The Crypto Debanking Lie Distracts From Crypto’s Defrauded Customers
By Mark Hays
This month, Congress has held hearings discussing so-called debanking of crypto firms and a purported golden age of digital assets. The congressional Republicans are doing this to cozy up to the wealthy venture capital and crypto industry donors who claim — without substantive evidence — that regulators pushed banks to deny crypto firms access to banking services because of politics. This incendiary and misleading charge of de-banking is really a red herring to distract from the industry’s real goal: that banking regulators and banks ignore the very real risks of crypto to customers and banks themselves.
In 2022, many crypto platforms that were allegedly launched by financial geniuses collapsed due to reckless investments, shoddy management, laughable bookkeeping, or outright fraud and theft. The 2022-2023 crypto crash led to $2 trillion in losses, with millions of crypto customers around the world reporting widespread financial loss and harm. Some crypto bros had promised that their products were better or even safer than banks. Others falsely told investors that their products were protected by banking regulatory safeguards; they weren’t.
While the crypto bubble inflated, banks large and small opened their doors to crypto firms, gave them access to their payment networks, allowed depositors to buy crypto from their accounts, provided banking services to crypto firms, and more. Nor did banking regulators ban banks from dealing with crypto firms; the regulators primarily urged banks to exercise caution and prudence dealing with crypto. The irony is that banking regulators only urged banks to reduce their exposure to crypto after the crash that could have hurt the broader financial system. In response, the crypto industry has spent hundreds of millions of dollars on political donations and a public relations charm offensive to create an alternative history, where regulators were to blame for the fall. But banking regulators and banks didn’t cause the crypto crash, it was the fraudsters.
Many Americans have been harmed by crypto-related crime, scams, hacks, and fraud. Many more suffered huge losses due to the industry’s system wide collapse in 2022-2023. Here’s a short list of some of those people harmed by the crypto industry who the Republican cryptocrats won’t call to testify in any of these so-called de-banking side shows.
Nearly 2 million creditors of the failed and fraudulent crypto platform FTX. Sam Bankman-Fried (SBF) was once hailed by many as a genius. He graced the cover of Fortune, received massive funding from venture capital firms like Paradigm, and donated money across the political spectrum to curry favor for regulatory changes that, in retrospect, could have perpetuated the fraud for even longer had they gone into effect.
Like the Enron smartest guys in the room before him, SBF is now in prison for fraud for misappropriating billions of dollars of customer funds and hoodwinked investors and lenders out of $8 billion. FTX customers are slowly getting some fraction of their money back. While crypto industry players and policymakers have distanced themselves from SBF, other crypto business models aren’t that different from FTX. Many are vertically integrated trading apps that make money on both sides of trades and place risky bets with their customers’ money. And, they’ve used his political playbook — pouring money into the political system and calling for regulatory changes they claim are innovative but really amount to deregulation that just rewards bad business as usual.
The million users of failed and fraudulent crypto platform Terra/Luna. Terra/Luna’s founder Do Kwon was also hailed as a genius. Terraform Lab’s decentralized crypto trading platform, fueled by its algorithmic stablecoin Terra/Luna, was deemed a revolution in finance but was, in retrospect, a fraudulent house of cards. Luna was a venture capital darling: Jump Crypto, Coinbase Ventures, Lightspeed Venture Partners, Pantera Capital, and others invested in the platform. Failed platforms like FTX, Voyager, Celsius, and others invested in, borrowed from, or accepted investment capital from Terra/Luna as well. Mike Novogratz, the head of venture firm Galaxy Digital, had a tattoo of a howling wolf backlit by a moon drawn on his arm to demonstrate he was a true “Lunatic.”
Terra’s collapse triggered the crypto crash and revealed crypto’s decentralization lie: Big Crypto was and is just like Big Wall Street where a handful of firms were deeply intertwined with each other and controlled access and profits while the crypto bubble lasted. As many as a million people were impacted by Terra’s collapse, but it’s hard to know exactly how many given the chaos and opacity of the industry.
Nearly one million creditors of failed crypto platform Voyager. Voyager once claimed over 3.5 million customers, billions in customer deposits, and promotional support from the likes of Mark Cuban. It was a crypto lending and trading platform, blurring the line between a bank and an exchange. Voyager falsely claimed its customers’ deposits were FDIC insured; the FTC later imposed a $1.6 billion settlement on Voyager for its misleading statements. Yet, Voyager’s risky loans to other crypto firms defaulted when those companies went bust. Voyager’s customers were locked out of their accounts or were unable to fully redeem their assets. In the end, hundreds of thousands of creditors have since been locked in a years-long bankruptcy case, where they may get 35 percent of their assets back, at best.
Over half a million creditors of collapsed and fraudulent crypto platform Celsius. Celsius led by its CEO, Alex Mashinsky, was once hailed by investors and the business press as a “world-class business.” Celsius’ marketing decried traditional banks (“unbank yourself”) and presented Celsius as a safer crypto bank. But nothing could have been further from the truth. Celsius’ mishandled or lost customer assets, manipulated prices of its own token, and lost tens of millions on risky bets and investments made with customer money. This past December, Mashinsky pled guilty to fraud charges involving the theft or loss of $5 billion or more. Many Celsius creditors have yet to recover their lost assets. During the company’s bankruptcy proceedings, customer after customer shared heart-rending details of financial loss.
These cases are just the tip of the iceberg, but the Republican members of Congress in the thrall of the crypto bros won’t call any of the crypto victims to these so-called de-banking circuses. The cryptocrats want the banking regulators and banks to ignore the very real risks to customers and banks, as we learned in the 2023 collapse of Silicon Valley Bank and others entwined with crypto firms. The ultimate goal is to use the false narrative of so-called debanking to require banks to take on crypto clients regardless of the known risks and curtail banking regulators ability to supervise banks or enforce basic safety and soundness rules. This crypto grievance is an effort to roll back prudential bank regulation and embed the endemic fraud of the crypto industry deep into the financial system, which would mean that the next crypto crash could reverberate across the entire economy. And why do the crypto bros want access to the banks? Just like bankrobber Willie Sutton said, “that’s where the money is.”
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