The Wall Street Journal recently reported that approximately 120 hedge funds that are involved in the cryptocurrency industry have faced challenges in accessing banking services over the past three years. This represents about 75% of the 160 hedge funds surveyed by the Alternative Investment Management Association (AIMA). Interestingly, none of the 20 alternative investors in other asset classes, such as real estate and private credit, reported similar difficulties with banking services. The issues faced by the crypto hedge funds varied from unclear communication to the outright termination of banking relationships. In some cases, banks notified the funds that their relationships would be terminated without providing clear reasons, citing a desire to limit exposure to the crypto industry.
According to John D’Agostino, head of institutional sales at Coinbase and an AIMA board member, the affected funds eventually found banking partners, but these were often smaller or regional institutions. This highlights the struggle that crypto hedge funds face in accessing banking services from larger, more established financial institutions. There is speculation within the crypto industry about the existence of an effort by the Joe Biden administration known as “Operation Chokepoint 2.0,” which is believed to aim at restricting the crypto industry in the US by limiting access to banking services. Recently, Coinbase chief legal officer Paul Grewal released letters from the Federal Deposit Insurance Corporation (FDIC) to banks in 2022, urging them to pause or completely stop crypto-related activities.
These documents were obtained through a Freedom of Information Act (FOIA) request that sought clarification on an alleged 15% deposit cap imposed on banks that are friendly towards crypto. Grewal believes that these letters provide evidence of the existence of Operation Chokepoint 2.0. Custodia Bank CEO Caitlin Long also supported this claim, stating that the letters signify a coordinated effort to hinder the crypto industry in the US. Furthermore, Austin Campbell, CEO of global digital payments company WSPN, pointed out that the AIMA survey serves as additional proof that Operation Chokepoint 2.0 is a real concern within the crypto industry.
The challenges faced by crypto hedge funds in accessing banking services highlight the disparities in treatment between traditional financial institutions and those involved in the cryptocurrency industry. The unclear communication and termination of banking relationships experienced by many crypto hedge funds have raised concerns within the industry about potential efforts to restrict or hinder its growth. The revelation of letters from the FDIC urging banks to limit their crypto-related activities has added fuel to these concerns, with industry experts like Paul Grewal and Caitlin Long pointing to this as evidence of a concerted effort to stifle the crypto industry in the US.
As the debate around Operation Chokepoint 2.0 continues within the crypto industry, the findings of the AIMA survey stand as a concrete example of the challenges faced by crypto hedge funds in accessing banking services. The fact that smaller or regional institutions have stepped in to provide banking services to these funds further highlights the issues that larger banks have in serving this sector. With advocacy from industry leaders and continued monitoring of regulatory actions, the hope is that the crypto industry will be able to navigate these challenges and continue to innovate and grow. By shedding light on the obstacles faced by crypto hedge funds and the potential threats posed by Operation Chokepoint 2.0, the industry can work towards finding solutions and ensuring a level playing field for all participants.
