[Senate Hearing 119-364]
[From the U.S. Government Publishing Office]
S. Hrg. 119-364
INVESTIGATING THE REAL IMPACTS OF DEBANKING IN AMERICA
=======================================================================
HEARING
before the
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED NINETEENTH CONGRESS
FIRST SESSION
ON
EXAMINING
ACCESS TO FINANCIAL SERVICES
__________
FEBRUARY 5, 2025
__________
Printed for the use of the Committee on Banking, Housing, and Urban
Affairs
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Available at: https: //www.govinfo.gov/
______
U.S. GOVERNMENT PUBLISHING OFFICE
63-425 PDF WASHINGTON : 2026
COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
TIM SCOTT, South Carolina, Chairman
ELIZABETH WARREN, Massachusetts, Ranking Member
MIKE CRAPO, Idaho JACK REED, Rhode Island
MIKE ROUNDS, South Dakota MARK R. WARNER, Virginia
THOM TILLIS, North Carolina CHRIS VAN HOLLEN, Maryland
JOHN KENNEDY, Louisiana CATHERINE CORTEZ MASTO, Nevada
BILL HAGERTY, Tennessee TINA SMITH, Minnesota
CYNTHIA M. LUMMIS, Wyoming RAPHAEL G. WARNOCK, Georgia
KATIE BOYD BRITT, Alabama ANDY KIM, New Jersey
PETE RICKETTS, Nebraska RUBEN GALLEGO, Arizona
JIM BANKS, Indiana LISA BLUNT ROCHESTER, Delaware
KEVIN CRAMER, North Dakota ANGELA D. ALSOBROOKS, Maryland
BERNIE MORENO, Ohio
DAVID MCCORMICK, Pennsylvania
Lila Nieves-Lee, Staff Director
Jon Donenberg, Minority Staff Director
Cameron Ricker, Chief Clerk
Shelvin Simmons, IT Director
Pat Lally, Assistant Clerk
Sheryl L. Arrington, GPO Detail
Jason T. Parker, GPO Detail
(ii)
C O N T E N T S
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WEDNESDAY, FEBRUARY 5, 2025
Page
Opening statement of Chairman Scott.............................. 1
Prepared statement....................................... 49
Opening statements, comments, or prepared statements of:
Ranking Member Warren........................................ 3
Prepared statement....................................... 50
WITNESSES
Nathan McCauley, Cofounder and CEO, Anchorage Digital............ 5
Prepared statement........................................... 51
Stephen T. Gannon, Partner, Davis Wright Tremaine LLP............ 7
Prepared statement........................................... 54
Mike Ring, President, CEO, and Cofounder, Old Glory Bank......... 8
Prepared statement........................................... 85
Aaron Klein, Senior Fellow in Economic Studies, Brookings
Institution.................................................... 10
Prepared statement........................................... 87
Responses to written questions of:
Senator Cortez Masto..................................... 102
Senator Blunt Rochester.................................. 102
Additional Material Submitted for the Record
Letters and Statements submitted to the Committee................ 104
(iii)
INVESTIGATING THE REAL IMPACTS OF DEBANKING IN AMERICA
----------
WEDNESDAY, FEBRUARY 5, 2025
U.S. Senate,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Committee met, pursuant to notice, at 10 a.m., via
Webex and in room 538, Dirksen Senate Office Building, Hon. Tim
Scott, Chairman of the Committee, presiding.
Present: Senators Scott, Rounds, Tillis, Kennedy, Hagerty,
Lummis, Britt, Ricketts, Banks, Cramer, Moreno, McCormick,
Warren, Reed, Warner, Van Hollen, Cortez Masto, Smith, Warnock,
Kim, Gallego, Blunt Rochester, and Alsobrooks.
OPENING STATEMENT OF CHAIRMAN TIM SCOTT
Chairman Scott. I'd like to invite the witnesses to come
sit at the table. Thank you.
Good morning, and thank you all for being with us today.
We're here to address an issue that strikes at the core of
what it means to live in a free and fair society: access to
financial services.
Every federally legal business and law-abiding citizen
deserves to be treated equally, regardless of political views
or ideological leanings.
This is an issue that is deeply personal to me.
When my grandfather was growing up in the Jim Crow South,
banks did business with people they felt looked the right way--
based on the color of their skin.
One's ability to get a loan to finance their home or start
a business was based primarily on the color of their skin. And
in the 1940s, my mother experienced the same redlining that has
been persistent, pervasive, and unfortunate for decades.
Thankfully, our Nation continues to evolve in the right
direction.
And in the 1990s, when I was starting my small business, I
went to a bank and looked for an opportunity to get a loan.
I'll say, without any question, at that time as a kid growing
up in poverty in a single parent household, my best asset--Mr.
Ricketts--was a 1990, 10-year-old car with 253,000 miles. One
would not consider that an asset, perhaps a liability. But it
was my only means of transportation. And I will tell you,
without a doubt, for me, it was an asset.
The bank, however, completely helped me understand it was
not. However, in those days someone could get a character loan,
because of your time in a community, because of your
relationships with local and community banks. Because of that,
not only was my financial life changed, not only did my
American Dream become a reality, but more importantly, my
mother's American Dream became a reality. We saw the
strengthening of confidence in our banking system because
things had changed in the right direction. With that loan,
everything seemed to get better.
Had I not gotten that line of credit, I may not be here
chairing this Committee today. You see, my story is so
consistent with so many other stories that really reflects
positively on the American Dream.
In this country, access to credit is one of the
cornerstones of building your American Dream.
Owning a home and starting a business are challenging
journeys filled with complexities, and achieving success is
never a guarantee, nor should it be. That's why access to
financial services is so important.
The United States is home to a vast competitive network of
banks and payment providers, creating one of the most robust,
diverse financial services ecosystems on the planet.
It is this incredible landscape that offers countless
opportunities for homeowners and entrepreneurs to build a
healthy foundation and make strides toward achieving their
version of the American Dream.
However, it is incredibly alarming and disheartening to
hear stories about financial institutions cutting off services
to digital asset firms, political figures, and conservative-
aligned businesses and individuals.
Under the Biden administration, we've seen the rise of what
many are calling Operation Choke Point 2.0, where Federal
regulators exploited their power, pressuring banks to cutoff
services to individuals and businesses with conservative
dispositions, or folks aligned with industries they just didn't
like--like the color of one's skin in my family's history.
I wholeheartedly believe that debanking someone over their
political ideology is un-American and goes against the core
values that our Nation was founded upon.
Today we'll have an opportunity to hear from Anchorage
Digital's CEO, whose OCC-chartered bank was debanked, Old Glory
Bank's CEO, who started a bank to serve those who had been
debanked, and from a legal expert with extensive experience
navigating these regulatory abuses, and from a policy expert at
the Brookings Institution.
This hearing will also examine how practices similar to the
original Operation Choke Point have persisted, despite
assurances that they would end.
We'll investigate the role both regulators and financial
institutions have played in these harmful practices which hurt
not just businesses but also consumers and our entire economy.
This issue should concern every single American, regardless
of political affiliation and that's why I'm committed to a
bipartisan solution to stop this form of discrimination.
This hearing is just the beginning.
We are here to shine a bright light on these unacceptable
practices and to hold those responsible accountable. The
message is crystal clear: no regulator and no bank is above the
principles of fairness and market access.
Speaking of shining a light, I was so glad to see that just
a couple of hours ago, the FDIC under President Trump's
leadership released a fresh set of never-before-seen
supervisory documents, which further prove that Choke Point 2.0
was real.
I will be going through the documents in greater detail,
but rest assured for those in this room and those watching at
home, they paint a disgusting and disheartening picture of
abuse.
As Acting Chair Hill characterized them, these and other
actions sent the message to banks that it would be
extraordinarily difficult--if not impossible--to move forward
with crypto-related activities.
I commend the new FDIC leadership for its commitment to
transparency, but it is a shame that it took an election--an
election--for the agency to being following the laws of our
country.
Thank you. I look forward to hearing from our witnesses and
working with colleagues on both sides of the aisle to stop
debanking and protect every American's right to participate
fully in the economy.
Ranking Member Warren.
OPENING STATEMENT OF RANKING MEMBER ELIZABETH WARREN
Senator Warren. Thank you, Mr. Chairman. And thank you for
holding today's hearing on debanking. It's a real problem, and
it's something that I hope we can work on together.
People need access to a banking account in order to thrive
in today's economy. And the same goes for businesses. Without a
banking account, you just really can't get along.
``Debanking'' happens when a bank shuts down a customer's
bank account because they think that account poses a financial,
a legal, or a reputational risk to the bank. Once the bank
shuts someone out, the bank may share that information with
companies that get paid to maintain a Do Not Bank list--with
the result that the customer is blacklisted everywhere.
For me, this is straightforward. It doesn't matter who you
voted for, what you believe in, or the origin of your last
name--people shouldn't be arbitrarily denied access to their
banks, locked out of their accounts, or stripped of their
banking privileges.
To help identify what's going on, my staff reviewed the
Consumer Financial Protection Bureau's complaint database,
looking for cases where consumers reported that they were
unable to open accounts or that their accounts were wrongly
closed--classic debanking. Mr. Chairman, we put together a
supplemental memo on this data, and I'd like to make that part
of the Committee record.
Chairman Scott. Without objection.
Senator Warren. My staff identified 11,955 complaints--and
that is only the people who took the time to file complaints
and only during the past 3 years.
All of these complaints reported common themes: no warning,
no explanation, and no chance to dispute or appeal.
These people described how one day, all of a sudden, they
lost their place in the banking system.
We know from the consumer complaint hotline that millions
of Americans--of all political stripes--have had the same
experience.
Tens of millions of customers have been blacklisted by the
banking industry because they overdrafted their account a few
times.
Formerly incarcerated Americans have been debanked because
of their criminal history.
Some people have even been debanked merely for having the
same name as someone who has a criminal history.
Muslim Americans and Armenian Americans have faced
debanking on account of their last names.
Nonprofits and charities operating internationally have
been debanked through no fault of their own.
Lawful cannabis businesses have been unable to open
accounts, and employees of those businesses have been debanked.
This shouldn't be happening. And we need to figure out why,
and who is responsible. My staff did some more work here as
well. They found that just four big banks--Bank of America,
JPMorgan, Wells Fargo, and Citibank--accounted for half of all
the complaints filed at the CFPB.
Donald Trump was onto a real problem when he criticized
Bank of America for its debanking practices.
Banks may be taking shortcuts when it comes to assessing
risks. Rather than investing the time and the resources to
identify true criminal risks and shutting down those accounts,
big banks are relying on black box algorithms and middlemen
companies and shutting down accounts without doing careful due
diligence.
We can prevent these abuses. I know that the Consumer
Financial Protection Bureau is a favorite whipping boy of the
Republicans on this Committee, but the CFPB is the main agency
in our Government that is actively working to stop unfair
debanking.
Let me say that again. The CFPB is the one agency that is
actively working to stop unfair debanking. Right now, the
agency has five different rules either in place or in progress
that would help prevent debanking by addressing some of the
root causes, from overdraft fee practices to religious
discrimination. And the CFPB is working to hold banks
accountable when they close law-abiding citizens and
businesses' accounts for no good reason.
I sent a letter to President Trump today that walks through
the CFPB's work. And I'd like to make that part of the
Committee record.
Chairman Scott. Without objection.
Senator Warren. I said that the CFPB is the one agency
fighting back against debanking, but that may be at risk.
Earlier this week, Treasury Secretary and Acting CFPB Director
Scott Bessent halted all CFPB rulemaking, enforcement
investigations, and litigation against financial institutions
that are breaking the law--including the banks that are
wrongfully debanking their customers. The freeze Secretary
Bessent put on the CFPB means more Americans across this
country will be unfairly debanked, and they will the one agency
that is working to help them.
There is additional work to be done by the Treasury
Department, the Federal Reserve, the FDIC, and other regulators
to issue clear Anti-Money Laundering rules and guidance for
banks to follow, which would reduce the incentive to use
debanking as a form of risk management.
Mr. Chairman, I'll say again: I appreciate your holding
this hearing. Debanking is a real problem. I'm eager to work
with you and President Trump to support the CFPB's efforts to
make sure that everyone is treated fairly and that we put an
end to this debanking.
Chairman Scott. Thank you, ma'am.
I now recognize our first witness, Mr. Nathan McCauley, CEO
and Cofounder of Anchorage Digital. You may begin your
testimony. Thank you for being here.
OPENING STATEMENT OF NATHAN MCCAULEY, COFOUNDER AND CEO,
ANCHORAGE DIGITAL
Mr. McCauley. Thank you, Chairman, Ranking Member, and
distinguished Members of this Committee for having me as a
witness today on the important issue of debanking.
My name is Nathan McCauley. I'm the CEO and Cofounder of
Anchorage Digital, an institutional crypto platform that is
home to the Nation's only federally chartered crypto bank. I
grew up in Economy, Indiana, a population of about 150. Though
I came from what many call flyover country, and one of my first
jobs was grilling burgers at McDonalds--I had big dreams. I
wanted to be a computer engineer and entrepreneur. Early in my
career, I worked on cryptography as a security engineer. In
2017, after being asked for years by friends to help them
manage the private keys to their crypto wallets, my cofounder
and I decided to start a company to offer a safe way for
institutions to custody their crypto at scale.
That company is Anchorage Digital, with about 400 employees
around the globe, including 282 employees across 37 different
U.S. States and offices in South Dakota, New York, Portugal,
and Singapore. While we started out as a State trust company, I
believe that our company clients and the industry would benefit
from the highest regulatory standards. So we chose to pursue a
national bank charter under the OCC that would allow us to
offer crypto custody, staking, settlement, and other services
to our institutional clients.
We received the charter in January of 2021, the first and
still only of its kind. Today, we're privileged to safeguard
billions of dollars worth of crypto for institutions ranging
from crypto protocols to asset managers to sovereign wealth
funds.
I'm here today to talk about something I could not have
imagined when I started this company, not in America. That is a
story of how we were virtually shut out of the Federal banking
system despite being a Federal bank ourselves. Since January of
2021, we held a corporate bank account with a partner bank
which held client fees from custody and other services along
with general corporate funds for day-to-day expenses like
payroll and administrative expenses.
One day in June of 2023, we received an urgent email from
the bank saying they need to speak with us that day. On the
call, they told us they were closing our account in 30 days
because they were not comfortable with our crypto clients and
their transactions. They refused to provide any further
explanation or allow us to speak with a risk management team.
Needless to say, I was shocked. We had a positive
relationship with our bank for nearly 2\1/2\ years. Not once
had they raised any issues with our account. In fact, at the
time we were told our account would be closed, we were in
active talks to expand our relationship and new partnerships.
Separately, following the closure of the banks where we
held our capital reserve and fiat subcustody accounts for our
clients, we had extreme difficulty finding new bank partners.
We spoke to about 40 banks across the country and were rejected
by all of them, many telling us they had a blanket policy
against serving crypto clients.
So why did this happen? I believe that regulators pressured
banks to shut an entire industry out of the Federal banking
system. Why do I think this? Two things: a series of crypto
regulatory actions spanning from 2021 to 2023 and my own lived
experience.
First, in my written testimony, I go into great detail
about the long list of anti-crypto regulatory actions that led
to mass debanking of our industry. But in my view, the nail in
the coffin was the joint statement from the Fed, FDIC, and OCC
in January of 2023, warning national banks from serving crypto
clients or engaging in crypto activities of their own.
Second, I want to talk about my lived experience. Outside
of what happened to our company, I'm an investor in four crypto
companies that struggle to obtain and keep their bank accounts.
During this time, some of them actually had to shut down.
Further, I have at least two employees that have debanked
because what they believe is associated with the crypto
industry, including one as recently of December of last year.
Finally, I have spoken to dozens of crypto leaders that
have been debanked personally or had their crypto companies
debanked.
While Anchorage Digital was eventually able to find banks
willing to partner with us, the impact of nearly being shut out
of the banking system was devastating. It was extremely
disruptive to our business and our clients and contributed to
the very difficult decision to lay off 70 employees here in the
United States, about 20 percent of our staff.
To this day, our clients lack the ability to send wire
transfers to third parties, a basic banking service we
previously had access to. Furthermore, it abruptly ended
opportunities to provide subcustody to other national banks who
are actively exploring partnerships with us.
The irony of having trouble accessing the Federal banking
system despite the fact that we ourselves are a federally
chartered bank cannot be overstated. Congress is right to
investigate what happened to us and our peers across the
industry, to protect and promote fair and open access to
banking services for all law-abiding citizens and companies.
Thank you for the opportunity to appear today, and I look
forward to answering your questions.
Chairman Scott. Thank you, sir.
Mr. Stephen Gannon, Partner at Davis Wright Tremaine, you
are now recognized.
OPENING STATEMENT OF STEPHEN T. GANNON, PARTNER, DAVIS WRIGHT
TREMAINE LLP
Mr. Gannon. Good morning, Chairman Scott. I thank you and
the other Members of the Committee.
Chairman Scott. Hit your button.
Mr. Gannon. Thank you, Mr. Chairman.
Chairman Scott. Yes, sir.
Mr. Gannon. And good morning. And I thank you and the other
Members of the Committee for the opportunity to address you on
the matter of the underlying policies, processes, and norms
that have allowed debanking to continue.
I'm a partner at the law firm of Davis Wright Tremaine, and
for 20 years prior to that, I was a senior legal executive at
several large banks and bank owned broker-dealers.
Debanking has come to my attention, both in my in-house
roles and in private practice as a lawyer who represents both
banks and digital asset firms. Debanking, of course, is not
new. This Committee is familiar with the unfortunate history of
Operation Choke Point 1.0 in which former FDIC Chair Bill Isaac
described it as one of the most dangerous programs he had
experienced in his 45 years of service in the Government and
the private sector.
The Committee also has seen examples of debanking, both
this morning and on the record. One more may illustrate the
challenge posed directly to banks by virtually unbound
supervisory discretion. A small bank had been making tax refund
anticipation loans.
Those loans were legal then, and they're legal now. The
FDIC, however, instructed it to stop that business. The bank
refused. And according to a report by the FDIC's OIG, the bank
and its tax preparers then became the subject of a special
horizontal review staffed by 400 FDIC examiners.
I'll now address the building blocks used by regulators to
engage in debanking activity. They depend on broad, vague, and
malleable terms, always subject to reinterpretation by
supervisors. You could call it strategic ambiguity.
For example, reputation risk does not relate to the
financial condition of a bank but rather on how an examiner
perceives the reputation of the bank. And because reputation
risk can impact any aspect of bank management and bank risk, it
is literally everywhere and subject to unlimited discretionary
judgment of bank examiners. And in the same vein are terms such
as safety and soundness and risk of future harm.
Finally, there's the term management, the M element of the
well-known CAMELS rating system. Unfortunately, management has
come to mean almost anything the supervisors find to be
unacceptable, regardless of whether there is an impact on the
financial health of the bank. And a poor management rating can
have disastrous consequences for a bank's business going
forward.
Compounding the problem, this kind of arbitrary discretion
is not subject to meaningful challenge. Supervisory
examinations are shrouded in secrecy and are not available for
any effective review by the very banks whose information is
being analyzed. Bank regulators contend that everything done
within the envelope of an examination is confidential
supervisory information and that CSI is the property of the
regulator itself, even though that argument rests on weak legal
and constitutional grounds.
The digital asset industry has felt this impact with great
intensity. For example, in 2021 and 2022, using interpretative
letters, each banking agency promulgated an unusual prior
restraint requirement called a supervisory nonobjection before
any bank could engage in permissible crypto activities.
Notably, these letters met the definition of a rule under the
Congressional Review Act.
But they were never submitted to this body for review under
that law, and no bank has dared to disobey their mandates. This
exercise of nearly limitless regulatory discretion suffers from
a fundamental problem. It distorts the relationship between a
regulatory agency and Congress. Under Article 1, the entirety
of an agency's power is delegated to it by Congress. Not some
of it, all of it.
If an agency wishes to make a legal business illegal, it
must ask Congress for that power. Debanking of legal businesses
ignores that fundamental concept and also contravenes this
Administration's recent Executive order stating that regulatory
agencies are to, quote, protect and promote fair access to
banking services. The good news is that there are a series of
remedies that can be implemented, some starting even today, as
we discuss in our written statement.
But while those remedies look forward, it cannot be stated
strongly enough that the challenge remains to provide full and
complete remedies for those already harmed by banking.
Commentators wrote after Operation Choke Point 1.0 that we have
to demand that accountability and those remedies or we risk
setting a terrible precedent, that ideology can control our
regulatory agenda at the expense of banks and small businesses
alike. But despite the best efforts of Congress, the spirit of
Operation Choke Point 1.0 did not end in 2017. It simply
morphed into Operation Choke Point 2.0.
Mr. Chairman, history teaches us that if this time there is
no real accountability and no genuine remedies for the actual
damage done, one thing is certain. There will be an Operation
Choke Point 3.0. Thank you.
Chairman Scott. Thank you, Mr. Gannon.
I will turn to Mr. Mike Ring, President, CEO and Cofounder
of Old Glory Bank. You are now recognized. Thank you.
OPENING STATEMENT OF MIKE RING, PRESIDENT, CEO, AND COFOUNDER,
OLD GLORY BANK
Mr. Ring. Thank you, Chairman Scott, Ranking Member Warren,
other Members. Thank you for having me and allowing me to share
the story of Old Glory Bank which launched from beautiful
Elmore City, Oklahoma, in April of 2023, and became a market
solution to debanking. And Chairman Scott, we are a community
bank that does do character loans, and we would love to have
your business. Nathan, we have a program on being the on-off
ramp for crypto, and we would love your business.
[Laughter.]
Mr. Gannon. Do you have one for law firms?
Mr. Ring. You bet. I'm honored to speak on behalf of more
than 50,000 customers across all 50 States, our 88 passionate
employees, and our pro-America cofounders, including someone
here today. I've got radio and TV host Larry Elder with us
today, future Governor of California, I hope.
I've got the 27th Governor of Oklahoma and former two-term
Member of Congress with us, Mary Fallin-Christensen. I've got
former--one of our other cofounders, former copresident of Fox
News and the White House Deputy Chief of Staff of
Communications for President Trump's first term, Bill Shine,
with us. Of course, we have our brilliant and beautiful chief
legal officer who's also my wife of 20 years, Anne Marie Ring.
And two of our cofounders who could not be here today are
former Secretary of HUD Dr. Carson and America's favorite
patriot, country music icon John Rich. And hopefully he's
tweeting right now talking about this. I want to also thank Mr.
Wade Christensen, who's with us today from the great State of
Oklahoma whose family previously owned the bank we purchased to
launch Old Glory Bank and who are now co-owners of the bank.
So as we heard today, lots of debanking going on. And
there's two types the way I define it. There's the regulatory
type of debanking which other folks much smarter than I am will
talk about. And there's Operation Choke Point 1.0, 2.0, and
there's probably some 2\1/2\ in there somewhere.
And then there's participant debanking which is where the
big banks debank you. So other folks will talk about the
regulatory. But I just want to remind folks it cannot be a
coincidence that in April of 2022 both the FDIC put out FIL 16-
22 and the SEC put out SAB 121.
There was clearly--those are big organizations. They were
clearly working together to choke out not only banks acting as
a custodian for other people's customers' crypto but to stop
the demand deposit services of a bank. And if a crypto company
can't provide that on and off ramp, you choke out the business,
and that is what has happened in America.
But the more interesting part of it is the participant
debanking. And that is the voluntary effort by the big banks to
debank Americans who disagreed with them on the issues we all
know, whether it's COVID, the vaccines, or who supported Donald
Trump, including his wife who is debanked as we know, and other
conservative causes. And I don't know the First Lady, but I can
assure you she is not a money laundering risk, and she was
debanked.
The founders of Old Glory Bank saw what many of us saw. But
instead of sitting around and complaining about it, we all got
together and created Old Glory Bank as a market response. We
purchased a one-branch bank in beautiful Elmore City, Oklahoma,
on November 30th, 2022. And just 5 months later, working hard,
we launched the best digital-first banking service in America.
In less than 2 years, we grew from 10 million in deposits
to now over 170 million in deposits. We grew from 300 customers
in Elmore City to now more than 50,000 customers across all 50
States. We serve over 2,000 small businesses.
We have respectfully better products than the megabanks.
But our service is in Durant, Oklahoma, not offshore. Our
customers love us and we love our customers.
As part of our market solution, in less than 2 years, we
had to do a 360-degree approach. We had to do our own version
of cancel-proof PayPal called Old Glory Pay. We had to launch a
cancel-proof version of GoFundMe called Old Glory Alliance.
We launched Old Glory Cash-In so our customers can walk
into one of 88,000 locations across America and deposit cash.
You always talk about the friction point of banking online, how
do you deposit cash. We solved that with Old Glory Cash-In.
We are serving Middle America. And the one I'm most proud
of is Old Glory Protect. We have a free $100,000 line of duty
death benefit for our protectors, God forbid they're killed in
the line of duty.
John Rich and I show up at your house and give you $100,000
if you bank at Old Glory Bank. And the protectors are a big
group: law enforcement, military, firefighters including
volunteer firefighters, and importantly, U.S. Border Patrol
Agents.
We all know debanking is wrong. But I believe a simple
solution is a market solution, not regulatory with all respect.
We've got to keep--make it easier for banks to start and run.
And I'll close with this. In the last 2 years, 229 banks
closed or were merged. Only 8 were started. We've lost 73
percent of our banks in the last 40 years. It is not
sustainable.
We've got to make it easier to start and run banks. Thank
you.
Chairman Scott. Thank you, sir. Next, we'll hear from Mr.
Aaron Klein, Senior Fellow at Brookings Institution. You are
now recognized.
OPENING STATEMENT OF AARON KLEIN, SENIOR FELLOW IN ECONOMIC
STUDIES, BROOKINGS INSTITUTION
Mr. Klein. Thank you, Chairman Scott, Ranking Member
Warren, Members of the Committee. Thank you for the opportunity
to testify on the pernicious consequences of debanking in
America. All of the views I offer here today are my own.
Ten percent of American households are currently unbanked
or were unbanked at some point within the last year. Not having
a bank account adds significant costs, makes people less
healthy, and makes it impossible to fully participate in
America's increasingly digital economy. People are debanked
because the cost of basic banking is too high.
There are unpredictable fees. Banks don't offer the
services they want. There's a lack of trust in banks, concerns
about privacy, and problems opening an account due to
identification or bad credit histories.
Checking accounts are free for those who always have money,
while those living paycheck-to-paycheck pay a myriad of fees
that can easily reach over 500 dollars a year, making basic
banking unaffordable.
My written testimony illustrates how debanking harms
consumers and businesses and enumerates ideas for reform. I
want to highlight five proposals to combat debanking. First,
require all banks to offer and credit unions to offer BankOn-
style accounts. BankOn accounts are affordable, low fee, non-
overdraft accounts that are wildly popular among consumers and
are considered a best practice by the American Bankers
Association. Why should any federally insured bank or credit
union not be required to offer a best practice account?
Two, reduce penalties and surprise fees that debank the
financially vulnerable. Most of America's largest banks and
many small banks and credit unions voluntarily reform their
overdraft practices. According to my estimate, that will return
5 billion dollars a year into the pockets of people living on
the financial edge.
But many did not. The CFPB's overdraft regulation
recognizes the economic fact that overdraft is credit and
treats it accordingly. That rule should be allowed to go
forward. However, the rule erred in not--in exempting banks and
credit unions under 10 billion dollars which includes many
institutions whose overdraft practices ought to raise serious
concerns.
I'll mention one, Armed Forces Bank. They generate 92
dollars of overdraft per customer compared to just over one
dollar of overdraft per customer from Bank of America. How is
that bank or any bank that generates a majority or totality of
its profit year after year on overdraft, operating in a safe
and sound practice? Regulators need to treat it as such.
Three, we need to improve the design of the financial
system to better serve working people. How can Amazon get
anything to almost anyone's door faster than it takes two banks
to transfer electronic funds? If America instituted real time
payments when England did, people would've saved over 100
billion dollars in overdraft fees, check cashing fees, and
payday loan fees alone.
Seventy percent of the people who go to a check casher have
a bank account. Why are they at the check casher? Because the
check casher gives them cash immediately. The bank doesn't.
The Federal Reserve has been required by law to lower the
amount of time a bank can sit on your check and they have
ignored the law for 37 years, even when the past CFPB director
called for modernization. Legislation introduced by Senator
Warren and Senator Van Hollen, the Payments Modernization Act,
would hardwire this into law and fix this problem and would be
the most effective thing I can think to combat debanking by
improving the quality of services banks offer to people living
on the edge.
Four, reform AML. When Congress established the $10,000 CTR
limit in 1972, you could walk in and buy a fully loaded, brand
new Cadillac in cash and not trigger that report. Today, Mr.
Scott, I don't know if your used car would trigger a CTR.
Chairman Scott. I'm not sure it would trigger anything, but
thank you very much.
[Laughter.]
Mr. Klein. If you adjust that $10,000 limit for inflation,
you'd be over $75,000 dollars today. Why is Congress--why are--
what's the Government doing looking at things at such a
different level?
In addition, banks file 2.5 million Suspicious Activity
Reports today, an increase of 10 times more than they did 20
years ago. Banks spend a lot of money making SARs and they pass
that along to consumers and small businesses. And the result in
economic terms are low profit customers get pushed out, high
profit customers keep their bank account.
Look at Japanese baseball star Shohei Ohtani. He got to
keep his bank account despite somebody fraudulently
impersonating him and wiring 17 million dollars into the
account of a bookie. That person kept their account, but plenty
of low income people as Senator Warren pointed out, 11,955
people lost their account.
It has to do with the economics here. States need to--
there's a cannabis banking issue that deals with SARs as well
where I hope the Safe Banking Act which was a good step forward
but needs to go further.
Last, five, we need to reform these Do Not Bank list
systems like CheX where you get kicked out for being just poor,
not for fraud. The BankOn program has helped solve that, and
that ought to be done across the board.
I thank you all for holding this important hearing, and I
look forward to answering your questions.
Chairman Scott. Thank you, Mr. Klein. I'll start the
questions, and then we'll have the Ranking Member. We'll go
back and forth.
Mr. Ring, the Biden administration took several actions
that likely contributed to the debanking of crypto firms. In
January 2023, the prudential regulators issued a joint
statement urging banks to limit their exposure to
cryptocurrency activities and associated risks. The FDIC IG
disclosed that the existence of pause letters sent to financial
firms between March of '22 and May of '23 asking them to pause
planned or ongoing crypto-related activities and provide
additional information.
As I said earlier, we received validation today with Chair
Hill's actions. The FCC issued Staff Accounting Bulletin 121
which effectively preventing banks from holding digital assets
in custody. These actions collectively help create an
environment where banks became reluctant to work with crypto
firms fearing regulatory backlash.
You've worked to create a banking environment focused on
being a home for so many Americans and businesses who have been
debanked. I'm hoping you can share what your interactions have
been like with our Federal banking regulators.
Mr. Ring. Well, I'd like to say that I'm standing between
the regulators in America, and I'm the only bank executive who
is not intimidated by the regulators. And I definitely fly too
close to the sun, but you've got to, to protect America.
And what was really disappointing about FIL 16-22 that you
referenced, Chairman Scott, is that on its face if you read it,
it wasn't entirely unreasonable about safety and soundness.
Unfortunately, the examiners took that to stop banks from even
being in the on and off ramp. So if you're a legal crypto
business, it's one thing that there could be some challenges
holding customers tokens and keys.
But to think you could not be that legal business' bank
account was the real problem with FIL 16-22. And thank goodness
it's been exposed. SAB 121, I don't know how that passed the
laugh test.
To think that if you're holding a customer's crypto that
you've got to book that as a liability and then put capital
against it is ridiculous. And thankfully, that's been
rescinded.
Chairman Scott. Thank you for that answer. Mr. McCauley,
Anchorage Digital has the honor of being the only OCC-related
federally chartered crypto bank in the United States. This
stamp of approval from the OCC should provide your company with
legitimacy and access to traditional banking services.
However, as you detailed in your testimony, Anchorage has
still struggled to access the traditional banking system
despite you're a bank. This is unacceptable. Could you
elaborate on Anchorage's debanking experience and the impact on
your business operations, including making payroll for your
employees and going beyond the 20 percent layoffs, devastating
for any business?
Our employees are very much like our family when you're in
business. And I'd love for you to share in addition other
issues and challenges that you face because they don't want you
to be a bank.
Mr. McCauley. Senator Scott, thank you for that question. I
think the first effect that was so pernicious about the
debanking that has gone on for the last several years has been
the betrayal of the bargain that is the American experiment. We
were taught growing up that we would have a fair legal system
and a fair justice system that we could face our accusers.
And so I would say the most devastating part of this to the
crypto industry has been that betrayal of trust. And I think
that as we look forward to the new Administration coming in and
thinking about the path forward here, that is probably the most
important thing to reestablish is this industry's trust in the
reliability of the American banking system and the legal and
justice system here.
Chairman Scott. I would suggest it goes to the entire
Government. Anytime you see the weaponization of Government
against you or your industry, it makes you not just cautious
but leery of the entire system itself. I wonder if you would--
because your day-to-day interaction with so many crypto firms,
how widespread is debanking in the crypto space?
Mr. McCauley. So an anecdote I can share is I was speaking
at a meet up of about 100 crypto founders in San Francisco. And
just as a show of hands, I said, hey, who here has had trouble
getting a bank account or has had debanking issues? All the
hands in the room went up.
And so to say this is pervasive is an understatement. It's
been across the entire industry. Everybody has dealt with this.
In fact, it became so commonplace to us that it became
background noise. And we started to think about it. It was just
assumed that if you're a crypto company, you would have trouble
getting bank services.
Chairman Scott. Unbelievable. Ranking Member Warren.
Senator Warren. Thank you, Mr. Chairman. So debanking is a
real problem, and we need to work across the aisle to solve it.
I've got a stack of stories sent in by consumers and
organizations that were debanked. I'd like to submit them for
the record.
Chairman Scott. Without objection.
Senator Warren. Thank you, Mr. Chairman. These stories are
from Muslim Americans, from cannabis businesses, from formerly
incarcerated individuals, all of whom lost their bank accounts
for no apparent reason. So I want to talk about what kind of
recourse consumers have or don't have when they are debanked.
Mr. McCauley, you testified that your company lost its bank
account. When you tried to open a new one, dozens of banks,
including some of the biggest banks in the country, turned you
down. Which of the big banks refused to offer you an account?
Mr. McCauley. Senator, I don't think it's productive to
name individual banks. I believe the banks were the victims
here.
Senator Warren. OK. I just want to get it into the record
because we have recourse. Did you get an opportunity to appeal
the decision with any of those banks?
Mr. McCauley. No, Senator. There was no room for discussion
with the banks.
Senator Warren. So, no appeals at all. That's unfortunate.
The CFPB has accepted 11,955 complaints from consumers and
organizations that were unable to open accounts or their
accounts were wrongly closed just in the last 3 years. Do you
agree that it's useful to have a database for this information
so that we can identify trends, both the types of individuals
or businesses that are targeted and also the banks where this
is happening?
Mr. McCauley. Senator, more data and more transparency will
help.
Senator Warren. OK, good. I don't think for a second that
you should be locked out of our banking system. In many cases,
it is wrong for banks to close accounts and threaten your
ability to make payroll or pay rent on time without even
providing an explanation so long as you're following the law.
So Mr. McCauley, do you agree that people who are
illegitimately debanked deserve some rules to protect them and
an appeals process if they lose their accounts?
Mr. McCauley. Yes, Senator. Something should be done to
make sure that regulators do not do this again.
Senator Warren. OK. And if banks are adopting policies that
routinely debank people based on their beliefs or other
illegitimate reasons, that's wrong. It needs to be stopped. Mr.
McCauley, should consumers be protected from being debanked
based on their political or religious beliefs?
Mr. McCauley. Yes, Senator. Many individuals within the
crypto industry were debanked, and I wish agencies had helped
them.
Senator Warren. And I presume you would carry that over to
people who are debanked for other reasons as well----
Mr. McCauley. Of course.
Senator Warren. ----because of their beliefs. The CFPB has
been on the front lines of combating debanking for years now.
In 2022, they added debanking to the list of illegal practices
that bank examiners should be on the lookout for. Last year,
they wrote rules to crack down on debanking by payment apps and
the third party data aggregators that the banks use to decide
who to kick out of the financial system.
Just last month, they proposed a rule to stop companies
like PayPal that it considered fining users for certain types
of speech on their platform. Mr. Klein, how would the CFPB's
rules help put a stop to unfair debanking?
Mr. Klein. Well, Senator, the CFPB is really on the
forefront of looking out for consumers, making sure consumers
have access to high quality and fair banking practices, as
opposed to the bank regulators who are too often focused on the
bank.
I can think of five rules that the Bureau has: their
contract rule; their UDAP or Unfair Discriminatory Practices
Rule; their larger participant rule which would give them
authority over places like Venmo and PayPal, which you just
described; their data broker rule which includes credit
reporting agencies like this CheX system that maintain a de
facto do not bank list. Where, again, there's no economics to
require those things to be accurate. It's simply a limited
appeal process.
And their overdraft rule, because when you ask people
who've lost their bank account or are out of the banking
system, ``Why don't you have a bank account?'' the number one
reason is it's too expensive. And there are overdraft fees,
which some estimates were up to $30 billion a year or more, are
part of the larger reason people leave.
So, those five rules the Bureau put out would all combat
debanking in various ways.
Senator Warren. Thank you.
The CFPB is ready for this fight. And every day that the
CFPB is locked out of doing its job, people are getting
debanked.
If the President is serious about stopping debanking, then
he needs a strong CFPB as his partner to get this done.
Thank you, Mr. Chairman.
Chairman Scott. Senator Rounds.
Senator Rounds. Thank you, Mr. Chairman.
Well, I think, as many of you can see in this room, the
different directions that we're talking about here in terms of
the direction that we need to go. Some of us are interested in
having the regulatory oversight actually be identified as the
problem here versus suggesting that the big, bad banks are
suddenly doing this all on their own.
Let's walk our way through this.
Mr. McCauley, it's good to see you again. I'm glad that you
decided that South Dakota was the right home base for you when
you started the State-chartered trust facilities that you've
got. You shared with us the challenge that you had in getting
bank.
First of all, you are the first and only federally
chartered crypto bank; correct?
Mr. McCauley. Yes. That's correct.
Senator Rounds. And Anchorage Digital is both a qualified
custodian and has a conditional OCC bank charter.
What's the nature of your accounts with the other banks?
Checking accounts?
Mr. McCauley. Basic checking accounts and holding our
capital reserves. And then, further, we, as a condition for
charter, hold cash for our clients at partner banks.
Senator Rounds. So, any of that illegal?
Mr. McCauley. Absolutely not.
Senator Rounds. So, you ever overdraft?
Mr. McCauley. No.
Senator Rounds. So, in other words it's not a reason, it's
not a case of a business reason why anybody would not do
business with you, other than the fact that you were a crypto
gen--or you would hold crypto in trust for other people, and
that was a no-no?
Mr. McCauley. That's right.
And to put a very, a finer point on it, the bank that
debanked us was actively trying to work with us more.
Senator Rounds. But for some reason there appears to be a
point at which they said we can't do this with you anymore. Was
it because they didn't want to bank with you?
The answer to that is no, that wasn't the case. What was
the case?
Mr. McCauley. No, not the case.
Senator Rounds. What was it?
Mr. McCauley. They wanted to bank with us. And many of the
other banks that we reached out to after that bank account was
closed also wanted to work with us. This was consistent across
the board. The banks did want to work with us, were not
discriminating against us, but they were worried about
regulatory risks.
Senator Rounds. So, you weren't doing an illegal activity
like cannabis, which is federally illegal to do, and you
weren't overdrafting, you were simply part of a legal industry
that banks were told by regulators would be a problem for the
bank. Is that correct?
Mr. McCauley. That's right. I'm a, a bit of a square. I
like rules. I like following rules. And so, we've always
followed all the rules and regulations.
Senator Rounds. Mr. Gannon.
Thank you, sir.
Mr. Gannon, you've represented financial institutions. Are
you finding that these banks simply don't want to do business
with people or is it a matter of for people that will follow
the law, that aren't violating the law, and are not business
risks of simply overdrafting their accounts. These banks want
to look for business but, because of a regulatory environment
that they have been in, they have been forced to decide whether
they want to do business with certain types of industries,
whether they were gun manufacturers, people that sold guns,
people that did the terrible thing of being in the business of
crypto activity, and so forth, were now suddenly being
identified because of the type of business that they had, which
was a legal business, by regulators who were coming down hard
on them.
What can a regulator do to a bank that doesn't want to
comply with their demand, whether it be written or implied?
Mr. Gannon. Senator, the regulators can do quite a bit. The
banks are not making this up. They like to have customers, like
all business like to have customers. Regulators have a lot of
tools subject almost to their complete discretion.
Senator Rounds. Supervisory in nature?
Mr. Gannon. Supervisory tools.
Senator Rounds. The auditors walk in and say, Guess what?
You've got a problem. A CAMEL rating might change; correct?
Mr. Gannon. Correct. Like----
Senator Rounds. What happens if a CAMEL rating changes for
a bank? Let's say it goes from a two to a three, what happens?
Do they get bonded?
Mr. Gannon. They don't. That's a very, very bad result,
Senator.
What happens is you're pretty much locked out of any
ability to expand. Your what you pay for your FDIC insurance
goes up. And there are a lot of other strictures on what you
can do as you go forward and attempt to grow your business.
So, that is, that really is the big hammer that the
regulators have. And management rating can be almost
everything. One of the--Anything.
One of the things that's remarkable is if you look at the
Fed's supervisory report from November of 2024, you will find
out that they say two-thirds of the large banks in the United
States are not well managed.
Those same banks--and we have a chart on this in our
written statement--those same banks have record levels of
capital and liquidity. And I can tell you, Senator, they also
invest enormous amounts in technology, in community
reinvestment, et cetera, perhaps higher than any time in
history. Yet, somehow two-thirds of them are not well managed.
Senator Rounds. Thank you.
Mr. Gannon. That doesn't make a lot of sense.
Senator Rounds. Thank you.
Mr. Chairman, I just really appreciate you taking the time
to have this hearing. And I think the focus of what's happening
to banks who want to do business with legitimate businesses,
and the struggle they've had with a supervisory approach for
the last couple of years which has put pressure on them for
what they consider to be inappropriate types of legal
businesses, this has got to stop.
Thank you, Mr. Chairman.
Chairman Scott. Thank you, Mr. Rounds. And thank you for
the questions. They were illuminating. Senator Reed.
Senator Reed. Thank you very much, Mr. Chairman. And thank
you, all, gentlemen, for your testimony.
One of the factors involved in this discussion is
reputational risk because that's often the justification for
the actions and rules of the Federal banking regulators. Last
year we had a very positive discussion about the Safe Banking
Act. And I've worked with my colleagues to come up with a
compromise that would still allow reputational risk to be a
factor, but to put up some guardrails with regard to its
application.
Mr. Klein, can you elaborate on the importance of
maintaining reputational risk as a factor in evaluation, and
also the guardrails that might be in place?
Mr. Klein. Yes, Senator.
I think the compromise that was worked out in the Safe
Banking Act on reputational risk effectively addressed that
problem. Look, at the end of the day all banks are a
reputation-based business. Trust is the cornerstone of all
banks.
Consumers trust that the banks have their money. And when a
bank loses trust, it has the possibility to have a run on it.
So, the need to consider reputational risk is real and it
is important. It is possible that it is abused, and you need to
have guardrails on it. But it is absolutely a certain and
important part of bank regulation and supervision.
Senator Reed. Thank you.
Mr. Ring, I know you understand this very well because in
your offering circle or back in 2024 you've consistently
pointed out the dangers of money laundering and terrorist
financing. And one of the aspects of crypto, it's a rather new
phenomenon, is that it seems to be a very often-used vehicle
for financing of places like North Korea, financing of illicit
activities.
Does that put more pressure on you to be more stringent and
regulate? And, also, as regulators to be more careful in
watching what you do?
Mr. Ring. I believe the Bank Secrecy Act, which is what
you're talking about for AML--and by the way, for folks not in
this room, the Bank Secrecy Act has nothing to do with secrets,
and has nothing to do with your customer data. It is strictly
about money laundering and those, and those rules that you're
talking about.
I am, I am not in favor of the amount of delegation law
enforcement has done on banks with respect to these type of
issues. They're real issues, but banks should not be on the
front lines because what happens is that that, that is the
Trojan Horse for banks to do whatever they want. Oh, it's AML,
BSA issues. Or the regulators that come in and say you can't do
crypto because of that.
If you're checking out at a grocery store, does the cashier
and the bagger have to let the police know you bought some
chemicals? Of course not. And so, I believe it's the Trojan
Horse and should be a small component of the issues you're
worried about with crypto.
Senator Reed. Well, again, I think the bank regulators are
trying to react to a relatively new phenomenon. Crypto is about
a decade in----
Mr. Ring. Shouldn't take 10 years, respectfully.
Senator Reed. No. But it's a situation in which looking
from our perspective in national security on the Armed Services
Committee, North Korea makes a lot of money through crypto
operations. And a lot of these, as you point out in your
offering circle is terrorist groups use it, too.
So, I think there has to be a heightened awareness both in
the industry and also within the regulators with respect to
crypto. And that's a factor that's not common, that's not as
prominent in other banking institutions that don't do crypto.
Mr. Ring. I believe every bank has the same concern about
AML and terrorist activities. And I don't believe that crypto
is the overwhelming factor that, that the Bank Secrecy Act
really which is preventing, is going to solve what you want,
respectfully.
Senator Reed. Mr. Klein, you have a comment?
Mr. Klein. Yeah. I wish every bank felt the same way. I
think one of the problems that we have in our anti-money
laundering system is we've created an economic structure where
the costs are very high. And the banks respond by saying if
you're a low profit customer we don't want you because of the
AML costs. But if you're a high profit customer, we'll just pay
the AML fine.
I mean, I can't understand how a foreign national was
wiring $17 million in hundred-thousand-dollar increments--and I
encourage you all to listen to the D, read the DOJ's filing and
listen to the, to the audio that's been released of his
interpreter saying, I'm paying $200,000 to this illegal
bookie's bank account for a personal, for a car loan. And maybe
there will be more.
And that bank account was not closed.
So, I think that there's a very different world going on
between very wealthy people, very wealthy businesses, and banks
who see AML as a fine and a cost. Some, not most. Not most.
But what I'm saying here is that we have an AML system
where the economics of it are not in line with the objectives
of it, which are to use this information to catch criminals.
We're reporting too much information that's not useful, but
there's too much criminal activity where banks are being let
off the hook too easily just to pay a fine.
Senator Reed. Thank you.
Chairman Scott. Thank you. Senator Tillis.
Senator Tillis. Thank you, Mr. Chairman. Thank you, all of
you, for being here today.
Mr. Chair, when you were opening up I was thinking about
why I knew what a 90-day note was when I was 14 years old.
Because it kind of went like this:
My dad did construction work. He had a relationship with a
couple of agents, insurance agents. And when they had damage
that was not of a major scale, that was my dad's work. And I
was a 14-year-old helper that would be in the bank parking lot
when my dad would go in to a banker in Nashville, Tennessee,
that he had a relationship with and got a 90-day note.
And that's what paid, that's what paid the bills for the
project that ultimately put food on our table.
We have all but overregulated those personal relationships
out of business. My dad today probably couldn't get that 90-day
note because he'd have some supervisor breathing down the
bank's back about how could you possibly give this man money
that's living paycheck to paycheck and trying to feed six kids.
We are overregulating in a way that is debanking people de
facto.
Now, Senator Warren mentioned, well, people have been
debanked because they bounced a check a couple of times. That's
called a, that's called managing a risk. I'm not saying that
they should not find a way to provide that person with help,
but them having a consistent pattern of bouncing checks does
not help in the long term. We need to figure out how to help
them manage their finances, not force banks to carry that at-
risk customer on their, in their portfolio.
Now, if we talk about and then we also talked about, and
we've got the cannabis business. Well, the last time I checked,
the cannabis business is illegal at a Federal level. I, for
one, think we should reexamine that.
But we damn sure shouldn't do it by passing the Bank
Secrecy Act which makes it default legal before we've taken any
firm position here that provides the industry with clarity.
Somebody wants to work on rules of the road, and do that and
bank the industry in a cohesive, sustainable way that doesn't
kind of turn around the fact that it's still illegal at the
Federal level, count me in. Happy to do it.
Now, I think we've got a lot of regulator-initiated
debanking going on with this concept of reputational risk, Mr.
Gannon. I think you've got people going into banks and, I don't
know, these gun people may not be, you know, these unsavory
people are--fill in the blank. Now, I will tell you, so I want
your, I want your input on that, but let me tell you what I've
told every GSIB CEO that's been in my office. And everyone has
been, and their counterparts in Europe. I said, if you act like
a politician, I'm going to treat you like a politician. You
provide banking services, period.
Now, if you adjudge as a CEO, if you adjudge that you want
to do a bank that only banks blond-headed, blue-eyed people and
there's a market opportunity for that and a growth strategy,
knock yourself out. If you can prove to the investors and the
shareholders in your entity that it is in the best interests of
your bank and your underlying strategy to grow, fine.
But we have clearly seen reputational risk being overused
by bank supervisors, bank examiners, saying, well, maybe you
want to move out of there. And it changes depending upon who's
in the White House.
I don't think that that's right in either case. Banks
should be able to figure out what they can do to derive value
and serve their customers.
Can you give me some examples or your thoughts on whether
or not, Mr. Gannon, you believe that a lot of, a lot of these
debankings is a direct result of regulators kind of doing a
wink and a nod: this is an unsavory segment to serve?
Mr. Gannon. Senator, I do think that. And, and the reason
is regulators have taken the term reputation risk and made it
incredibly----
Senator Tillis. It's overly broad. It's anything.
Mr. Gannon. It's, it's, it's almost the definition of
subjective. It's, it's not really tired or linked to anything
that's objective.
And one of the things that I can tell you, having sat in
planning sessions for some fairly large banks, is it's
impossible to plan against that. When you don't know what the
terms are of what your regulator and supervisor want you to do,
it's really difficult to come up with a plan.
Senator Tillis. And the perverse consequence of all this
stuff is it's costing banks more money, it's shutting down more
market opportunities, and making it more difficult to continue
to bank the people that just bounced a couple of checks.
Because at some, at some point you're affecting the business
plan, the underlying success of the business, and they have to
close the aperture to the most profitable, most sustainable
part of business.
So, I just feel like we need to, we need to--I'm here to
talk about the regulator-initiated debanking. I'm not talking
about other behaviors where people lose financial services. We
need to have a hearing and a discussion about that.
But I would like anything you can provide for the record on
some use cases of debanking that in your opinion was driven by
regulator interaction. That would be very helpful.
I'm sorry, I don't have more time. Thank you.
Mr. Gannon. We'll do that, Senator.
Chairman Scott. Thank you. Senator Warner.
Senator Warner. Thank you, Mr. Chairman.
I want to pick up where my friend Senator Tillis was on
this question of reputational risk.
I think it has been overused. I've been trying to push the
banks to use the discount window more often before we add
additional tools. That's out there. But the response is always,
well, reputational risk.
I do agree with Mr. Klein that banking is a reputation-
based business. And if people start to lose confidence in that
bank, they're going to move, whatever the regulator does or
doesn't do.
And that's why I've got to ask, rhetorically at least, and
perhaps my colleagues, you know, the United States dollar, and
U.S. Government, and the full faith and credit all buildup the
reputation of the United States of America.
Now, if any of your institutions suddenly let somebody into
your payment system that had no background in banking, that had
no understanding of money flows, but suddenly gets an ability
without any screening to look at all of your customers'
personal banking information, I believe that would cause
reputational risk. And that is exactly what is happening in the
United States Treasury at this moment in time.
We don't know if the DOGE crowd there's one person maybe
has a clearance, the others we have no fricking idea. But the
ability--and we don't know for sure whether this is a read-only
ability or read and write, which past the legalese means that
person can potentially go in and alter code or manipulate
payments. I say to my Republican friends, guys, can't we agree
that the risk of the United States is worth protecting?
And the idea that we've got people intentionally
manipulating our payment system, we have no idea. And we're
going to sit silently by?
This isn't about efficiency, this is about the kind of
payment system we're going to have in our country. If any
financial institution let unscreened individuals into their
payment book or into the private banking information about
their customers, Mr. Klein, I believe their reputation would go
straight to hell.
Mr. Klein. Absolutely, Senator. I worked in the Treasury
Department for almost 4 years with a Top Secret clearance; I
was going nowhere near that.
And as you point out, this is not about efficiency. You, if
you wanted to make the Treasury system more efficient, you
would move it to a real-time payment network. Should have been
done years ago. You wouldn't just sit there and take read-
access to look at every single payment the U.S. Treasury
Department does. Any bank that did that to their customers
would be in deep violation.
Senator Warner. It is also the fact that the payment system
in the Treasury, that's not where determinations are made about
whether something is illicit or illegal, that is actually the
subject matter expertise that resides at the agency that has
oversight.
Come on, guys, this is about the full faith and credit of
the United States. It is about our reputation in the world.
You're getting the same calls that I'm getting. They don't
identify whether they're Democrats or Republicans. But these
programs that may or may not be arbitrarily eliminated by
somebody that we don't even know who they are? Efficiency, sign
me up.
Turning over the payment system to people that we don't
have any idea who they are, or what their goal is, or what
their mission is, where we can't even get a full answer whether
they simply have read capabilities, or read and write, there's
an enormous difference in those extra couple words.
And I just, you know, Mr. Chairman, this ought to be
something that we, as the Banking Committee, that are looking
at the Treasury, we ought to jointly want that.
You know, there's a 25-year-old that I read about in the
news. I don't, I don't know the individual. I don't have the
slightest idea if they've got security clearance.
I will tell you this--Mr. Gannon, I was going to ask you
something about crypto but I'm not going to be able to get to
you. I look forward to working with Sam Lummis on how we
promote innovation but don't overdo on the risk side. And I
think, you know, we can, we can do much better than we've done
so far.
But I have to just tell you, you know, as somebody who was
chair of the Intelligence Committee and now vice chair, and
take that role as incredibly important, the notion that
somebody maybe arbitrarily put out these payment flows, for
something that looks kind of funky but they don't have any idea
what it is we'll hurt our national security. Because candidly--
and this is not classified--we fund things sometimes under a
cover. We put out this information and the bad guys find out
about this, people's lives are at risk.
And I implore you all as experts, I implore my colleagues,
this should not be a partisan issue. Let's get to the bottom of
who these people are, what kind of clearances they have, and
make sure that we don't put in further jeopardy the risk and
reputation of the U.S. Government, which I believe is under
immediate and imminent attack from these unsanctioned
individuals.
Thank you, Mr. Chairman.
Chairman Scott. Thank you, Mr. Warner.
Before I go to Mr. Kennedy, I do want to respond to your
comment there, Mark. The Treasury just put this out:
``Importantly, the ongoing review of Treasury's systems is not
resulting in the supervision or rejection--suspension or
rejection of any payment instructions submitted to Treasury by
other Federal agencies across the Government. In particular,
review at the Fiscal Service has not caused payments for
obligations such as Social Security and Medicare to be delayed
or re-routed. To be clear, the agency responsible for making
the payment always drives the payment process. Currently,
Treasury staff members working with Tom Krause, a Treasury
employee, will have read-only access''----
Senator Warner. Mr. Chairman.
Chairman Scott. Just----
Senator Warner. Mr. Chairman, do you know--Mr. Chairman,
can I, Mr. Chairman, I'd just like to. So, you are saying it is
read-only and not read and write?
Chairman Scott. That's what Treasury just said.
Senator Warner. And do you know the identity of these
individuals? Mr. Krause is a known quantity and he's got
security clearance. The other individuals who've been reported
in the press, do they have security clearance, sir?
Chairman Scott. I'll just say this and----
Senator Warner. Do you want that individual without
security clearance to have access to all that information?
Chairman Scott. I was clarifying that comment you made and
wanted to simply say that under the Biden administration we had
no clue who was doing what most of the time. Mr. Kennedy.
Mr. Kennedy. Senator Warner is a reasonable man. Everybody
on this Committee knows that. And he's a good man. And I
understand he's interested in process. And I'm not saying that
process isn't important. But if the United States of America
has been taking taxpayer money and using it to produce a
transgender opera in Colombia, now I want to know about it. And
I'm glad to know about it.
And it seems to me that that's the main issue with respect
to all of this. And I look forward to talking further with my
friend Mr. Warner about that.
I mean, for 4 years under President Biden, as was his
right, the topic of discussion in Washington was: Who needs to
pay more in taxes? Who needs to pay more in taxes?
That's no longer the main question. The main question is
now, as it should be in my judgment, What the hell happened to
all the money? And we're going to find out.
Now, I need to get back to the subject. With the exception
of Mr. Klein, whose testimony I enjoyed, I understand his
position. He wants to let the CFPB run America's banks. And I
appreciate that perspective. But, Mr. Klein, it's not going to
happen in your natural lifetime or mine.
Now, let me turn to the other gentlemen. What I hear Mr.
McCauley, Mr. Ring, and Mr. Gannon saying is that some of
America's banks have been discriminating, debanking customers
because of their religious beliefs, because they support the
Second Amendment, and/or because they hate fossil fuels.
I don't want to go with all three of you, I've run out of
time.
Mr. Ring, is that what you're saying?
Mr. Ring. Yes, sir.
Senator Kennedy. Which banks?
Mr. Ring. Well, I think it's been publicly reported that
Bank of America has certainly picked and choosed when----
Senator Kennedy. Who else?
Mr. Ring. And Chase Bank has.
Senator Kennedy. Who else?
Mr. Ring. I think Citibank has.
Senator Kennedy. Who else?
Mr. Ring. I think Key Bank has.
Senator Kennedy. I'm going to probably run out of names
pretty soon, but I think the megabanks are.
Mr. Ring. Old Glory Bank is not, of course. We love the
Second Amendment and----
Senator Kennedy. Well, then we need----
Mr. Ring. ----fossil fuels.
Senator Kennedy. We need to get those banks in here, Mr.
Chairman. We need to get all those CEOs in here. Mr. Ring. I
would agree.
Senator Kennedy. Now, why--you, I appreciate your candor--
why do you think, are banks doing this because they're scared
of the regulators or are they doing this because the people
running the banks are prosecuting their political beliefs?
Mr. Ring. I think----
Senator Kennedy. I mean, let me, when a bank, when a bank
holds a seminar, taking up valuable employee time to discuss
whether a man can breastfeed, are they doing that because
regulators are leaning on them, or are they doing that because
the CEO really thinks that is, that's subject to debate?
Mr. Ring. I think it's definitely the latter. And I think
it's also been on management----
Senator Kennedy. What do you mean ``the latter''?
Mr. Ring. It is not the regulators. I do not believe the
regulators push the big banks to debank conservative causes.
Senator Kennedy. You don't?
Mr. Ring. I, I do not. I think it was their internal choice
by these big banks.
Senator Kennedy. Why?
Mr. Ring. Well, why? The same reason by Big Tech pick and
choose winners. I think big banks pick and choose winners that
they care about.
And that, and that's, that's why we need a market solution
because you can't regulate that type of behavior without having
unintended consequences. And now every time you get a customer
application you've got to fill out five forms as to why you
picked, did or did not pick that customer.
Senator Kennedy. So, you think that that's the management
of these banks that are just imposing their own politics on
customers and, ultimately, ultimately to the detriment of the
shareholder. Is that your testimony?
Mr. Ring. Yes, sir.
Senator Kennedy. Either of your two gentleman in my last 10
seconds disagree with that?
Mr. Gannon. I strongly disagree, Senator, yes. I've spent a
lot of time with a number of banks who----
Senator Kennedy. Who do you think it is?
Mr. Gannon. I believe it's the regulators.
Senator Kennedy. How about you, sir?
Mr. McCauley. It's definitely the regulators. All the big
banks wanted to work with crypto and were scared away from it
by the regulatory apparatus. Senator Kennedy. All right. I'm
out of time.
Thank you, Mr. Chairman.
Senator Van Hollen. I thank you, Mr. Chairman. Thank all of
you for your testimony.
Mr. Ring, you work hard to protect your customer-sensitive
personal information, do you not?
Mr. Ring. Yes, sir.
Senator Van Hollen. And you wouldn't just turn it over to
anybody who walked into your bank, would you?
Mr. Ring. No.
Senator Van Hollen. And, Mr. McCauley, I assume the same is
true for you?
Mr. McCauley. Yes.
Senator Van Hollen. So, I do want to bring up this issue
that Senator Warner makes, because what we are witnessing right
now in real-time is Elon Musk going into the Department of
Treasury and demanding access to highly sensitive personal
information that could impact any American. The highest ranking
civil service at the Department of Treasury resigned before he
became complicit in turning over this information.
So, I know that Chairman Scott had to leave, but I want to
underscore Senator Warner's point, and I know that Senator
Warren shares these views, that this Committee, which has
partial jurisdiction over the Department of the Treasury, we
should have an urgent hearing on this. This should be a top
priority. I would hope all of our colleagues, regardless of
party, would want to know what is happening to this incredibly
sensitive information that's just been turned in, turned over
to somebody who happened to contribute over $250 million to
President Trump's reelection efforts.
In my view it's a corrupt bargain. And I think we should
have a hearing urgently to address that matter.
A lot of people raid banks, but, you know, Elon Musk goes
after the Treasury Department. It's a big heist of personal
information. And in my view it's an abuse of power.
I appreciate Senator--and by the way, a lot of the
statements that have been made regarding the use of some of
these Federal funds, whether by AID or other foreign aid
programs, have been patently false. Made in one, some cases by
the chief spokesperson over at the White House. Just been
provenly proven false. And they haven't been able to provide
any information to substantiate those claims.
I appreciate Senator Warren's pointing out that CFPB has
been on the front lines of trying to protect people against
debanking, so it is ironic that many people who want to make
sure that we prevent debanking are trying to get rid of the
CFPB.
Mr. Klein, I appreciate your statements regarding the issue
of overdraft fees, and pointing out that for Americans who live
paycheck to paycheck, and we're talking about tens and tens of
millions of Americans, their lack of access to real-time
payments is causing them to incur these huge additional fees. I
think you said your estimate is $5 billion a year.
And it's also in some cases resulting in getting them
debanked. Is that correct?
Mr. Klein. Absolutely, Senator. One of the ways you get put
on this do not bank list is that your account is closed.
Say you withdraw your account in good standing and you
close it. But then the bank says, oh, for that last month of
your account you didn't maintain a minimum amount, so you owe
$10. And they send the $10 to your old address, but you closed
you bank because you moved, and you never got the mail. Well,
that $10 fee then becomes another $10 a month, another $10. And
they write it off in the collections and your data gets put on
this do not bank list because your bank account was closed in
bad standing.
And that's exactly how that process works.
Senator Van Hollen. So, you referenced legislation that
Senator Warren and I have introduced, the Payments
Modernization Act. Could you talk about how this would address
this very real problem?
Mr. Klein. Absolutely.
The Expedited Funds Availability Act of 1987 requires the
Federal Reserve to make payments move faster as technology
allows. The Fed has done nothing in 37 years to update that
regulation. As a result, banks sit on your money.
We can all agree in this Committee, and every American,
that Friday was January 31st. If you were short on your rent,
on you other obligations, you worked a second job, you got paid
that Friday and you deposited your check, you took a picture of
your check. I was on this Committee when we passed the Check 21
Act that lets you deposit your check on your phone on Friday,
the bank can sit on your money and it just became available
yesterday.
What happened between the 31st and the 4th? A bunch of
bills got paid. The result of that: overdraft, overdraft,
overdraft.
Now, your legislation would force the Fed's hand. Even
though the law says ``shall,'' not ``may'' but ``shall,'' and
the Fed just ignores it. Your legislation would rewrite that
law to mean that your money would have been available on the
1st when your debits came out, and your overdrafts wouldn't
have hit. And it would save people a tremendous amount of
money.
The Bank of England did this in 2008. If we did it then, a
hundred billion dollars a year would have gone back to people
from check cashers, payday lenders, in overdraft fees. It's the
best thing you could do to reduce income inequality without
raising taxes or increasing Government spending.
And I can't understand how Amazon can get anything to your
door faster than two banks can clear a check.
Senator Van Hollen. Thank you.
Thank you.
Senator Hagerty [presiding]. Thank you, Mr. Chairman.
I would like to welcome some Alabamians that are in the
audience, in particular Kate Robertson, who is a senior in high
school and is an outstanding star. I'm certainly proud to have
her here today.
Also just want to say thank you for holding this hearing,
Mr. Chairman. It's clear and it's been no secret that our
financial regulators have become increasingly politicized over
the last 4 years. We have heard our ranking member talk about
the number of complaints that have been made to the CFPB over
the last 3 years and, yet, this Committee in the last 2 years,
led by, obviously, one our Democratic counterparts, has not
held a hearing diving into this.
So, thank you, because this must stop. This is the United
States of America and this, what's happening, is completely and
totally unacceptable.
Look, when you're prioritizing a social agenda or a
political one instead of actually ensuring that people have an
opportunity and access to the American Dream, we, we've got to
call that for what it is. And, obviously, our large
institutions play a vital role in our country and our banking
system, but they need to stick to that banking, not politics.
And so, Mr. Ring, what you testified here to today is
incredibly alarming. And we need to get to the bottom of that.
I also just want to point out something that my colleagues
have to hear me say all of the time, and that is just how
grateful I am for our community banks and credit unions in
Alabama that serve our local communities and give people access
to the American Dream and remember that that is actually what
they're there for. So, thank you to them.
I do want to get to the bottom and better understand what
spurred this debanking and why certain industries and
conservative-aligned groups have been targeted over others and,
importantly, how we can prevent this moving forward.
So, I want to start by quickly clarifying a few things for
the record.
The first Trump administration finalized a fair access to
banking rule focused specifically on addressing this issue. Mr.
Gannon, what happened to that rule?
Mr. Gannon. That rule was revoked on January 20th, 2021.
Senator Hagerty. Tell me who revoked that.
Mr. Gannon. The President of the United States.
Senator Hagerty. That's the day he was sworn in?
Mr. Gannon. That's correct.
Senator Hagerty. Uh-huh. And so the day he was sworn in he
said we're not going to do this?
Mr. Gannon. There were a number of rules that were revoked
that day. That happened to be one of them.
Senator Hagerty. Well, thank you, Mr. Gannon. Is the
supervision of the reputational risk a directive from Congress
or found anywhere in law?
Mr. Gannon. Well, that's a little bit of a complex
question. It certainly is found in, in law in the sense that
Congress has directed the banking agencies to conduct
supervisory activities. But the details about how that
supervisory activity is conducted is almost entirely generated
by the regulators themselves.
Senator Hagerty. You mentioned earlier the subjective
nature of that.
Mr. Gannon. Correct.
Senator Hagerty. Does the reputational risk have any real
connection to the material safety and soundness of a bank?
Mr. Gannon. Almost on no occasions that at least the
literature has been able to come up is there a connection
between reputational risk and some of the basic elements of
banking: capital, liquidity, operations, and so on. There's a
disconnect there.
And, in fact, the regulators--and this is quite
interesting, at least to me--the regulators fined stakeholders
for reputational risk. And one of those stakeholders is
themselves.
So, it's a little bit difficult to argue with a regulator
when they say you've got reputational risk----
Senator Hagerty. Now, that's something.
Mr. Gannon. ----because you're, because you're arguing with
the stakeholder that owns that reputational risk.
Senator Hagerty. Tell me, you mentioned earlier in your
testimony about management rating.
Mr. Gannon. Right.
Senator Hagerty. And you said many times it has actually
nothing to do with management. Can you, can you dive into that
a little bit more?
Mr. Gannon. Well, I'll go back, Senator, to what I just
said. If you look at how banks really are resilient today and
how they have higher levels of capital today, how they have
more liquidity than ever, how they have invested, a very
interesting statistic, in 2016, which is a baseline that this
data comes from, which was a, not an easy year for banks--Mr.
Tarullo was still the vice, kind of acting vice chair for
supervision of the Fed--banks spent let's say $100 on
technology in terms of compliance.
Senator Hagerty. Uh-huh.
Mr. Gannon. Last year banks would have spent $160 for the
same activity.
So, banks have, have poured money into technology, into
compliance, et cetera. Now, are banks perfect? No. Do things
slide through? Yes, they do. But I don't think anybody can
doubt the commitment to invest in these sorts of things. And
reputation risk doesn't have anything to do with that.
Senator Hagerty. Thank you very much.
And in my final few seconds, Mr. Ring, just to, just to
level set here, what are the real world impacts to a small,
legally operating business if they are denied access to our
financial system? Because I know that you have seen that
firsthand.
Mr. Ring. Well, if you can't make payments and if you can't
bank, then you can't exist in America. It has, it's happened in
crypto, it's happened in the Second Amendment space, it's
happened among conservative causes. You can't exist without
banking.
Senator Hagerty. Thank you for what you're doing.
Mr. Ring. Thank you.
Senator Cortez Masto. Thank you.
I am sorry one of my colleagues had to leave, Senator
Kennedy, because I do, I do need to address this. And I so
appreciate my colleague Senator Warner bringing this up.
You know, we can, and we should be, identifying waste,
fraud, and abuse. I think we all agree about that. And we can
do it, and we should be doing it as a Congress, but we should
be doing it without giving a private, unelected citizen access
to the Federal Treasury payment system that contains personal
information of U.S. citizens.
Now, I hear my colleagues all of the time invoking former
President Biden for all the bad things. If he had done this, I
know my colleagues would be the first to call it out. And would
be, I would be with you. I would be with you.
This is such an important issue for us to stand together
on. And if we don't, who will? Who will?
So, I just, I am frustrated, along with my colleagues on
this. But let me get back to the issue at hand. Because I also
want to address the overdraft piece, Mr. Klein.
I know a vast majority of people who complained to the CFPB
but also to AGs, I'm a former AG, I heard this as well, about
losing access to bank accounts usually blame overdraft as the
reason. Right?
And we know that one of the areas of focus and enforcement
around this, if not the attorneys general, then it is the CFPB.
And we know the CFPB took action to prevent illegal, punitive,
expensive overdraft fees. In fact, in November Navy Federal
Credit Union agreed to refund more than $80 million to
servicemembers and their families.
By the way, servicemembers are the number one group that is
always constantly taken advantage of in this area.
And the credit union also paid a $15 million civil penalty
for charging illegal and deceptive overdraft fees.
So, Mr. Klein, you've been leading the call to end abuse of
overdraft practices. We've heard you today. Can you talk a
little bit more about it?
And it's more than just somebody just, just a bad check out
there; right? And everyone that says it, well, they're just,
they're just writing bad checks and they should be held
accountable. It's more than that.
Can you talk a little bit about what we're talking here?
Mr. Klein. Yes. So, it's about reordering your
transactions. You swipe your debit card during the day and
maybe you run out of money at the end of the day, well, there
are banks and credit unions who go and reorder your
transactions from the highest dollar amount to the lowest in
order to maximize the number of overdrafts that you have.
The State of New York just put out some new regulation
prohibiting that practice of reordering your account.
There's other things about systems of debits and credits.
Look, our outdated payment system runs on this technology
called a batch, which not to bore you, but think about your
washing machine. You throw everything in, you hit a button, it
all comes out clean at the same time. One of the big values of
real-time payment is it goes piece by piece, laundry by
laundry.
When you do a batch, you don't know what comes out. Well,
the question becomes when the batch is clean do we put in your
credits first or do we take out your debits? And which order
you pick, debits or credits, makes a big difference in the
total quantity of overdraft if you post your credits before you
put the money into your account. Right?
So, that's another pernicious practice that we see. And
this is how you see a bank like Armed Services generate $92 of
overdraft per customer relative to other national banks that
are around $1, $2, $5, $10.
You say to yourself, how can Armed Service Bank get $92 of
overdraft per customer? It's these types of tricks and trades.
And you're right, Senator, that in my research I keep
finding that you find these practices at military bases, you
find these practices that co-locate in Walmart or seek out
other things. Eight percent, 9 percent of Americans pay 80
percent of the overdrafts. Those are very profitable customers
for certain types of banks who try to bring them through the
system.
And the last point I want to make as it relates, Senator
Tillis made that comment about, oh, you passed a few bad
checks. Why? Why did the check bounce? Well, the check bounced
because of this time delay.
Other banks that have given people 48 hours to cure an
overdraft have seen their overdraft numbers fall by 50 percent.
This is some of the types of reforms that would occur if you
moved to a faster payment system and you eliminated some of
these checks.
And, sadly, the prudential regulators over the last 4 years
have done nothing to stop these banks and credit unions who
rely on overdraft for more than 100 percent of their profit.
They're giving safe and sound CAMEL ratings. I don't understand
how their management has such a high CAMEL ratings because all
they're doing is overdrafting people. They should be a check
casher, not a bank.
Senator Van Hollen. Thank you, Mr. Klein.
Senator Ricketts. Thank you very much, Mr. Chairman. And I
want to thank Chairman Scott and Ranking Member Warren for
holding this hearing.
And thank you to our witnesses today, Mr. McCauley, Mr.
Gannon, Mr. Ring, Mr. Klein, for being here as well to talk
about this important topic.
What we saw over the last few years, the Biden
administration weaponized Government at all different levels to
be able to push its liberal agenda on the rest of the country.
We saw it in things like having the EPA push EV mandates,
Homeland Security ignored illegal immigration. We saw a number
of different agencies do things, the FBI for example even
identified Catholics as extremists and sought to put spies into
the Catholic Church.
All of this undermines people's faith and belief in our
system of Government. And what we're talking about here now
where we have regulators that are pushing their agenda does the
exact same thing: it undermines the rule of law in our country
if regulators start pushing an agenda of what they want to see,
what kind of businesses you do business with, versus what
you're allowed to do, versus just saying making sure we have a
safe banking system that is complying with our rules and
regulations.
A legal business should not lose access to the banking
system just because they deal in firearms, or crypto, or
something like that because a regulator doesn't like that.
That's just simply wrong.
But that's what we're seeing, of course, out of the last
two Administrations. It was mentioned earlier about Choke Point
1.0 in the Obama administration. And firearms, you know, for
example, that were disfavored were prejudiced against and tried
to be forced out of the financial system.
And I think it was you, Mr. Ring, who just said that if
you're out of the financial system you cease to exist as a
business.
And then, of course, now more recently in the Biden
administration it's been the crypto industry.
And I've got to tell you this is an issue that's near and
dear to my heart. I came from the financial services industry.
We have the most transparent, liquid capital markets in the
world because of proper regulation. Regulation actually got us
to the point where we have these great capital markets. And
it's at risk when we have regulators that are undermining the
faith of that.
We've got to make sure that we do not weaponize our
regulators to push an agenda.
Mr. Gannon, during Operation Choke Point 1.2 and 2--or 1.0
and 2.0, did regulators exceed their statutory authority by
focusing on vague metrics and reputational risk instead of
safety and soundness?
Mr. Gannon. Senator, the way I'd answer that is to say that
the effect of Operation Choke Point 1.0 and 2.0 is that many
small, perfectly legal businesses are no longer in operation.
The people that ran those businesses lost their jobs, lost
their bank accounts. I'm not sure what they're doing today. But
that was a backdoor way to make those businesses illegal.
And getting to the point that I made earlier, if the
regulators wanted those businesses to be illegal, they had to
come to you and ask. And they didn't. Instead, they just
executed their own agenda without the approval from Congress.
And that's what I mean by a distortion of the relationship
between regulators and Congress. Their power comes from you, it
does not fall from the sky.
Senator Ricketts. So, did bank regulators evade the notice
and comment rulemaking requirements of the Administrative
Procedures Act by imposing requirements through formal guidance
documents in both Choke Point operations?
Mr. Gannon. Yes, they did, Senator.
Senator Ricketts. And why do you think they were doing
that?
Mr. Gannon. Because notice and comment and, by the way, the
Congressional Review Act, has the effect of shining a light on
the activities that are afoot. You have to give notice. You
have to take into account the comments. Critically, you have to
do, if you're going to pass a rule under the Administrative
Procedures Act, you have to do a valid cost-benefit analysis.
And those sometimes can be difficult. Economists should run
those; it's just simply hard.
And, oh, by the way, rules that never got approved through
the Congressional Review Act process have never taken effect.
Senator Ricketts. So, in fact, to your point earlier, by
issuing formal guidance they were purposely trying not to come
to Congress or not to raise the attention of the public of what
they were trying to do. Is that a fair statement?
Mr. Gannon. I can't get into their heads, Senator, but
that's the effect for sure.
Senator Ricketts. Mr. Ring, your bank was one of many that
was issued a consent order by the FDIC in recent years; is that
correct?
Mr. Ring. Yes.
Senator Ricketts. Would you describe your relationship with
your regulator to have been collaborative or more combative?
Mr. Ring. I think it has gotten better recently. In fact, a
great regulator at the FDIC, Joe Meade, who spent 30 years
there, recently left, retired. Invested in our bank and he's
now on the board. And I think that has helped.
But they, they definitely do not make it easier to be a new
and growing bank; right?
Senator Ricketts. Well, I see my time's up, Mr. Chairman.
But I do want to just wrap up by saying, again, my
experience in the financial services field was that when you
had regulators that had a relationship with the regulated
community, that actually helped them do their job to find the
bad actors.
And we all have an interest in really bad actors that are
in our industries. And that when you take an approach where you
weaponize Government, it's actually bad for the regulatory
scheme in general because players or, you know, companies who
are good, that are trying to stay in business and actually
follow the rules are discouraged because the regulators are
acting in a political manner.
So, thank you for indulging me there.
Chairman Scott [presiding]. Senator Kim.
Senator Kim. Thank you. Thank you to the four of you for
coming on out. Mr. Klein, I wanted to just start with you. I
thought you made some very poignant assessments about the
Suspicious Activity Reports in particular. You mentioned about
just, you know, millions of these every year that are being
used. But as far as I can tell from your testimony, it doesn't
seem like there is any feedback, any sense of are these useful.
Is that correct?
Mr. Klein. Correct. Banks are not judged on the quality of
their performance. They are judged on the quantity. And the
consequence is the bank has every incentive to file more
without getting information as to the quality of it. This is
how filings have increased tenfold in 20 years.
In my written testimony, I cite some work that shows that
the ability of it to lead to prosecutions for tax evasion, one
of the primary purposes of AML, has been extremely thin.
Senator Kim. And so we are seeing a situation where the
banks are filing millions of these. You know, they are costing
them a lot of money and time. But we are not certain whether or
not--it doesn't sound like they are getting any real feedback
in terms of whether or not those have been useful.
And I think you cited, in fact, in terms of some reports it
seemed like the IRS prosecutors may be used only a few hundred
of some out of millions of different reports that come before
them. Is that correct?
Mr. Klein. It is correct. Three-hundred-twenty-seven
reports started a prosecution on tax evasion out of about 27
million. That's a piece from Nick Anthony at CATO. And let me
just say, like, the way that I have come to analogize this is
the thesis of the entire AML process is like as criminal as
like a scuba diver swimming deep in the dark ocean in order to
evade detection, and the money from the criminal activities are
like the bubbles that float to the air.
And the idea here is that you use the data that comes in
SARs and other things to find the bubbles and go down. But in
point of fact, all we are doing in the current process is
blowing air into the system. I don't understand who is reading
all of these SAR reports.
And this gets to the point about State-licensed cannabis
that was raised earlier. That is federally illegal. If the DEA
wants to go in and shut down any cannabis company in the State,
they can. But you don't need a bank report to tell you where
the cannabis shop is. It's called Google Maps. It will work
really well. Why are we forcing the banks to continue to file
all of these things?
Senator Kim. Because this is putting pressure upon the
banks. You know, when we are talking about reputational risks,
you know, these are some of the calculations that banks are
making in terms of having to file these reports.
One thing I wanted to ask you, you know, I thought you made
a very convincing argument in terms of the currency transaction
reporting, in terms of the lifting of that number that hasn't
been lifted in quite some time. But I guess I wanted to ask
with more specificity when it came to the Suspicious Activity
Reports.
Do you have more concrete reform proposals there that our
Committee should be looking into as we are thinking about our
next steps?
Mr. Klein. Yeah, no, absolutely. So, for example, on State-
licensed cannabis, right? If you're running a State-licensed
cannabis business, you should be treated like other businesses.
If law enforcement wants to deal with you, go to the State
capitol, find where you are. Why you are being treated
differently makes absolutely no sense.
The second thing is let's be clear on what the priorities
are for banks to file SARs. There are areas where I think more
suspicious activity, like elder abuse, which has been the
subject of another CFPB report, is one where you could be
providing more information.
But there is a whole host of different categories of
activities. And I think what we need is a whole blue-sky
approach where Treasury's Financial Crimes Enforcement Network
and the bank regulators are brought before this Committee and
the public to discuss a prioritization of what we are going
after. Because in the 50 years we have been doing this regime,
we keep adding more targets, never taking anybody off the list.
Senator Kim. And I think that is right. And, you know, I
would have to say, Mr. McCauley, when I was, you know, hearing
your testimony and just--I am sorry for what you went through
in that kind of capacity. And when we look at the reputational
harm or reputational risk that banks are considering here, yes,
you know, it certainly seems like this excessive amount of
reporting, other things like that, are adding to it.
And I think one thing I hope we can all agree on is, you
know, having a greater sense of transparency across the board,
but then also some sort of feedback loop, some process by which
to try to appeal. Because it is not just on the SARs, but, you
know, also the customers are unaware that something has been
filed about them. And so there is just multiple layers of lack
of transparency on that front.
And, you know, I also want to just raise this, not ask a
question, but Mr. Klein, also you showed how with CheX and
other components, again, that sense of transparency is missing
as well as that lack of ability to appeal. So it just seems
like that is something systematic that I think this Committee
can hopefully dive in deeper on. So thank you so much. And I
yield back.
Chairman Scott. Senator Banks.
Senator Banks. Thank you, Mr. Chairman. Economy, Indiana,
is a small town. Mr. McCauley , congratulations on your
success.
Mr. McCauley. Thank you.
Senator Banks. It is really incredible, a fellow Hoosier to
go on and do the same--the incredible things that you are
doing.
My question for you is, obviously what happened to you is
wrong. It was disruptive. It didn't just affect you, but it
affected a lot of your employees and your partners. Was there
ever an opportunity for you to seek or recover any of the
losses that occurred to you?
Mr. McCauley. Senator, there wasn't any opportunity to
recover. The way losing your bank account works is you spend a
lot of time, you spend a lot of efforts, but there is not some
sort of a recouping you can do there.
We did appeal to our regulator, the OCC, and let them know
that this was happening to us, that our bank accounts were
being closed, and that we are having some disruption of
services there. But unfortunately, they weren't able to
necessarily help. They can't necessarily say positive or
negative things about any particular bank, and so they weren't
able to help us get banked anywhere else.
Senator Banks. Can you quantify the loss to you and others
involved?
Mr. McCauley. So we were--we had a trading business that we
were operating that was doing hundreds of millions in volume
per month that went to zero because we were no longer able to
bring on our clients' cash and bring that into our institution.
Because of that, we had to part ways with some of our staff as
I mentioned in my written testimony.
Senator Banks. And I assume that it wasn't just really rich
people who were affected by that? Common, every day, working
class investors that were affected, too?
Mr. McCauley. Senator, our bank serves institutional
investors, many of which are creating the products that the
retail investors of America use, for example ETFs. We custody
for some of the ETFs that are now owned by a broad swath of the
U.S. population.
Senator Banks. OK. Let me ask this a different way. When an
innovator gets hurt, it always benefits the incumbent player
and the industry. Do you think that the big bank that debanked
you had incentives to do that?
Mr. McCauley. Senator, I actually don't think that they did
that. I think that many of the large banks in the country were
actually in active conversations with Anchorage to add crypto
as an offering. So they were looking to maybe become crypto
custodians themselves or expand in that business line, which
makes it so clear that this was not something that they wanted
to do.
They did not want to debank crypto. Rather, they wanted to
embrace crypto, but they were very suddenly forced to take a
180 direction and go in the opposite direction, not just
stopping some of their crypto activity that they were looking
to expand into, but actually closing accounts.
Senator Banks. The Biden administration often claimed that
the crypto industry was a magnet for fraud and crime. But you
testified that Anchorage met the same know-your-customer and
anti-money laundering standards that every other bank does. Why
do you think the Biden administration was so dead set on
suffocating crypto currency?
Mr. McCauley. Senator, I can't necessarily comment on the
motivations. What I can say that if you look at the way that
the BSA works within America, the BSA works in America via the
banks. The banks are the ones that carry that out.
So the very idea of kicking crypto out of the banking
system was self-defeating because the way that we get
transparency, the way that we get monitoring of an industry is
to have it be integrated with the banking system. And so that's
why I think the debanking was so wrong-headed and did not make
any sense.
Senator Banks. Mr. Gannon, when I think of debanking, I
think of all of my services from the bank being taken away from
me. But is there something in between? I mean, banks that might
put holds on transactions or investments that we might not
think of as debanking but would also be a similar type of
politically motivated activity?
Mr. Gannon. Senator, that's possible. The technology exists
to do it, but it's usually more broad based than that. Just as
an example, I happen to be aware of a vineyard where the wife
of the vineyard owner happened to be an investor in the
cannabis industry.
The vineyard and the individuals that owned the vineyard
all lost their accounts. They had nothing to do with the
cannabis industry, but I guess it was a knock-on effect as far
as the regulators were concerned because all those accounts
went away.
That's the kind of--unfortunately, it would be nice to
think that the regulators work with a scalpel. But it's really
usually a five pound sledge hammer and a chisel.
Senator Banks. Very interesting. Thank you. I yield back.
Chairman Scott. Thank you. Senator Warnock.
Senator Warnock. Thank you so very much, Mr. Chairman.
Before I begin my questioning, I want to reiterate the request
Ranking Member Warren and my Democratic colleagues have made to
the Chairman to hold an oversight hearing in this Committee on
Elon Musk's dangerous access to the Treasury Department systems
that control $6 trillion in annual payments to millions of
American citizens, including Social Security, Medicare and tax
refunds. I can tell you that the people of Georgia are not
taking any comfort in the notion that this unelected
billionaire has access to these systems.
I think it is urgent that this Committee and the Senate
Finance Committee have a hearing to look into this matter to
protect Americans' private data, data that they are required to
provide and is now in the hands of Elon Musk and 22-year-old
interns.
We are approaching the 2 year anniversary of the failures
of Silicon Valley Bank, Signature Bank, and First Republic
Bank, three of the largest bank failures in U.S. history. A
review of Signature Bank's failures found that the FDIC, the
Federal bank regulator responsible for making sure our money in
the banks are safe, did not properly staff the team dedicated
to the bank with regular job vacancies--regulatory job
vacancies averaging 40 percent in the years leading up to the
failure.
Bank examiners are overstretched and overworked. And based
on today's conversation, it is clear that banks are begging for
more communication, more certainty, more clarity from
understaffed bank regulators. The last thing you want in
business is uncertainty, a lack of clarity.
This is why I was frankly shocked by the FDIC's decision to
withdraw job offers from more than 200 new bank examiners last
week. Mr. Klein, you are an expert in bank regulation. Do you
agree FDIC bank examiners are understaffed?
Mr. Klein. Yes.
Senator Warnock. And do you agree that this understaffing
has consequences for bank examiners' ability to communicate
with banks to provide regulatory clarity, especially when banks
are dealing with newer businesses that offer complicated or
potentially risky financial products or services?
Mr. Klein. Absolutely.
Senator Warnock. What I'm hearing is the Trump
administration's decision to rescind job offers to bank
examiners at the FDIC is going to make it less likely, less
likely, that some businesses, including the ones that my
colleagues here today are concerned about, can access the
traditional banking system or that they will be well-served by
it. Is that fair?
Mr. Klein. Yes. One of my colleagues just talked about the
difference between doing things with a scalpel and a five pound
sledge hammer. And this hiring freeze is a really big sledge
hammer.
Senator Warnock. I agree with that. And not only did the
Trump administration rescind bank examiner job offers, they
also emailed current examiners and basically encouraged them to
quit, which will only compound our staffing problems for all of
these businesses.
Mr. Klein, in addition to harming access to the banking
system, what other risks may arise from understaffing our bank
regulators?
Mr. Klein. Well, I mean, people talk about the need to
create new banks. New banks have to be approved. It's a
charter, not a license. And you need people there to approve
the charter. You need people to update your models. You need
people to collect and promote data and information. And there
is a whole host of things that could be slowed down by simply
being unstaffed.
In addition, the FDIC is a little bit like an ambulance. It
comes in when a bank fails. We have had several bank failures
this year already. And you need to have an emergency SWAT team
who is ready to go in.
The FDIC does a fantastic job of handling a failed bank. It
closes Friday evening. Monday morning, insured depositors have
full access to their money. That requires people. And it
requires trained people, expert people, people with experience.
Sometimes these things are more complicated, particularly in
small town America where you can't just show up 30 people and
sit in a hotel and not raise some concerns. And understaffing
this puts our ability to handle failures so that people have
access to their money immediately at great risk.
Senator Warnock. So I think this is very important because
there is always this sort of baked in assumption that having
regulators is a drag on the business. But you are demonstrating
through your testimony that understaffing these bank examiners
is bad for business, bad for innovation.
And everyone agrees that legal businesses should not be
systematically excluded from the financial system. However, the
way to do that is to hire and to empower regulators who can
ensure banks are safe and sound and provide clear guidance to
banks on permissible levels of risk.
Revoking job offers for bank examiners and pushing these
experts out of their jobs in the precipitous way that we have
seen, especially over the last 2 weeks, it puts all of us who
rely on banks to keep our money safe at risk, and it is a drag
on the business. This is an issue that I look forward to
continuing to work with this Committee on.
Thank you so very much for your testimony.
Senator Hagerty. Thank you, Senator Warnock. And Senator
Cramer, thank you for letting me--well, you just stepped down.
Thank you for letting me take your spot.
Over the past 4 years, I have seen a shocking number of
industries and individuals be denied financial services here in
America.
I recently spoke with a company in my home State that is in
an industry that is often politicized but always lawful. Here
is what has happened to them. They have been denied business
due to ``reputational risk''. They have been prevented from
expanding their credit facility. They have been denied
insurance policies, and they have been denied the ability to
renew coverage.
These are shocking problems that we see here. And this
entire constellation of problems exist at multiple levels.
First, you have got partisan ideologues that actually operate
within banks, public affairs divisions or their so-called
reputational risk committees that are exerting their influence
to choke off disfavored industries.
You have got, externally, banks being pressured by
political activist groups. You have got these shareholder
proposals that are coming at the behest of a number of outside
players that are particularly enabled by proxy advisory firms,
which is another issue that this Committee will get at.
And last, we have had activist regulators that have abused
their supervisory authority. They have imposed their own policy
agendas that were never authorized by actual banking statutes
or by the Congress. Bank examiners' subjective assessments of
risk are ripe for abuse by ideologically motivated supervisors.
The banks themselves are unable to speak out about
debanking because when regulators pressure them to do it, there
are strict confidentiality agreements. There are requirements,
I should say, that prohibit these banks from even mentioning
the reasons for service denial. Clearly, the banks themselves
are very concerned about regulatory retaliation.
So whether this de facto debanking stems from either within
the banks or within regulatory agencies, in both cases, we have
unelected individuals that are dictating what kind of companies
can exist and thrive in our Nation and with no directive at all
from the American people or from their elected representatives.
So Mr. McCauley, I would like to start with you. This
morning, FDIC Acting Chairman Travis Hill released 175
documents relating to its supervision of banks who are
attempting to engage in crypto-related activities.
These documents confirm that banks faced extraordinary
resistance and actually directives from supervisors to pause,
to suspend, to refrain from expanding all types of crypto or
blockchain related activity.
Mr. McCauley, have you seen us lose American companies and
innovators to other jurisdictions as a result of the hostile
posture of our Federal Government?
Mr. McCauley. Senator Hagerty, thank you for the question.
I have actually printed out one of the documents that came from
the FDIC drop this morning. It is right there in plain letters.
Quoting, ``We respectfully ask that you pause all crypto asset
related activity.''
This is not a suggestion. This is right to the heart of it.
Senator Hagerty. Mm-hmm.
Mr. McCauley. The FDIC was asking banks to pause their
activity with crypto. The net effect of that, like you said,
has been that a lot of the crypto activity has moved to other
jurisdictions, other jurisdictions where people feel like they
will get a fair shake, like they will get a fair opportunity to
actually build their business. This has been damaging. Many of
these kinds of businesses are businesses that we want within
the United States, crypto businesses, crypto exchanges, and
notably stablecoins.
So I thank you for your introduction of the bill about
stablecoins. I think charting a path forward here is very
important to us. And thank you for your leadership.
Senator Hagerty. Well, I think it's incredibly important.
And this type of innovation that we like to see on American
shores is being pushed offshore. Can you tell me who signed
that memo that you are looking at right now?
Mr. McCauley. This one is signed Eric T. Guyot, I think. He
is the assistant regional director.
Senator Hagerty. Whoever this person is, I have never heard
their name before. They certainly aren't an elected official.
Yet this person is taking on the authority and the
responsibility to debank an industry here that has tremendous
potential. So I think it is deeply concerning.
Mr. Gannon, I want to turn to you very quickly. There are
important parts of our BSA and AML regime that are susceptible
to weaponization for political purposes. Under our current
system, senior public officials and their families can be
designated as politically exposed persons or PEPs. And once you
are designated as a PEP, you think about it. Former Senator Sam
Brownback was designated a PEP. It results in higher regulatory
scrutiny and therefore, an increased chance of account closure.
In your view, Mr. Gannon, how can our BSA and AML regime
most effectively balance what are legitimate law enforcement
concerns with the risks that unwanted account closures are
going to occur with the--in fact the actual dampening effect,
the chilling effect, that we have seen taking place? How do we
balance that?
Mr. Gannon. Senator, there are two things, I think, that
can be done. Number one is I think the partnership between the
banks and the regulators needs to get into the 21st Century.
And there is much better technology that exists rather than
sending armies of people to go around filling out SARs and
filling out currency transaction reports.
If you have better data, you will have better results. And
if you have that result, that better result, then you can
determine is somebody being debanked because, in fact, they are
a risk, or are they being debanked because they may have some
sort of association that the regulators find unpleasant?
Senator Hagerty. Thank you. Senator Gallego.
Senator Gallego. Thank you so much, Chairman and Ranking
Member. Mr. McCauley, in your testimony about how Anchorage
Digital Bank manages risk and identifies suspicious activity to
comply with regulations. So how often would you say you detect
potentially suspicious activity among your bank's clients?
Mr. McCauley. Senator, we have active monitoring programs
that look for suspicious activity. One of the things we're
actually most proud about our systems is that we think they go
beyond what traditional banks are able to do in that we look
not at just point-to-point transactions, which are available in
traditional banking, but because of the rich data that is
available through blockchain systems, we are able to detect far
more of that.
Now our client base that we serve is primarily
institutional investors. So this is not the place that is
necessarily set up to have a lot of potential money launderers
in there. But we do make sure that any suspicious activity that
we do detect is detected and dealt with.
Senator Gallego. And you go through the proper protocol
filing? When you see something, everything else like that----
Mr. McCauley. Of course.
Senator Gallego. ----you abide by the regulations so it
doesn't come down on you or your shareholders? Did you ever,
because of just kind of the potential risk or feeling of risk
within your own discretion just--or maybe it's just not worth
the hassle, kind of choose to not open up a client or decline a
client of any sort?
Mr. McCauley. Absolutely, Senator. There are use cases that
our bank is not well set up to support. There are client types
or types of client activity that are not appropriate yet for
the systems that we have in place. And so we do express some
amount of judgment on that----
Senator Gallego. Right.
Mr. McCauley. ----on whether or not we can properly take on
an account and handle the risks that may or may not be present.
Senator Gallego. Or just the hassle that may come with it
because then you have to communicate with Government, and it
has to go back and forth, back and forth for something that may
not have much of a marginal return on investment.
Mr. McCauley. And, yes, I think this is a State-owned bank
procedure.
Senator Gallego. So it's important that we all think about
this aspect, the promise of every bank and, you know, different
regulators, you know, have different risk tolerances. And I
think that's a very healthy thing for us to understand. But we
should be very worried about kind of overcorrecting us on the
other end that could also increase risk to the banking system.
I think you are a good example of how to do it correctly, but
others may not.
Mr. Ring, in your testimony, it had to do with
``duplicative and overly burdensome'' regulatory burden--
burdensome regulatory burden--it is redundant, sorry about
that--during the 6 month approval process for Old Glory Bank.
What specific processes were duplicative, and how would you
propose we consider addressing these problems while still
making sure our regulators preserve their risk-based approach
to monitoring safety and soundness in the banking system?
Mr. Ring. That is a great question. Thank you. So to put
this into perspective, we bought a $10 million bank with only
$3 million of loans in Elmore City. That is probably smaller
than some bank accounts in here. And it took----
Senator Gallego. Not me. I wish, to be honest.
Mr. Ring. It took 6 months, three rounds of additional
information requests, and 300 pages of submission and then an
all-hands call. And we had to deal with the FDIC, the Federal
Reserve, and then even on the all-hands call, we had the CFPB
there.
And respectfully, I have never talked to a regulator that
was actually a banker, in all respect. Like if you deal with
the FAA, they are former pilots. If you deal with so many
organizations, they are actually the former business people. I
have only dealt with the Federal regulators who, respectfully,
were bureaucrats. And these are people that have never sat on
the front side of a check. And I feel like they do not have the
ability to apply judgment to some of these rules.
Senator Gallego. Well, what specifically would you
recommend then?
Mr. Ring. I would, going forward, make sure that you hire
at least half of all regulators with prior banking experience,
who actually know the impact of their regulations.
Senator Gallego. Any other?
Mr. Ring. I would go back and find the last chairman of
either the FDIC or the OCC that actually was a banker. I really
think it is about that.
And then, respectfully, I think they need to quit stepping
over dollars to pick up pennies. If you think about the banks
that failed in 2023, it was lack of liquidity, and yet they are
focused on the minutiae of banks and missing the forest for the
trees, such as loans and liquidity is what causes banks to
fail.
Senator Gallego. Right.
Mr. Ring. Not, you know, respectfully, an AML policy.
Senator Gallego. Thank you. And Mr. Klein, I think you have
a different opinion.
Mr. Klein. Yeah. I mean, Silicon Valley Bank didn't fail
because of a lack of liquidity. It failed because of a core
goal investment strategy in terms of its treasuries that it
held.
Mr. Ring. Except for the run.
Mr. Klein. So----
Senator Gallego. Mr. Ring.
Mr. Klein. Right. The run occurs when you realize the bank
is out of capital, and the first people come when you had a 93
percent uninsured deposit because you are running a $250
billion bank with four branches. It was not a regional bank. It
was a tech startup bank.
And part of the thing that frustrates me so much was it was
bailed out. It's--the single largest depositor at Silicon
Valley Bank was a crypto stablecoin company that had $3
billion. And as an economist, I can't dream of a better natural
experiment to understand the solvency of the stablecoin than
the fact that on Friday afternoon, that Silicon Valley Bank was
being closed under normal operations, which would have incurred
losses on uninsured depositors, and that stablecoin went from a
dollar to 87 cents on Saturday as people started to run. Then
Sunday, the regulators bailed out, took all of our money,
taxpayer money, fees that banks are going to charge back on
overdrafts and other low income people, and bailed out $3
billion back to that crypto, and its stablecoin went right back
up to par.
And so you see in this situation, is there is a connection
in crypto and the banking system. What you see in this
situation is that banks fail. And Silicon Valley Bank failed
for a variety of reasons, but primarily because of its
strategy, right? And I do agree with Mr. Ring on some of these
concerns about the relationship between banks and their
regulators. A CEO of Silicon Valley Bank sat on the board of
San Francisco Fed.
Chairman Scott. Thank you so much. We are going over to
Senator Moreno.
Senator Moreno. Well, thank you. Thank you, Chairman, for
the time for the hearing. I think it is very timely.
I think one of the things that I would like to say at the
beginning, especially for people watching this, is this can be
a very clinical conversation. We are talking about debanking.
But the reality is you have entrepreneurs that are absolutely
getting devastated by these policies.
I think it is hard for some of my colleagues who have only
been maybe attorneys or career politicians to know what it
feels like as an entrepreneur to chase a dream and have that
dream completely crushed, not because you had a bad idea, but
because you had a Government that was looking out for itself
and not looking out for you. So let me just say that from the
beginning.
Let me start with you, Mr. McCauley. What type of
cryptocurrency did Al Capone use?
Mr. McCauley. I would say that primarily the privacy coin
known as the U.S. dollar.
Senator Moreno. Got you. So I will look that one up and see
if we can ban that one. How about Pablo Escobar, my fellow
Colombian who gave a lot of reputational risk to fellow
Colombians in what he did. What kind of crypto did he use?
Mr. McCauley. I don't think he used any crypto.
Senator Moreno. Got you. How about Meyer Lansky?
Mr. McCauley. I am not sure.
Senator Moreno. There was some comments about dictators in
North Korea being powered by crypto. How about Ferdinand
Marcos? What was his crypto currency of choice?
Mr. McCauley. He did not have one.
Senator Moreno. Joe Kennedy?
Mr. McCauley. He did not have one.
Senator Moreno. OK. Got you. So maybe money laundering
wasn't invented by digital currency. Would that be fair to say?
Mr. McCauley. Very fair to say.
Senator Moreno. OK. Let's move on to this topic of--Mr.
Gannon, by the way, your bank helped me start my business. So
let me just give that little disclaimer up front. I appreciate
that your former chairman----
Mr. Gannon. I didn't know that, Senator.
Senator Moreno. Mr. Fish was very helpful so let me just
get that conflict out. I subsequently sold all of my businesses
so I have no conflicts. But let me just say this, how much of
loans do you just automatically forgive? I was a really good
client. I was a really good client, made payments. When could I
call you and ask you to forgive my loan?
Mr. Gannon. I don't believe you could do that, Senator.
Senator Moreno. Got you. So I am curious, because there was
a conversation from one of my fellow Senators earlier about the
rogueness of the Trump administration. And yet Joe Biden
illegally, according to the Supreme Court, forgave student
loans. And I remember that outcry, that need for an immediate
Senate hearing on why we were not forgiving, you know, not
chasing--why we would forgive student loans.
Now maybe my Democrat colleagues think it is great that
somebody becomes a gender studies major at Brown and racks up
$200,000 in student debt. But I had technicians working for me
that racked up thousands of dollars in tool loans that the bank
wasn't really--so what is wrong with a technician that a gender
studies major should get their loans forgiven and why aren't we
seeing outrage on that?
Mr. Gannon, have you ever heard of such a thing as loan
forgiveness from banks? And please give me the name of that
bank.
Mr. Gannon. I don't have a name for you, Senator, but what
I can say is some of my best friends at the banks where I have
worked were credit risk analysts. And they look very hard at
each loan, and they analyze the credit. And if we make the
loan, we expect you to repay it.
Senator Moreno. Well, that seems like an impossible
standard. So let's move on, Mr. Ring, to you on this topic of
regulation.
It seems like there is a debate in this room of who has
caused debanking. The good news is we agree that there is
debanking. I think that should be the first headline. Not so
long ago people were denying it. Right? So we have agreed on
that. That is an incredible accomplishment of the 119th
Congress. We have reached that conclusion.
So the question becomes why and who is responsible? Now, in
your mind, do you think that there is--is it easy for a small
community bank, let's say for example in Montpelier, Ohio, to
compete with JPMorgan Chase or Bank of America?
Mr. Ring. It is almost impossible. I find that about 75
percent of our time is spent serving regulators and only 25
percent serving customers. And when you are on small margins of
a community bank, you cannot compete with the big guys easily.
We are working hard at it, but it is very hard.
We have the same regulations as the big bank, but yet we
have less people and less money.
Senator Moreno. So you don't have 2,000 lawyers at your
beck and call?
Mr. Ring. Unfortunately, I am both the lawyer and the CEO
along with my wife. So we----
Senator Moreno. Probably H.R. also.
Mr. Ring. She is. And marketing.
Senator Moreno. All right. There you go. And Mr. Ring, I
actually applaud your testimony around helping working class
Americans that are getting crushed by banks. Do you think it is
fair to say that a lot of people know somebody or have
themselves been screwed by banks? I think that's fair to say.
And I appreciate that you are doing that.
But I think it is competition that ultimately makes that go
away. Don't you think like if there is just a lot more banks, a
lot more choices, don't you think that is the best elixir?
Mr. Klein. So America has almost 10,000 banks and credit
unions. I think there are some serious structural problems.
Senator Moreno. How many did we have 10 years ago?
Mr. Klein. We had more, Senator.
Senator Moreno. How many did we have 4 years ago?
Mr. Klein. We had a lot more because you couldn't bank in
multiple States.
Senator Moreno. The competition has dropped.
Mr. Klein. If you want more banks----
Senator Moreno. So competition has dropped dramatically. So
let me just end with this, and I hope my colleagues understand
philosophically as a business guy, the most greedy organization
on the planet is the Government. You pay your taxes, Mr. Klein,
1 day late, what do you get paid--what do you pay, like a $5
overdraft fee? No. You get late charges, interest that would
make the mafia jealous.
So let's just understand that the reason that the
Government is so damn greedy is because there is no competition
in Government. We need more competition in banking. That will
fix this.
Chairman Scott. Thank you, sir. Senator Alsobrooks.
Senator Alsobrooks. Thank you. First of all, thank you to
Chair Scott and Ranking Member Warren for hosting today's
hearing. And I want to thank all of our witnesses as well for
your participation.
I can say I agree with all of the others who you have heard
today who believe that we should both be expanding access to
credit and capital for all Americans and that we are concerned
about making sure that we keep our financial system safe as
well from criminals and fraudsters and scammers. And I happen
to believe we can do both at the same time.
And so I have--I also would like to say that Mr. McCauley
and Mr. Ring, you have both spoken about the need to protect
the integrity of our financial system from politics. And I have
to tell you that I could not agree more. And so these should be
fairly easy questions that I have just for both of you.
You both run businesses that depend on maintaining the
trust of your clients. And so my question is would these
clients trust you if you shared their most sensitive financial
information with someone outside your bank and without their
consent?
Mr. McCauley. Senator, no, they would not trust us if we
shared that information.
Mr. Ring. No, Senator.
Senator Alsobrooks. And so I ask as well, should an
unelected billionaire be snooping on Social Security payments,
say for example to my elderly parents? Would you agree that
that was wrong?
Mr. Ring. If you are talking about Elon Musk, I believe the
unintended consequences of that is probably offset by trying to
save taxpayers' money. And we haven't found a better way to do
it yet.
Senator Alsobrooks. And so you believe that your clients
and other elderly people who find someone snooping around in
their Social Security payments that they would be OK with that?
Mr. Ring. I don't know Elon Musk, but I don't think that is
what they are doing. I think they are looking at actual
taxpayer monies going out the door.
Mr. McCauley. Senator, if we hired an external auditor to
come and look at our books to make sure that we were doing a
good job of being fiscally responsible, I think our clients
would welcome that.
Senator Alsobrooks. And you think they would be comfortable
with doing that--someone doing that who is outside of your bank
structure? Say, for example, could I do that and look at your
clients' information?
Mr. Ring. Senator, going through the right process and
procedures for hiring and bringing that auditor in would be
extremely important and making sure they had direct, careful
access to the data would be important.
Senator Alsobrooks. So I would just say, I would echo
Senator Warren and Senator Van Hollen's sentiments on the
seriousness of this. And I really hope that our business
leaders will have the courage to speak out about a practice
that I can tell you I know you would never allow for your own
clients.
And so my next question is for Mr. Gannon and for Mr.
Klein, there have already been studies on how banks and bank
regulators can better balance the need for safety and soundness
with financial inclusion.
So for example, a 2023 report from the Treasury Department
examines circumstances where financial institutions
indiscriminately end relationships with broad categories of
people in the name of mitigating risk.
That report demonstrated that unfair debanking often
results in less financial inclusion, less fairness, and
ultimately consumers and small business owners are being pushed
toward less safe and less affordable financial products and
services.
And that 2023 report recommended that financial regulators
promulgate rules that promote a supervisory culture that
balances legitimate risk, mitigation, and strategies that
include financial inclusion.
So Mr. Klein, as far as you are aware, have regulators
adopted this 2023 recommendation?
Mr. Klein. No, they have not. Regulators push banks to use
systems like CheX and other do not bank lists for BSA, AML, for
other things, for other types of risk platforms. And they do
not adopt this. And I have been extremely disappointed at what
the Prudential regulators have done.
This BankOn movement has done a much better job in my
opinion of trying to get a better screen to let folks in, folks
who are not fraud risks. I am unaware of anything in the BankOn
program that has a greater risk of fraud than any other type of
account. And so I've been--from my experience I have seen too
little adoption of alternative ways to bring people into the
system and too slow adoption by regulators to do something
different.
Senator Alsobrooks. Thank you. And just one final question.
The Community Reinvestment Act is a law that encourages banks
to meet the credit needs of underbanked communities, especially
low and moderate income neighborhoods. And this law requires
banking agencies to assess banking institution's records of
meeting the credit needs of its community.
So I just want to ask quickly, Mr. Klein, how can
supervisory debanking make it harder for banks to meet their
community reinvestment obligations?
Mr. Klein. So I struggle because a lot of these overdraft
predator banks I have seen have gotten outstanding Community
Reinvestment Act from their regulators who keep giving them a
passing grade even when the bank loses money on every element
of its business model other than overdraft. So I have seen some
deeply problematic practices.
Senator Alsobrooks. Thank you so much.
Chairman Scott. Thank you, ma'am. I will turn to Senator
Cramer.
Senator Cramer. Thank you, Mr. Chairman, for having this
important hearing, Ranking Member Warren, as well, for your
leadership and congratulations to both of you. The title looks
good on both of you. And thank you to our witnesses.
I have to just state this hair-on-fire outrage by our
Democratic friends over a successful businessman giving his
time away from his business, I might add, to look at the books
of the Federal Government to identify waste, fraud, abuse, and
inefficiencies is some sort of a crime while Mr. Ring's bank
has never met a regulator that has a business background, or a
banking background. The irony is really quite rich. I think we
should have a few more business people looking at our Federal
books.
That said, thank you all for being here. My main interest
in the debanking discussion, and I am interested in all of it,
and I think both sides have brought up a lot of interesting
issues. But it's not so much the individual that I am
interested in, or even the individual company, but rather the
categorical discrimination against large swaths of businesses,
entire industries of businesses, constitutionally protected
industries, legal industries, I find frightening.
And I just want to reconcile, at least in my own mind, the
different answers that the three of you gave to Senator Kennedy
about which came first. Is this a problem with the regulators
or is this a problem with the bank presidents, to which I would
say yes.
The precursor to the regulators, quite honestly, and the
regulations--the precursor to this whole debanking thing was
this bizarro ESG movement in corporate America. And that was
happening before the regulators thought, ``Hot dog, we got
another issue we can, you know, shove at these guys.''
So whether it's--I've talked to many of the bank presidents
who very much support the legislation that me and 40 of my
closest friends so far have introduced, the Fair Access to
Banking Act, which doesn't require, by the way, a bank to do
anything, but it does prohibit them from categorically
discriminating against legal industries.
And the reason some of the bank presidents who have never
dared say it out loud tell me they support it is because they
want this burden removed from them. They want this political
pressure from their 30-year-old staff or the regulator, you
know, that they fear or the political movement of the day or
the activist investors that are trying to impose their values,
they want that removed from them. I am just saying let's not
discriminate against large industry.
And so I guess I would just ask each of you, what is your
sense of a bill like a Fair Access to Banking Act, that again,
doesn't require anybody--it is not saying you have to bank this
industry. It says you are prohibited from discriminating
against them. Does this seem like a radical idea?
Mr. Ring. Well, if I could go first.
Senator Cramer. Sure.
Mr. Ring. I think the regulators have pushed debanking of
industries, which you are talking about, I think midlevel
executives pushed debanking of individuals for political
causes.
Senator Cramer. Sure.
Mr. Ring. And my worry is, Senator, with a good intentioned
bill like that, you would have to prove somehow that we
followed the law. And so every time a relationship didn't work
out, there would have to be some type of reporting.
And so I actually respectfully think the free market is
always the best way to solve these problems. With more banks,
let banks bank where they want. If a pro-life bank wants to
exist and not bank Planned Parenthood, let them because there
is a bank that would love to bank Planned Parenthood.
Senator Cramer. But if you were going to discriminate
against large industries, should you be able to be insured by
the Federal Government?
Mr. Ring. Well, that's a great question. Because what is
unfortunate is the regulators were doing this through policies
and guidelines as we have already talked about. Like digest
those, you know, FIL 16-22 and SAB 121 and that is how you stop
it, is holding those individual regulators accountable, I feel.
Senator Cramer. Mr. Gannon.
Mr. Gannon. Yeah, Senator, if I could respond to that by
simply saying that what needs to be done consistent with the
act that you have introduced is simply that there is more
transparency.
Senator Cramer. Yes.
Mr. Gannon. And there is more notice----
Senator Cramer. Yes.
Mr. Gannon. ----when these kinds of decisions are made. And
one of the--there has been a long sort of volume of Executive
orders coming out of the White House. But one of them revived
an Executive order from 2019 called 13892. That Executive order
gives more due process to folks who wish to contest the actions
of regulators than the due process clause itself allows.
Senator Cramer. Well, maybe a law that puts that in statute
would be better.
Mr. Gannon. Correct.
Senator Cramer. My time is up, Mr. Chairman.
Chairman Scott. Thank you, Senator Cramer.
Senator Cramer. Thank you both.
Chairman Scott. Senator Lummis.
Senator Lummis. Thank you, Mr. Chairman. Thank you, Ranking
Member. And I think that today was the first time I have ever
heard the term hot dog used in testimony. And I so appreciate
that from my colleague from North Dakota.
Mr. Gannon, it is a pleasure to see you here today. I want
to thank you for everything you have done for the State of
Wyoming in the last few years. I just want you to know that I
am personally grateful. And I am going to start with you. In
your legal opinion, what is reputational risk?
Mr. Gannon. That would be very difficult to define,
Senator, because it really has no definition. It is something
that is, as I said earlier, it is malleable. It can be
reinterpreted. It is in the discretion of the regulators.
So what is reputation risk today? It might be something
different tomorrow.
Senator Lummis. Does it give bank examiners license to
censor viewpoints or base regulatory decisions on someone's
subjective viewpoint of what is a controversial comment?
Mr. Gannon. It can.
Senator Lummis. Well, let me show you that it does. So here
is this quote from an internal excerpt. It is a confidential
Federal Reserve Implementation Handbook on account access. It
requires that Federal Reserve staff consider whether a person
has made a ``controversial comment'' in making decisions about
access to the payment system. And of course, access to the
payment system is a defining feature of a bank, is it not?
Mr. Gannon. Correct, very much so. Without that, a bank is
vault.
Senator Lummis. So is it dangerous for the Fed to serve as
judge and jury on a particular banker's speech?
Mr. Gannon. Senator, I am kind of absorbing that still a
little bit because it is really quite unusual. I have never
seen anything like that before. But my immediate reaction is
number one, it sort of proves out the comments I have been
making about the subjectivity around reputation risk because,
who is to say what is controversial and what is not
controversial? That is number one.
Number two, it is chilling to me that it is possible that
access to the Federal Reserve payment system might be dependent
on whether the applicant was engaged in some sort of
controversial commentary or--now I can see it, or activities.
That is the kind of stuff that is--that is the kind of thing
you see in countries that appear on OFAC lists.
So I don't see how it has any place in assessing the
capabilities of an institution to have access to the Federal
banking system. We don't want to be in a place where free
speech is chilled because there is a concern that I might not
get access to banking services.
Mr. Klein. I agree very much, Senator. And I have been very
deeply concerned by the Kansas City Federal Reserve precluding
places like the credit union in Colorado from accessing the
payment system. And that chart puts my hair on fire.
Mr. Gannon. If I might add to that, by the way.
Senator Lummis. Yes, Mr. Gannon.
Mr. Gannon. I believe in litigation involving an
institution in Wyoming, Custodia Bank, I believe, if I recall
correctly from the oral argument, the position of the Federal
Reserve is that the Federal Reserve Bank of Kansas City has
complete and unfettered discretion as to whether or not they
allow access to the payment systems. That is a lot of power.
Senator Lummis. Thank you, Mr. Gannon. And that is a
concern of mine. I know this is hard to see. I couldn't see it
from where you are sitting.
Mr. Gannon. I can see it now.
Senator Lummis. OK. Let me read it to you all. This, again,
is an internal memo within the Fed. It says, Reserve Bank staff
generally should consider the conduct of the institution and
its leadership and whether association with the institution
poses undue reputational risk to the Reserve Bank.
Is the institution's leadership associated with
controversial commentary or activities? What is a controversial
comment or activity? What is that?
Mr. Gannon. Senator, I have no idea.
Senator Lummis. Is it in the eye of the beholder?
Mr. Gannon. It's completely in the eye of the beholder,
yes.
Senator Lummis. Mr. Ring, what is a controversial
commentary or activity?
Mr. Ring. Well, considering the things I have said about
pro-American causes and the flag, I feel like that was written
for me.
Senator Lummis. Mr. McCauley.
Mr. McCauley. It appears to be a tacit attempt to hold back
speech that is considered undesirable.
Senator Lummis. And thank you. What I would call this is
hard proof of Operation Choke Point. And it has now been
discovered by Congress. Thank you, Mr. Chairman. I yield back.
Chairman Scott. Thank you, Senator, very much for your
thoughts and your comments. Thank you to each of the witnesses
for participating in today's really important hearing. More to
come, by the way. This will not be the last time we have an
opportunity to talk about debanking in this Nation.
For Senators who wish to submit questions for the hearing
record, those questions are due 1 week from today, Wednesday,
February 12th. Witnesses have 45 days from that day to follow
up with answers.
Thank you. And the Committee is adjourned.
[Whereupon, at 12:32 p.m., the hearing was adjourned.]
[Prepared statements, responses to written questions, and
additional material submitted for the record follow:]
PREPARED STATEMENT OF CHAIRMAN TIM SCOTT
Good morning and thank you all for being with us today.
We're here to address an issue that strikes at the core of what it
means to live in a free and fair society: access to financial services.
Every federally legal business and law-abiding citizen deserves to
be treated equally, regardless of political views or ideological
leanings.
This is an issue that is deeply personal to me.
When my grandfather was growing up in the Jim Crow South, banks did
business with people they felt looked the right way--based on the color
of their skin.
One's ability to get a loan to finance their home or State a
business was based primarily on the color of their skin. And in the
1940s, my mother experienced the same redlining that has been
persistent, pervasive, and unfortunate for decades.
Thankfully, our Nation continues to evolve in the right direction.
And in the 1990s, when I was starting my small business, I went to
a bank and looked for an opportunity to get a loan. I'll say, without
any question, at that time as a kid growing up in poverty in a single
parent household my best asset--Mr. Ricketts--was a 1990, ten-year old
car with 253,000 miles. One would not consider that an asset, perhaps a
liability, but it was my only means of transportation. And I will tell
you, without a doubt, for me, it was an asset.
The bank, however, helped me completely understand it was not.
However, in those days someone could get a character loan, because of
your time in a community, because of your relationships with local and
community banks. Because of that, not only was my financial life
changed, not only did my American Dream become a reality, but more
importantly, my mother's American Dream became a reality.
We saw the strengthening confidence in our banking system, because
things had changed in the right direction.
With that loan everything seemed to get better.
Had I not gotten that line of credit, I may not be here chairing
this Committee today.
You see my story is so consistent with so many other Americans
story that really reflects positively on the American Dream.
In this country, access to credit is one of the cornerstones of
building your American Dream.
Owning a home and starting a business are challenging journeys
filled with complexities, and achieving success is never a guarantee,
nor should it be.
That's why access to financial services is so important.
The United States is home to a vast competitive network of banks
and payment providers, creating one of the most robust and diverse
financial services ecosystems on the planet.
It is this incredible landscape that offers countless opportunities
for homeowners and entrepreneurs to build a healthy foundation and make
strides toward achieving their version of the American Dream.
However, it is incredibly alarming and disheartening to hear
stories about financial institutions cutting off services to digital
asset firms, political figures, and conservative-aligned businesses and
individuals.
Under the Biden administration, we've seen the rise of what many
are calling Operation Chokepoint 2.0, where Federal regulators
exploited their power, pressuring banks to cut off services to
individuals and businesses with conservative disposition, or folks
aligned with industries they just didn't like--like the color of one's
skin in my family's history.
I wholeheartedly believe that debanking someone over their
political ideology is un-American and goes against the core values that
our Nation was founded on.
Today, we'll have an opportunity to hear from Anchorage Digital's
CEO, whose OCC-chartered bank was debanked, Old Glory Bank's CEO, who
started a bank to serve those who had been debanked, and from a legal
expert with extensive experience navigating these regulatory abuses,
and from a policy expert at the Brookings Institution.
This hearing will also examine how practices similar to the
original Operation Chokepoint have persisted, despite assurances that
they would end.
We'll investigate the role both regulators and financial
institutions have played in these harmful practices, which hurt not
just businesses but also consumers and our entire economy.
This issue should concern every American, regardless of political
affiliation and that's why I am committed a bipartisan solution to stop
this form of discrimination.
This hearing is just the beginning.
We are here to shine a bright light on these unacceptable practices
and to hold those responsible accountable. The message is crystal
clear: no regulator, and no bank, is above the principles of fairness
and market access.
Speaking of shining a light, I was so glad to see that just a
couple of hours ago, the FDIC under President Trump's leadership
released a fresh set of never-before-seen supervisory documents, which
further prove that Chokepoint 2.0 was real.
I will be going through the documents in greater detail, but rest
assured for those in this room, and those watching at home, they paint
a disgusting and disheartening picture of abuse.
As Acting Chair Hill characterized them, ``these and other actions
sent the message to banks that it would be extraordinarily difficult--
if not impossible--to move forward with crypto related activities.''
I commend the new FDIC leadership for its commitment to
transparency, but it is a shame that it took an election--an election--
for the agency to begin following the laws of our country.
Thank you. I look forward to hearing from our witnesses and working
with colleagues on both sides of the aisle to stop debanking and
protect every American's right to participate fully in the economy.
______
PREPARED STATEMENT OF RANKING MEMBER ELIZABETH WARREN
Thank you, Mr. Chairman. Thank you for holding today's hearing on
debanking. It is a real problem, and I hope it is something we can work
on together.
People need access to a bank account in order to thrive in today's
economy. The same goes for businesses. Without a banking account, you
really can't get along.
``Debanking'' happens when a bank shuts down a customer's bank
account because they think that account poses a financial, legal, or
reputational risk to the bank. Once the bank shuts someone out, they
may share that information with companies that get paid to maintain a
Do Not Bank list--with the result that the customer is blacklisted
everywhere.
For me, this is straightforward. It doesn't matter who you voted
for, what you believe, or the origin of your last name--people
shouldn't be arbitrarily denied access to their banks, locked out of
their accounts, or stripped of their banking privileges.
To help identify what is going on, my staff reviewed the Consumer
Financial Protection Bureau complaint database, looking for cases where
consumers reported that they were unable to open accounts or their
accounts were wrongly closed--classic debanking. Mr. Chairman, we put
together a supplemental memo on this data that I'd like to make part of
the Committee record.
My staff identified 11,955 complaints--and that's only the people
who took time to file complaints and only in the past 3 years.
They all reported common themes.
No warning.
No explanation.
No chance to dispute or appeal.
They described how one day, all of a sudden, they lost their place
in the banking system.
We know from the consumer complaint hotline that millions of
Americans--of all political stripes--have had the same experience.
Tens of millions of customers have been blacklisted by the banking
industry because they overdrafted their account a few times.
Formerly incarcerated Americans have been debanked because of their
criminal history.
Some people have been debanked for merely having the same name as
someone who has a criminal history.
Muslim Americans and Armenian Americans have faced debanking on
account of their last names.
Nonprofits and charities operating internationally have been
debanked through no fault of their own.
Lawful cannabis businesses have been unable to open accounts, and
employees of those businesses have also been debanked.
This shouldn't be happening. So we need to figure out why, and who
is responsible. My staff did some more work here as well. They found
that just four big banks--Bank of America, JPMorgan, Wells Fargo, and
Citibank--accounted for half of all the complaints filed at the CFPB.
Donald Trump was onto a real problem when he criticized Bank of
America for its debanking practices.
Banks may be taking shortcuts when it comes to assessing risks.
Rather than investing time and resources to identify true criminal
risks and shutting down those accounts, big banks are relying on black
box algorithms and middle-men companies and shutting down accounts
without doing careful due diligence.
We can prevent these abuses. I know that the Consumer Financial
Protection Bureau is a favorite whipping boy of Republicans on this
Committee, but the CFPB is the main agency in our Government that is
actively working to stop unfair debanking.
Let me say that again: the CFPB is the one agency that is actively
working to stop unfair debanking. Right now, the agency has five
different rules either in place or in progress that would help prevent
debanking by addressing some of the root causes, from overdraft fee
practices to religious discrimination. And the CFPB is working to hold
banks accountable when they close law-abiding citizens and businesses'
accounts for no good reason.
I sent a letter to President Trump today that walks through the
CFPB's work. I'd like to make that letter part of the Committee record.
I said the CFPB is the one agency fighting back against debanking, but
that may be at risk.
Earlier this week, Treasury Secretary and Acting CFPB Director
Scott Bessent halted all CFPB rulemaking, enforcement investigations,
and litigation against financial institutions that are breaking the
law--including the banks that are wrongfully debanking their customers.
The freeze Secretary Bessent has put on the CFPB means more Americans
across the country will be unfairly debanked, and they will lose the
one agency that is working to help them.
There is additional work to be done by the Treasury Department, the
Federal Reserve, the FDIC, and other regulators to issue clear Anti-
Money Laundering rules and guidance for banks to follow, which would
reduce the incentive to use debanking as a form of risk management.
Mr. Chairman, I'll say again: I appreciate your holding this
hearing. Debanking is a real problem, and I'm eager to work with you
and President Trump to support the CFPB's efforts to make sure that
banks treat all people fairly and that we put an end to this debanking.
______
PREPARED STATEMENT OF NATHAN MCCAULEY
Cofounder and CEO, Anchorage Digital
February 5, 2025
Thank you, Chairman, Ranking Member, and distinguished Members of
this Committee for having me as a witness today on the important issue
of debanking and ensuring fair access to banking.
I am Nathan McCauley, the CEO and cofounder of Anchorage Digital,
an institutional crypto platform that is home to the Nation's first and
only federally chartered crypto bank. I grew up in a small town in the
Midwest called Economy, Indiana, with a population of about 150 people.
Though I came from what many call ``flyover country'' and one of my
first jobs was grilling burgers at McDonalds--I had big dreams. I
wanted to be a computer engineer and entrepreneur. Early in my career,
I worked on cryptography and as a security engineer. In 2017, after
being asked for years by friends to help them manage the private keys
to their crypto wallets, my cofounder and I decided to start a company
to offer a safe way for institutions to custody their crypto at scale.
That company is Anchorage Digital, which has offices in South
Dakota, New York, Portugal, and Singapore and 400 employees around the
globe, including 282 employees across 37 different U.S. States. As a
remote first company, our employees are distributed throughout the
United States providing great jobs in big cities but also small towns.
Under the terms of our national bank charter, granted to us by the
Office of the Comptroller of the Currency (the OCC) in January 2021,
Anchorage Digital Bank safeguards digital assets, or more specifically
the cryptographic keys to access digital assets. We have over a
thousand institutional clients, including crypto-native companies,
public and private funds, wealth and asset managers, and sovereign
wealth funds. Anchorage Digital also provides these institutions access
to other services such as staking, on-chain governance, settlement, and
over-the-counter trading. We are proof that crypto companies can
operate safely and soundly within the regulatory perimeter, and we are
proud of the role we play as a bridge between the traditional financial
system and the emerging crypto economy.
I am grateful for the opportunity today to tell our story: how we
sought out the highest level of regulatory scrutiny and certainty by
becoming a national bank, how we built a best-in-class compliance
program, and how we were nevertheless debanked, and denied access to
banking services that our company depended on--the ramifications of
which we are still dealing with to this day.
What It Means To Be a Federally Regulated Crypto Bank
For those who are not familiar, I want to briefly explain what it
means to be a federally regulated crypto bank. We are subject to
multiple on-site examinations by the OCC each year, including in-depth
reviews of our documents and processes to ensure that we operate in a
safe and sound manner and comply with applicable laws and regulations.
Our examiners assess how we manage numerous categories of risk
including credit risk, liquidity risk, price risk, operational risk,
compliance risk, strategic risk, and reputational risk. Finally, we are
held to the same asset management, BSA/AML and OFAC compliance, IT,
security, and other standards as any other federally regulated bank. In
fact, we have the ability to go beyond what traditional banks do in
terms of transaction monitoring. We monitor the flow of funds not only
within our bank, but funds that were once in the bank, and identify
suspicious activity to an extent not possible in the traditional
financial system. This has led to us assisting law enforcement in their
efforts to catch and or sanction persons conducting illegal activities,
well after these funds have left the bank.
Meeting the requirements of a Federal bank charter is a significant
undertaking. Yet we sought one because we believe that Anchorage
Digital, our clients, and the industry benefit from the OCC's extensive
supervisory experience and expertise, and that our business is a model
for how existing laws and regulations can be adapted to the unique
benefits and risks of new technologies.
How We Were Debanked
Despite being a federally regulated bank ourselves, subject to the
same liquidity, capital, and risk management expectations of other
federally chartered banks, we were debanked. I will describe here
briefly what that experience looked like for our company--an experience
that we believe was shared by many in our industry and perhaps in other
industries, as well.
For over 2 years, we had been doing business with our bank. We were
a valuable client to them: we held a corporate bank account there, and
they held our client fees from custody and other services, along with
general corporate funds used for day-to-day business expenses such as
payroll and administrative expenses. The relationship was so positive
that we were in active discussions to expand our partnership. Not once
in our 2\1/2\ year relationship had they raised any issues. We were a
highly regulated, well-capitalized, well-run business--in many ways the
ideal bank client.
One day in June 2023, we received an urgent email from the bank
informing us that they needed to speak with us that day. On the call,
we were told that our account would be closed in 30 days because they
were not comfortable with our crypto clients' transactions. We
attempted to explain the source of all payments from our crypto clients
were fully documented as a part of our robust KYC, AML, sanctions
compliance, and other internal transaction monitoring and attribution
processes, and that we would be willing to provide more information to
their risk management team. They were uninterested. They refused to
engage in further discussions, provide any additional explanation, or
offer any chance to appeal the decision.
Alongside this experience, we found ourselves shut out of the
banking system at other touchpoints. After the closure of some of the
few banks that were willing to serve crypto clients in March of 2023,
we were forced to find a new banks to hold clients' cash funds in
custody for trading purposes, as well as an account to hold segregated
regulatory capital, both required to be held at an FDIC-insured bank
under the terms of our bank charter. Again, we should have been a
desirable, low-risk client for a bank. Yet over the course of a 7-month
period we spoke to over 40 banks and were rejected by all of them. Many
did not even cite a reason; others just vaguely told us it was not
within their risk appetite to work with crypto clients.
While Anchorage Digital was eventually able to find banks willing
to partner with us, the impact of being nearly shut out of the banking
system was devastating. It was extremely disruptive to our business and
our clients, and contributed to the difficult decision we made in 2023
to lay off 20 percent of our workforce, including 70 U.S. employees. To
this day, our clients lack the ability to send wire transfers to third
parties, a basic banking service we previously had access to.
Furthermore, it abruptly ended opportunities to provide subcustody to
other national banks we were actively exploring partnerships with.
So why did this happen? I believe that regulators pressured banks
to cut off services to the crypto industry. Why do I think this? Two
things: a series of anti-crypto regulatory actions between 2021 to
2023, and my own lived experience.
First, in January 2021, the OCC put a hold on its Fair Access Rule,
which may have prevented discrimination against disfavored industries
such as crypto. Then in November 2021, the OCC issued Interpretive
Letter 1179, requiring banks to seek permission from the OCC before
engaging in legal crypto banking activities. Shortly thereafter, in
April 2022, the FDIC required banks under its supervision to flag any
current or potential business with crypto, and warned of the risks of
conducting business with such entities. Also that month, the SEC issued
SAB 121, which effectively prevented any public bank from providing
custody of digital assets at scale. Finally, in what I believe was the
nail in the coffin that led to the en masse debanking of the crypto
industry, the Federal Reserve, FDIC, and OCC issued a joint statement
in January 2023 warning banks against serving crypto clients or
engaging in crypto activities of their own. The implied threat of
enforcement action was clear, leaving many banks with no choice but to
cut off crypto clients completely.
Second, my lived experience. Outside of what happened to our
company, I am an investor in four crypto companies that struggled to
obtain and keep their bank accounts during this time, forcing some of
them to shut down. Further, I have at least two employees that have
been debanked because of what they believe is their association with
the crypto industry. Finally, I have spoken to dozens of crypto leaders
that have been debanked personally or had their crypto companies
debanked.
I want to remind this Committee and the public that none of the
actions by the regulators described above were authorized by Congress
or subjected to agency rulemaking, both of which would have allowed for
the public to weigh in and offered transparency and accountability. The
entire process was opaque, unfair, and amounted to a de facto ban on
crypto by choking it off from the Federal banking system, something any
industry needs to survive.
Moving Forward
Congress is right to investigate what happened, to protect and
promote fair and open access to banking services for all law-abiding
citizens and companies, as the President's Executive order on digital
assets recently stated.
Debanking is about more than just the inconvenience and disruption
to our business and many others in the crypto industry. It is about the
broader issue of ensuring fair access to the financial system and
fostering the growth of an industry that could benefit Americans in
terms of jobs, technological innovation, and financial inclusion. It is
a threat to American values to create such arbitrary barriers against
new technology and innovation which undermines our economic
competitiveness as a country.
I am encouraged by this Committee's efforts to investigate and put
an end to the practice of debanking, including special attention to the
debanking of crypto firms. In addition to holding hearings such as this
one, I urge Congress to consider legislation similar to what has been
passed at the State level to ensure fair access to financial services.
Furthermore, the new Administration should consider rescinding the
January 2023 joint banking regulators' statement and the OCC's
interpretive letter 1179, which imposed an arbitrary pre-clearance
requirement for banks wishing to engage in certain crypto activities.
Thank you for the opportunity to appear today and I look forward to
answering your questions.
______
PREPARED STATEMENT OF STEPHEN T. GANNON
Partner, Davis Wright Tremaine LLP
February 5, 2025
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PREPARED STATEMENT OF MIKE RING
President, CEO, and Cofounder, Old Glory Bank
February 5, 2025
Chairman Scott, Ranking Member Warren, and Members of the Banking
Committee, thank you for allowing me to share how Old Glory Bank,
launched from Elmore City, OK, in April 2023, became a market solution
to debanking.
I am honored to speak on behalf of our more than 50,000 customers
across all 50 States, our 88 passionate employees, and our pro-America
cofounders, including Radio and TV Host Larry Elder (who is here with
us today), the 27th Governor of Oklahoma and former two-term Member of
Congress, Mary Fallin-Christensen (who is here with us today), former
Copresident of Fox News and White House Deputy Chief of Staff of
Communications for President Trump's 45th administration, Bill Shine
(who is here with us today), Old Glory Bank cofounder and Chief Legal
Officer (also my wife of more than 20 years), Anne Marie Ring (who is
here with us today), plus the former Secretary of HUD, Dr. Ben Carson,
and America's favorite patriot, Country Music Icon and John Rich (both
of whom could not join us today). I'm also honored that Mr. Wade
Christensen is here with us today, from the Great State of Oklahoma,
whose family previously owned the bank we purchased to launch Old Glory
Bank, who are now co-owners of Old Glory Bank.
My perspective is that there have been two forms of debanking in
America, regulatory debanking and participant debanking. Old Glory Bank
is a market response to both.
Regulatory Debanking
Regulatory Debanking is an orchestrated effort by the Fourth Branch
of Government--the administrative state, to deny banking services to
LEGAL industries.
The original Operation Choke Point began in 2013, when the Obama
DOJ, working with the FDIC, bullied Banks to stop serving the firearms
industry. This had the intended impact of choking-out deposit and
lending services to the firearms industry, which Old Glory Bank has
been working hard to solve since we launched in April of 2023.
Operation Chokepoint 2.0 was started in early 2022 when the Biden
administration caused the FDIC and the SEC to bully banks into not
serving legal crypto companies, through FIL 16-22 and SAB 121.
FIL 16-22, issued by the FDIC, effective April 2022, while
reasonable on its face, was intentionally misused by the FDIC to choke-
out banks from providing depository services to legal crypto companies.
SAB 121, issued by the SEC, also effective April 2022, set forth
irrational accounting rules for holding crypto as a custodian.
Thankfully, FIL 16-22 has been exposed with lawsuits, and SAB 121
was revoked by the new Administration 2 weeks ago.
But, for almost 3 years, this one-two punch by the FDIC and the SEC
had the intended effect of preventing banks from serving as a custodian
of crypto and choking out banks from providing demand deposit services,
which prevented banks from being the on-off ramp for legal crypto
companies.
Participant Debanking
On the other hand, Participant Debanking is a voluntary effort by
the Big Banks to debank Americans who disagreed with them on COVID, or
who supported Donald Trump, or who held or donated to conservative
causes.
However, instead of sitting around complaining about what the Big
Banks were doing, we created Old Glory Bank to be a market response.
After a lengthy and difficult regulatory approval process, we
purchased a one-branch bank in beautiful Elmore City, OK, on November
30, 2022. Five months later, in April 2023, Old Glory Bank launched the
best digital-first banking service for America. In less than 2 years,
we grew from $10mm in deposits to more than $175mm in deposits. We grew
from 300 customers in the Elmore City area, to more than 50,000
customers across all 50 States. We now serve more than 2,000 small
businesses across America. I humbly submit that we have better products
than the mega banks, plus better service. Our customer service center
is in beautiful Durant, OK, (not offshore), and we actually love our
customers and respect their views.
As part of our market solution, in less than 2 years, we launched a
cancel-proof version of PayPal, called Old Glory Pay. We launched a
cancel-proof version of GoFundMe, called Old Glory Alliance. We
launched Old Glory Cash-In, so that our customers can easily deposit
cash at 88,000 retail locations across America. We launched Old Glory
Protect, which is a free $100,000 line-of-duty death benefit for
America's Protectors, such as the military, firefighters, U.S. Border
Patrol Agents, and Law Enforcement.
Big Banks debanking Americans is clearly wrong, but I do not
believe the answer is additional regulations telling banks who they
must bank. If that occurs, this will certainly boomerang on us.
For example, an openly pro-life bank should not be required to
accept planned parenthood as a customer. Likewise, an openly pro-green
bank should not be required to accept oil and gas companies as a
customer. This should be a market decision, not a Government decision.
Consider Tesla--Elon Musk never wanted EV mandates. Just a market
opportunity.
I believe that the simple solution to debanking, is more banks.
Allow the free market to solve this problem.
Unfortunately, the administrative state makes it too difficult to
start and run a bank. In the prior 4 decades, America lost 73 percent
of its banks. But starting a new bank is nearly impossible. For
example, in a 2-year period of 2023 and 2024, about 8 new banks
started. During the fiscal year period for 2023 and 2024, there was a
reduction of 229 Banks (as reported by the FDIC).
This lack of new banks is not because there are less entrepreneurs,
less bankers, or less communities to serve. It's because the
administrative state makes it too hard to start and grow a bank. To put
this in perspective, in June 2022, we submitted an application to buy a
one-branch bank in beautiful Elmore City, OK, with only $10mm in
deposits and less than $3mm in loans. Yet to obtain regulatory approval
to buy this little bank, it took 6 months, 3 rounds of additional
information requests and more than 300 pages of submissions.
I'll never forget an all-hands Zoom call we had with the FDIC, the
Federal Reserve, and the CFPB, many of whom were D.C.-based (with
preferred pronouns). They were visibly disgusted at being forced to
talk to me about debanking, the Flag, and Pro-America issues. These
career bureaucrats behaved like they were on Shark Tank, with the
discretion to pick winners and losers. On that call, I actually had a
career bureaucrat ask me: ``If Old Glory Bank is such a good idea, why
has no one done this before?'' Of course, to any actual businessperson,
that's the whole point. No one had done this before.
Conclusion
Senators, for all of the talk about not wanting Banks who are ``too
big to fail,'' the exact opposite has happened. Big Banks keep getting
bigger, small banks keep disappearing, and new banks are restricted
from launching. With so few banks, the big banks have too much power
over freedom and the economy.
Please, instead of imposing any new requirements about debanking,
consider a reimagined look at the existing regulatory scheme on banks.
A free market can fix debanking. We merely need to make it possible for
more great banks like Old Glory Bank.
______
PREPARED STATEMENT OF AARON KLEIN
Senior Fellow in Economic Studies, Brookings Institution
February 5, 2025
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RESPONSES TO WRITTEN QUESTIONS OF
SENATOR CORTEZ MASTO FROM AARON KLEIN
Q.1. Why should SARs reform be paired with the SAFER Banking
Act?
A.1. Response not received in time for publication.
Q.2. How should SARs filing requirements be changed for State-
legalized cannabis businesses?
A.2. Response not received in time for publication.
------
RESPONSES TO WRITTEN QUESTIONS OF
SENATOR BLUNT ROCHESTER FROM AARON KLEIN
Q.1. Transparency--Financial institutions play an important
role in protecting our communities from financial crimes. Anti-
money laundering reporting requirements are structured to not
tip off bad actors. However, without updates to these decades-
old regulations, law-abiding citizens may be caught up in
reporting.
What steps should we take to improve these reporting
systems to target bad actors more accurately?
A.1. Response not received in time for publication.
Q.2. How can we better balance the need for transparency for
consumers with the importance of confidentiality in serious
situations?
A.2. Response not received in time for publication.
Q.3. Barriers to Bank Accounts for Justice-Involved
Individuals--In the House, I cochaired the Bipartisan Second
Chance Task Force, and I look forward to reintroducing the
bipartisan Clean Slate Act, which seals eligible criminal
records and allows those who have completed their sentence to
participate fully in society, including accessing a bank
account. We have worked on this at the Federal level and now
States are passing their own Clean Slate laws. So much progress
has been made across the country. Despite these strides, the
fact remains that for returning citizens, it is still too hard
to access a bank account.
What barriers to banking do returning citizens face?
A.3. Response not received in time for publication.
Q.4. Does the use of AI and machine learning in risk analysis
pose a debanking threat to returning citizens?
A.4. Response not received in time for publication.
Q.5. Where do returning citizens turn if they've been denied a
bank account?
A.5. Response not received in time for publication.
Q.6. Do you think returning citizens would have better economic
and social outcomes if they had full access to the financial
system? How so?
A.6. Response not received in time for publication.
Q.7. Cannabis Banking--Starting this spring, the first
recreational cannabis dispensaries will be licensed in
Delaware. Up to 30 new retail businesses will have the
opportunity to open. It is a public safety hazard if they are
forced to operate in all-cash.
What does Congress need to do here to address debanking of
State-legal cannabis businesses?
A.7. Response not received in time for publication.
Additional Material Submitted for the Record
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