December 2024. We will discover that the FDIC was urging banks to discontinue collaborations with cryptocurrency firms prior to these incidents. Although the events mentioned earlier are not directly linked to the FDIC’s actions, they occurred during a period when banks were already compelled to suspend services for their crypto clients due to external circumstances.

Possible implications of Operation Choke Point 2.0

Banks lack a specific set of criteria to judge whether their clients can utilize their services, especially when it comes to those involved in cryptocurrency transactions. If banks are uncertain about the risk level they’re comfortable with, they might choose to restrict services for these clients as a precautionary measure against potential criticism from the Federal Deposit Insurance Corporation (FDIC).

AIMA (Assn. for Financial Markets Industry) has previously discussed potential ramifications. At present, the high pressure on banks and ambiguous guidance are expected to pose challenges to innovation within the United States, potentially making it less appealing for firms involved in the cryptocurrency industry.

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2024-12-26 14:16