“Regulation through exhaustion”: see how the FDIC was forcing banks to stop services to crypto clients

On Feb. 5, 2025, the Federal Deposit Insurance Corporation released 175 documents from the Biden-era FDIC correspondence ahead of the U.S. Senate Banking Committee GOP hearing on the debanking of crypto companies. New documents reveal new details of the so-called “Operation Choke Point 2.0.”

Following Trump’s inauguration, a pro-crypto team took the FDIC over and sided with Coinbase in the battle against the alleged debanking of the companies working with cryptocurrency. 

In 2024, Coinbase sued the FDIC. The move allowed the company to use the Freedom of Information Act to force the agency to release some of its correspondence with financial institutions. The FDIC released a portion of heavily redacted documents now known as the “pause letters.” 

Those letters showed that the FDIC was pressing financial institutions to pause all the operations of the companies using cryptocurrencies, effectively stripping them of the right to use banking services without a proper cause. This practice cemented the growing concerns of the ongoing “Operation Choke Point 2.0” under the Democratic administration. 

The new FDIC team is critical of their predecessors and released the new documents voluntarily, without relation to Coinbase exercising the FOIA.

What’s inside the new batch of the FDIC correspondence

Another 175 documents from the FDIC were compiled for release after the review made under the new chair, Travis Hill. The release date coincides with the start of the Senate hearing entitled “Investigating the Real Impacts of Debanking in America.” The documents may serve as additional evidence of the Biden-era FDIC’s efforts to block businesses dealing with cryptocurrency out of banking services.

The newly released documents revealed that the FDIC pressed on more companies to debank the crypto clients. The efforts of the banks to resist or ask additional questions were met with silence from the FDIC that could last for months. On some occasions, the FDIC sent directives to suspend or refrain from all crypto- or blockchain-related activity altogether. 

The Coinbase CLO, Paul Grewal, who has been active and vocal in the battle against the debanking of crypto clients, took to X to demonstrate and comment on several excerpts from the published documents. He compared the actions of the FDIC to execution and called them “regulation by exhaustion.”

The documents illustrate that in the cases when banks and the FDIC made agreements that limited the services for the crypto clients, the Corporation made efforts to cancel such agreements and achieve wider restrictions. 

The FDIC was consistent in demanding the banks restrain from supporting the clients involved in crypto transactions despite all the efforts by financial institutions to convince the agency of the safety and soundness of such transactions. Judging from the available documents, banks were losing in this battle and halted all operations with the companies dealing with crypto. The refusal to make crypto transactions didn’t mean the clients were regaining banking services.

The FDIC cited reputation risks, crypto volatility, and consumer protection as the reasons to deny some clients their right to use banks.

An unexpected ally

In the Feb. 5 hearing, both Democrats and Republicans agreed that the cases they investigated saw unfair denials of banking on political grounds. Surprisingly, even Sen. Elisabeth Warren, who is often seen as an outright enemy of cryptocurrencies, stepped in to investigate the unfair debanking and take action. 

Warren sent a letter to President Trump in which she expressed her willingness to work with the president, chairman Tim Scott, and Congress to stop debanking. In the letter, she shares some of her findings. According to her analysis, in three years, there were thousands of cases of unfair debanking, and over half of the complaints are related to four banks: Bank of America, JPMorgan Chase, Wells Fargo, and Citigroup. 

It is indicative that her letter does not mention cryptocurrencies at all, meaning that Warren uses the crypto community agenda while not explicitly expressing her attitude towards cryptocurrency.

What’s next?

Now that the FDIC and the government become Coinbase allies, the anti-crypto operations of the previous FDIC iteration will probably be stopped. The bipartisan animosity towards the debanking initiatives is a strong signal of the change.

Based on the press release, we can picture an approximate image of the future relationships between the FDIC and the crypto industry. According to Travis Hill, the FDIC is going to “reevaluate [their] supervisory approach to crypto-related activities.” It includes several points. First off, the Corporation is going to replace the Financial Institution Letter (FIL) 16-2022. This letter obliges all the institutions supervised by the FDIC to notify it about any engagement with cryptocurrency activity and provide information for review. As we can see now, following these reviews, banks have been forced to stop working with crypto clients. 

The FDIC will work closely with the President’s Working Group on Digital Asset Markets. Hill stresses that the FDIC will continue to adhere to safety and soundness principles.