Operation Chokepoint 2.0: How Crypto Firms Are the New Target of Financial Exclusion

Recent discussions surrounding "debanking" have highlighted the challenges law-abiding crypto firms face in accessing banking services. While banks play a vital role in detecting and reporting financial crimes, the regulatory framework governing their actions is often inefficient and opaque. The existing compliance landscape forces banks to file millions of Suspicious Activity Reports (SARs) and categorize customers as "high risk" without clear evidence of wrongdoing, raising concerns about fairness and transparency. Addressing these inefficiencies will benefit both financial institutions and legitimate businesses while enhancing law enforcement’s ability to effectively combat financial crime.

The Current State of Play

Banks dedicate significant resources to preventing illicit actors like terrorists and drug traffickers from exploiting the financial system. However, the regulatory approach to anti-money laundering (AML) and countering the financing of terrorism (CFT) is flawed in several key ways:

• Overuse of Suspicious Activity Reports (SARs): The current bank examination system incentivizes financial institutions to err on the side of caution by filing excessive SARs. Banks fear regulatory penalties for failing to report potential illicit activity, even if the risk was only evident in hindsight. However, with no penalty for over-reporting, the system is flooded with unnecessary filings, making it harder to identify actual criminal behavior.
• Secrecy Surrounding SARs and Account Closures: SARs are confidential, and banks are legally prohibited from disclosing details to customers regarding why their accounts are closed. This lack of transparency can leave businesses in the dark, making it difficult for them to challenge or rectify their status.
• Regulatory Pressures on Risk Designations: Bank examiners can compel institutions to label certain accounts as "high risk," which significantly raises compliance costs and regulatory scrutiny. Even law-abiding customers can find themselves derisked based on perceived threats rather than actual risk, often without clear justification.

The Impact of Overregulation and Opacity

Concerns about debanking are not new. Businesses from various industries and geographies have struggled for years with "derisking"—a process where banks limit services to mitigate perceived AML risks. Additionally, the growing scrutiny of reputational risk further restricts access to financial services for legitimate businesses.

Crypto-related businesses have become the latest target of this trend. Some banking agencies have required banks to obtain prior approval before engaging with crypto-related activities, effectively discouraging partnerships between banks and legitimate crypto firms. This echoes Operation Chokepoint 1.0, a controversial initiative that pressured banks to sever ties with payday lenders and other politically disfavored industries, often without clear legal justification.

At the same time, opaque regulatory guidance has increased uncertainty. While banking agency guidelines technically state that banks are not prohibited from providing services to lawful businesses, secretive supervisory practices effectively act as a hidden barrier. Recently revealed supervisory letters from regulatory agencies demonstrate how examiners can pressure banks to "pause" crypto-related activities without issuing formal prohibitions. These informal, behind-the-scenes interventions create uncertainty and hinder financial innovation.

Moving Toward Meaningful Reform

Addressing these challenges requires a comprehensive overhaul of the AML and bank examination regimes to create a more transparent, risk-based, and effective system. Policymakers should consider the following reforms:

• Refining AML Oversight: Implementing the Anti-Money Laundering Act of 2020 more faithfully will help financial institutions focus on the highest-risk transactions rather than adopting a one-size-fits-all approach to compliance. Additionally, revising the current FinCEN proposal to align with a truly risk-based framework will improve the system’s efficiency.
• Overhauling the SAR Regime: SAR requirements should be reevaluated to reduce unnecessary filings and ensure that law enforcement receives more targeted and valuable intelligence.
• Reforming the Bank Examination System: Eliminating hidden regulatory levers that dictate how banks operate will restore fairness and predictability to the system. Banks should not face undue pressure to sever relationships with customers based on vague risk concerns.

Conclusion

The current regulatory environment disproportionately impacts law-abiding crypto firms and stifles legitimate financial activity under the guise of risk mitigation. By refining AML oversight, improving transparency in bank examinations, and eliminating unnecessary regulatory burdens, policymakers can create a fairer and more effective system. A risk-based—rather than a checkbox-driven—approach will allow banks to better detect actual financial crimes while ensuring lawful businesses have access to essential banking services.