An answer to politically motivated debanking
An answer to politically motivated debanking
The power of a neutral protocol like Bitcoin provides an antidote to the risk-based banking enforced by state KYC/AML rules
Bankers make for easy villains.
In the 1946 Christmas classic, It’s a Wonderful Life, Mr. Potter is the ultimate foil: a dastardly businessman who owns every piece of town and wants to use his minority board position to overtake the neighborhood bank for being too charitable in its loans to members of the community.
Only George Bailey (played by Jimmy Stewart), through the intervention of Christmas angels, musters up the strength to oppose him and save the town.
In Shakespeare's Merchant of Venice, written in the late 1500s, the moneylender Shylock is the enemy of the play, demanding a “pound of flesh” for a defaulted loan by our main hero Antonio, an otherwise successful merchant.
Indeed, the trope of the evil banker persists throughout the Western literary and cultural canon, even playing a big role in the Old and New Testaments and shaping many mantras of the Christian religion.
In our present age, banks are once again in the crosshairs, albeit for very different reasons. It’s the age of debanking.
THE REAL BANKING CRISIS
To contextualize this, we must understand how banks have interacted with our public institutions in the last several decades.
This is much beyond the billions or even trillions of dollars in bailouts from Western governments throughout several banking crises, whether in 2008, through central banks like the Federal Reserve, or the recent actions to save Silicon Valley Bank and Signature Bank with government deposit insurance funds.
For years, central banks around the world kept rates at historical lows, offering massive pumps of liquidity into markets and banks to keep lending at a constant flow. Money flooded the system, and if you believe the warnings of Austrian economists, this loose monetary policy facilitated a financial and banking crisis we are only coming to terms with.
Now, as inflation heats up and rates get jacked up across the world, “tight” money is the new guiding star. The introduction of Bitcoin and its crypto offspring has opened an entirely new world of true borderless, censor-proof cash that exists mostly outside the traditional financial sector.
At the same time, governments starved of resources are turning to punitive measures to ensure citizens and firms are “paying their fair share”. Political movements are giving them extra ammunition to crank up the oppression.
In 2023, many bank customers are facing a new regime that routinely freezes balances, limits transactions, or even shuts down accounts entirely. The Canadian trucker Freedom Convoy and UK politician Nigel Farage are only the latest public examples.
The reason given for debanking varies but ultimately comes down to a question of risk exposure. For Farage, it was questions about his business dealings and perhaps his political views. Others are tied to questions about money laundering, terrorism, or people at risk of being “politically exposed”. Often, banks are not required to disclose why they are shutting off banking access to a customer.
For the Canadian truckers, it was about an instantaneous response to the invocation of the Emergency Act, which froze the assets (and Bitcoin addresses) of those involved in raising funds for the downtown Ottawa protest.
In free societies, banks are (for the most part) owned and operated as private entities. They must apply for and receive various licenses and permits from state authorities to custody customer funds, make loans, and offer financing to various businesses. These banks exist at the remit of governments and must dedicate a growing part of their revenue to compliance with state mandates.
WHY DEBANKING HAPPENS
In order to offer banking services, a firm must adhere to a complicated mix of regulations and disclosures that have only grown more voluminous in the past two decades.
The US PATRIOT Act, passed in the wake of 9/11 and the Dodd-Frank Wall Street Reform and Consumer Protection Act, passed after the 2008 financial crisis, have ratcheted up the compliance that banks must follow.
More precise KYC/AML rules (know your customer and anti-money laundering) require banks not just to gather all known information on their customers, but also to police their transactions and ensure there’s no funny business.
When banks decide that an account holder is too risky, it is a complicated calculation that serves the regulatory overlords. Whether it’s risk of fraud, political exposure, or money laundering concerns, banks have now been deputized to run financial surveillance operations on their customers or risk losing their business.
It’s an unfortunate situation that will leave many vulnerable to losing their accounts, many of them innocent actors. In the pursuit of actual criminals, terrorists, or you name it, banks now must treat all non-routine transactions as suspicious. And that is detrimental to the average bank account holder.
How this is carried out is still unclear. Many neobanks and larger institutions use algorithms to determine account risk, and some have likely been too harsh in cutting off bank access. But at its core, the debanking crisis stems from overly burdensome government regulation, and we must admit that. The rules are the villains.
SOLVING IT
Some measures are being considered to stop the debanking. In the US and the UK, there is potential legislation to ensure citizens’ “rights” to a bank account. Some European nations guarantee their citizens banking services through the Post Office, and others have proposed this where it doesn’t yet apply.
But beyond using yet more legislation and government force, why not turn to the censorship-proof Bitcoin protocol? Why not embrace the privacy-facing tools offered by many developers and entrepreneurs in the Bitcoin space to supercharge our post-banking financial life?
It’s surely something Farage has been exposed to, considering he’s spoken at various Bitcoin conferences and been interviewed on Bitcoin-centric media. But he seems set on a political, rather than technological, solution.
In a situation where employees begin receiving their pay in sats, and we begin exchanging value for Bitcoin to replace fiat currencies, outside the regulated banking system, we can envision an ecosystem where debanking is less of a concern. Bitcoin fixes this.
Of course, we are far from a Bitcoin silver bullet when it comes to banking and compliance issues. Acquiring Bitcoin is still mostly done via regulated exchanges, which are now facing their own KYC/AML regulations that are even more onerous than those imposed on banks.
And on-chain Bitcoin, at present, remains entirely transparent and can be easily demystified by chain surveillance companies now often working hand-in-hand with governments and tax authorities.
If we want to conjure a solution to the problem of debanking, we need people to take Bitcoin seriously. That means more adoption, more trade, and more tools to make it a true freedom technology. Some of this already exists, but we need much more volume to make it happen.
Will that save our wealth by embracing the golden coin and eschewing traditional banks? At least for me, it’s a principal tool I’m keeping sharpened. I hope the same is true for you as well.
Best,
Yaël
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