Crypto and FinTech Cry Foul Over Debanking — Could Real Issue Lie in Risk?

FinTech and crypto investor Marc Andreessen kicked off a firestorm over the weekend by alleging, on Joe Rogan’s podcast, that those two sectors — and dozens of companies backed by his namesake firm, Andreessen Horowitz — were being fundamentally “debanked” by U.S. financial institutions (FIs).

“Did you know that 30 tech founders were secretly debanked?” tweeted Elon Musk on X, linking to a clip of the podcast.

The term “debanking” often refers to the practice of financial institutions, such as banks, closing or restricting access to accounts or refusing services to certain individuals, organizations or industries. This can occur for various reasons, including regulatory concerns, perceived risks, compliance issues or reputational considerations.

For the past few days, Andreessen has continued retweeting alleged debanking stories from founders. Neither he nor his fund replied immediately to PYMNTS’ request for comment.

But while the tech investor’s remarks may resonate with the frustrations of many in the cryptocurrency and FinTech sectors, the reality could be far more nuanced than a political assault on crypto and FinTech.

After all, innovation typically moves faster than regulation, and the growing strain between traditional banks and future-fit FinTech and crypto firms can also be in part chalked up to the inevitable consequence of outdated regulatory frameworks, stricter know your customer (KYC) and anti-money laundering (AML) standards, as well as heightened fraud risks.

Read more: Surging Business Innovation Puts Compliance Role at Center of Growth

The Regulatory and Risk Elephant in the Room

At the heart of the issue is potentially the lack of a clear, comprehensive regulatory framework to address the unique risks posed by the FinTech and cryptocurrency industries. Financial institutions, tasked with navigating a labyrinth of overlapping and often contradictory rules themselves, can commonly be left with little incentive to take on high-risk clients when the compliance burden could outweigh any potential gains.

For example, news broke on Monday (Dec. 2) that the a16z-backed FinTech Revolut was facing a lawsuit tied into a wave of anti-fraud complaints. The case covered Monday is among thousands of complaints filed against U.K.-based Revolut relating to authorized push payment (APP) fraud, scams in which criminals dupe people into sending money online to an account beyond their control.

Another a16z-backed FinTech, banking-as-a-service (BaaS) provider Synapse, collapsed in April, sending shockwaves throughout the sector and entangling four banks, American Bank, AMG National Trust, Evolve Bank and Trust and Lineage Bank, along with it.

“The regulators are now awake,” Thredd CEO Jim McCarthy told PYMNTS in June.

Within the crypto sector, specters of past failures like FTX and ongoing rates of fraud loom even larger. For banks whose risk teams may not have had systems in place to prevent criminal and downstream regulatory violations like those recklessly deployed by FTX, it can be easier to embrace a mindset where the innovation juice just isn’t worth the squeeze.

The crypto landscape remains one where the fraud rate is high, and the tools to mitigate this fraud are expensive. Until that changes, banks could hold the view that the industry as more trouble than it’s worth.

After all, traditional banks are highly incentivized to play it safe. The penalties for failing to identify illicit activity can be massive, not to mention the impact of the reputational damage. And the tightening of regulatory standards in the wake of high-profile financial scandals has created an environment where risk aversion is paramount.

Read more: Payments Execs Say Banking-as-a-Service Players Forgot the Banking Part

Moving Toward a Functional Framework

Debanking can create significant challenges for affected parties, especially if they rely on financial services to operate. For businesses, it might mean difficulty accessing payment systems, obtaining credit or even simply depositing funds. Critics argue that debanking can sometimes unfairly target legal industries or marginalized groups, raising concerns about financial inclusion and fairness.

Without a coherent framework that provides clear guidelines for banks, FinTechs and crypto companies to manage KYC/AML risks, the current stalemate may be likely to persist. Bridging the divide could ultimately require more than soundbites and instead rest upon a systemic rethinking of how financial institutions, regulators and innovators can coexist in an increasingly complex financial landscape.

PYMNTS covered Monday (Nov. 25) how cryptocurrencies, and more specifically their underlying blockchain technologies, have gone from a solution in search of a problem to a solution in hopes of some regulatory clarity. Of course, that clarity may come when cryptocurrency companies and other firms embrace and invest in, rather than resist, appropriate guardrails for their industries.