Synapse Investor Marc Andreessen Says CFPB "Terrorizes" Fintech, Crypto To Protect Big Banks

a16z's Sprawling Fintech & Crypto Investments Stand To Benefit From Lighter Regulation

Dec 01, 2024

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Synapse Investor Marc Andreessen Says CFPB “Terrorizes” Fintech, Crypto To Protect Big Banks

Famed venture capitalist Marc Andreessen, whose namesake firm, Andreessen Horowitz, has invested in some of the highest profile tech startups of all time, appeared on the Joe Rogan Experience podcast last week in an interview that has touched of a flurry of commentary about the fate of the Consumer Financial Protection Bureau and the alleged causes and impacts of “debanking.”

The more than three-hour conversation rambled through a broad set of topics, including a number of themes popular with certain wings of President-elect Donald Trump’s coalition, like an emphasis on reducing the size and scope of government and cutting taxes and regulations.

But it was the Consumer Financial Protection Bureau (CFPB) and the practice of “debanking,” in particular, that seem to have captured Andreessen’s imagination. The term “debanking” is often used to refer to financial institutions declining to work with potential customers or closing current customers’ accounts for risk-related reasons, most commonly for financial crime-related and so-called “reputational” risks.

During his wide-ranging discussion with Rogan about the consumer protection regulator and the topic of debanking, Andreessen neglects to mention how his investment firm, Andreessen Horowitz, popularly known as a16z, and its portfolio companies — a number of which have engaged in questionable practices — stand to benefit from a lighter-touch approach to regulation.

Andreessen’s broadside against the CFPB, however, is only loosely tethered to reality: he described the CFPB as Democratic Senator “Elizabeth Warren’s personal agency” that, as an independent agency, can “do whatever it wants.” (I imagine CFPB Director Rohit Chopra would beg to differ…)

While Warren is widely credited with the concept of a financial consumer protection regulator and worked to bring the agency to life, Warren herself never actually led the agency. The CFPB is led by an independent director appointed by the president.

Andreessen railed against the concept of independent agencies in general, characterizing them as run by unelected bureaucrats who lack accountability.

Many regulatory agencies, including the FDIC, the Federal Reserve, the NCUA, the SEC, and the CFTC are structured as independent agencies; the OCC is considered an independent bureau of the Treasury Department.

The Dodd-Frank Act, which authorized the creation of the CFPB, called for an independent director who would serve a five-year term and could be removed only for malfeasance, inefficiency or neglect of duty. However, in a 2020 decision, the Supreme Court determined that the structure violated the separation of powers and ruled that the president can replace the CFPB director at will.

Andreessen’s antipathy toward the CFPB seems to be grounded in his belief that, in his words, it “terrorizes” financial institutions, discouraging “anyone who wants to do anything new in financial services” — including the many fintech and crypto companies Andreessen’s firm has invested in — in order to, Andreessen argues, prevent competition with “the big banks.”

It’s hard to reconcile Andreessen’s characterization of the CFPB as “protecting” big banks from the competitive threat posed by fintech and crypto when, of all of the federal agencies involved with overseeing financial services, the CFPB is arguably the most explicitly vocal about promoting competition.

Andreessen also seems to believe that the CFPB specifically is responsible for debanking individuals and businesses in disfavored industries or that hold political views unpopular with the current administration and its banking regulators.

The wealthy VC’s distaste for the CFPB resonated with ideological fellow travelers in the libertarian-leaning techno-optimist and pro-crypto communities, with Elon Musk posting “Delete CFPB,” arguing that “there are too many duplicative regulatory agencies,” kicking off days of intense social media debate about the bureau and debanking.

To the extent that banks do close customers’ accounts or decline to open accounts in response to regulatory guidance, such actions are almost certainly not driven by the CFPB.

In fact, the CFPB under Director Chopra has attempted to update its examination manuals to expand protection similar to that from illegal discrimination in credit products, afforded by the Equal Credit Opportunity Act (ECOA) and its implementing rule, Reg B, to other types of financial services products, an authority which could be used to protect customers from discriminatory debanking.

The effort, admittedly an unconventional approach to attempting to expand the bureau’s power, was blocked following a challenge by the US Chamber of Commerce, the American Bankers Association, the Consumer Bankers Association, and others in the US District Court for Eastern Texas.

The CFPB has appealed the court’s ruling, specifically giving the example of financial institutions discriminating against groups based on their religious beliefs, arguing in its brief to the court that “[u]nder the district court’s logic, the Bureau could not even investigate this intentional religious discrimination to determine if it’s unfair.”

Further, in its recently introduced rule that, if it takes effect, would bring larger firms that operate digital wallet and payment services under CFPB supervisory jurisdiction, the bureau explicitly argued the rule would help it to protect users from unwarranted account closures of payment apps like Venmo, Cash App, and PayPal.

To the extent that banks — notably, private companies that generally have a right to decide whom to accept or not accept as a customer — are refusing certain types of customers or closing accounts in response to regulatory guidance, it is more likely coming from their primary federal regulators.

However, federal banking agencies have explicitly and repeatedly made clear to the banks and credit unions they oversee that no specific customer type presents a uniform level of risk and that financial institutions must undertake a risk-based approach to conducting customer due diligence.

For example, the Fed, FDIC, OCC, NCUA, and FinCEN released a joint statement in July 2022 that says in part (emphasis added and spacing adjusted):

The Agencies recognize that it is important for customers engaged in lawful activities to have access to financial services. Therefore, the Agencies are reinforcing a longstanding position that no customer type presents a single level of uniform risk or a particular risk profile related to money laundering, terrorist financing, or other illicit financial activity.
Banks must apply a risk-based approach to CDD, including when developing the risk profiles of their customers. More specifically, banks must adopt appropriate risk-based procedures for conducting ongoing CDD that, among other things, enable banks to:
(i) understand the nature and purpose of customer relationships for the purpose of developing a customer risk profile, and
(ii) conduct ongoing monitoring to identify and report suspicious transactions and, on a risk basis, to maintain and update customer information.

When evaluating whether or not to begin or continue working with a given customer, banks typically apply the lens any business in a capitalist society would: is this a profitable customer to serve?

Customers in higher-risk segments, like payday lending, gambling, adult services, online pharmacies and the like, cost more to serve in a manner that is compliant with existing law and regulation.

To the extent a financial institution does not have the infrastructure or resources to meet such regulatory compliance expectations, or cannot do so profitably, it is not surprising it would decline to serve certain kinds of higher-risk customers.

Politically Exposed Persons & Operation Choke Point “2.0”

Andreessen’s primary concern with the CFPB seems to be his belief that the bureau is linked to what crypto advocates are describing as “Operation Choke Point 2.0” and is behind the debanking of certain “disfavored” individuals and industries.

Andreessen’s logic is a bit difficult to follow, as he makes numerous factual errors in his attempt to explain what he believes is happening.

He points to a category of customers known as “politically exposed persons,” or PEPs, which Andreessen describes as being created through banking reforms over the past 20 years. According to Andreessen, banks “are required by financial regulators to kick [PEPs] out.” Andreessen claimed that only Republican or right-aligned entities have been classified as PEPs and that he’s never heard of anyone on the left being debanked.

Andreessen also brings up the widely misunderstood and misconstrued Obama-era bogeyman, Operation Choke Point. Andreessen inaccurately describes Choke Point as a response to the growing legalization of marijuana and prostitution, as well as firearms retailers.

The narrative that the Biden administration is leveraging the regulatory agencies to pressure banks to cut off access to disfavored industries — specifically, crypto — has been popularized as a so-called Operation Choke Point 2.0, with some crypto proponents alleging the government targeted and intentionally caused the 2023 failures of crypto-friendly banks Silvergate and Signature.

Debanking and what became known as Choke Point 2.0, Andreessen believes, were extended by the Biden administration and its regulators “to apply it to tech founders, crypto founders, and then just generally political opponents.”

The handwringing over alleged debanking and Operation Choke Point 2.0 isn’t limited to red-pilled or crypto-maxi internet commentators and, indeed, the talking points are increasingly showing up in Congress — perhaps not a surprise, given the at least $135 million that crypto groups spent leading up to last month’s election in order to boost candidates friendly to the industry.

Even before Andreessen’s recent appearance on Joe Rogan, crypto-friendly Republican politicians, like Arkansas Congressman French Hill, vowed to reverse what they describe as “politically targeted” pressure on banks to sever ties with certain industries like crypto.

But Andreessen’s arguments suffer from numerous factual errors.

The Financial Action Task Force, an international anti-money laundering policymaking and standard setting body, does recommend that jurisdictions formulate anti-money laundering laws and regulations governing how entities with AML compliance obligations screen and monitor politically exposed persons, which typically include close family members and associates of senior government officials.

However, though the term “politically exposed persons” does pop up in US banking regulatory exam manuals, it actually isn’t defined in US law or regulation, and the concept is functionally subsumed within the “risk-based approach” that typifies AML/CFT compliance in the US.

In fact, interagency guidance issued in 2020 specifies that US federal banking regulators “do not interpret the term ‘politically exposed persons’ to include U.S. public officials.”

The most similar terminology in US AML/CFT law and regulation is the concept of a “Senior Foreign Political Leader,” which, by definition, also excludes US politicians.

In his conversation with Rogan, Andreessen claims that anyone involved with crypto “became a politically exposed person,” because crypto is “politically controversial.”

This assertion is not only false but nonsensical, as PEPs, as a concept, don’t really exist in US law and, even if they did, being connected to the crypto industry hardly meets the FATF’s guidelines for what constitutes a politically exposed person.

When it comes to Operation Choke Point “1.0,” its mythology has grown in size and scope in some conservatives’ imagination in a way that bears little resemblance to reality.

Operation Choke Point was a real interagency task force, led by the Department of Justice, borne early in Obama’s first term, in the aftermath of the 2008 Global Financial Crisis.

The task force was charged with focusing on consumer fraud in digital commerce, with the “choke point” name coming from the strategy of focusing on third-party payment processors that facilitated fraudulent transactions.

Among other criteria, the initiative looked for tell-tale signs of consumer fraud, like abnormally high ACH return or card dispute rates — more common for higher-risk merchants and billers, including payday lenders, online pharmacies, and adult services, for example. The marijuana banking issue is functionally entirely separate, as, despite legalization in many states, the drug remains illegal at the federal level, making it difficult for federally-regulated banks to serve even legal marijuana businesses.

It was hoped that the efforts by DOJ combined with “moral suasion” from bank regulators would, according to Southern Texas College of Law professor Dru Stevenson, encourage banks to more carefully vet their customers’ customers, thereby reducing the risk of consumer frauds and scams.

Though the focus was on choking off illegal fraud schemes, the effort did result in a number of legal businesses, Stevenson says, that lost access to payment processing — the kind of derisking or debanking that seems to be animating Andreessen.

But in Congressional hearings about Choke Point held in 2014, Georgetown Law professor Adam Levitin said, “The fuss over [DOJ’s] Operation Choke Point reflects a fundamental lack of understanding of the operation of payment systems.”

Levitin explained that Choke Point “aim[ed] to reduce consumer fraud by ensuring that banks that provide payment intermediary services comply with their existing legal obligations under the Bank Secrecy Act and Anti-Money Laundering regulations.”

Ultimately, an Office of Inspector General investigation into the FDIC relating to Operation Choke Point found, with the exception of payday lenders, “no instances among the financial institutions we reviewed where the FDIC pressured an institution to decline banking services to a merchant on the high-risk list. Further, bank executives that we spoke with indicated that, except for payday lenders, they had not experienced regulatory pressure to terminate an existing customer relationship with a merchant on the high-risk list, including a firearms, ammunition, or tobacco retailer.”

Ironically, the uproar over Choke Point may have actually resulted in more businesses being debanked than the initiative itself, as “[b]ank managers and compliance officers listened to DOJ’s critics… and believed the doomsayers rather than what they actually heard from regulators,” Stevenson, the law professor, argues.

When it comes to crypto and stablecoins, industry proponents have taken to describing regulators’ attitude and actions toward banks’ involvement in the sector as the second coming of Operation Choke Point: Operation Choke Point 2.0.

In late 2021, the Fed, FDIC, and OCC announced a series of interagency “policy sprints” with the goal of quickly advancing the agencies’ understanding and approach to crypto. And it’s true that, as the federal banking agencies began more closely coordinating on policy responses to address banks’ growing involvement with crypto, guidance became more conservative.

During 2022, the federal banking regulators requested that banks involved or planning to become involved in crypto-related activity notify them and, in many cases, request obtain supervisory non-objection, though the exact guidance varied somewhat between the OCC, FDIC, and the Fed.

Describing crypto markets as “volatile” in 2022 would be an understatement. In May of that year, the TerraLuna algorithmic stablecoin collapsed, which was followed in short order by crypto lender Celsius freezing withdrawals and the subsequent collapse of Three Arrows Capital and Voyager. By November, 2023, crypto exchange FTX had collapsed and bitcoin prices reached a two-year low.

The early 2023 joint guidance issued by the Fed, OCC, and FDIC explicitly flagged the “significant volatility” and high rates of scam and frauds in the sector and the risks posed to banks involved with crypto, specifically flagging concerns about:

the risk of fraud and scams
legal uncertainties related to custody practices, redemptions, and ownership rights
inaccurate or misleading representations or disclosures by crypto companies
significant volatility in crypto markets, which could impact the deposit flows of crypto companies
susceptibility of stablecoins to run risk
contagion risk within the crypto sector
risk management and governance practices in the crypto sector, which the agencies describe as lacking “maturity and robustness”
heightened risks of open and/or decentralized networks, including the risk of cyberattacks, outages, lost or trapped assets, and financial crime

While the joint guidance explicitly stated that “[b]anking organizations are neither prohibited nor discouraged from providing banking services to customers of any specific class or type, as permitted by law or regulation,” the statement continued to say that “the agencies believe that issuing or holding as principal crypto-assets that are issued, stored, or transferred on an open, public, and/or decentralized network, or similar system is highly likely to be inconsistent with safe and sound banking practices.”

Regulators warned that bank organizations involved with crypto-related activities “should ensure that crypto-asset-related activities can be performed in a safe and sound manner, are legally permissible, and comply with applicable laws and regulations, including those designed to protect consumers (such as fair lending laws and prohibitions against unfair, deceptive, or abusive acts or practices).”

The 2023 and related guidance and actions, including “pause” letters sent to some banks during 2022-2023, are widely understood to have a chilling effect on banks’ participation in crypto-related activities — helping to build the impression that the Biden administration and its regulators had embarked on “Choke Point 2.0,” in an intentional and coordinated effort to block crypto firms’ access to the banking system.

Andreessen Fails To Disclose Long List of Questionable Practices By Portfolio Companies

Although Andreessen’s stated concern is around fair access to the banking system, he fails to mention how companies his firm has invested in stand to benefit from lighter-touch regulation.

a16z is one of the most prolific venture investors in fintech and crypto, including companies that have or may be likely to run into regulatory issues, particularly related to consumer protection and anti-money laundering compliance:

Synapse has, perhaps, become a16z’s most infamous investment. Firm partner Angela Strange touted the company as “the AWS of banking” and lauded Synapse’s ability to help fintechs launch new programs in “weeks vs. months or years.” Synapse collapsed into bankruptcy, leaving tens of thousands of users unable to access their funds for months — with many still unable to do so.
Latitud, which aims to make it easier for LatAm-based startups to setup business operations in the US, is also an a16z portfolio company. Latitud helps companies set up corporate structures designed to be appealing to foreign VC investors, including the so-called “Caymans Sandwich,” in which a Cayman Island-based holding company owns a Delaware LLC, which owns a country-specific operating company, or a “Delaware Tostada,” where a Delaware LLC owns a local country operating company. The Cayman Islands were on the FATF’s “grey list” from February 2021 to October 2023. Latitud previously partnered with Synapse to offer banking services to its startup, but appears to have removed any mention of the bankrupt middleware platform from its site.
Maza, backed by a16z, previously leveraged Blue Ridge Bank via middleware intermediary platform Unit, made false claims about FDIC coverage and targeted undocumented immigrants with potentially deceptive marketing claims.
Mercury, the high-profile business banking startup, which enabled higher-risk foreign customers to open US bank accounts by using registered agent addresses, in clear violation of CIP and KYB requirements. Two of Mercury’s partner banks, Choice and Evolve, have received regulatory enforcement actions, though it isn’t clear to what extent, if any, their relationship with Mercury contributed to the actions. Mercury ultimately closed scores of accounts for companies located in higher-risk jurisdictions, like Ukraine and Nigeria, pointing to the compliance resources necessary to serve these customers.
Tellus, which scored a $16 million seed round led by a16z, has engaged in potentially deceptive practices by marketing its product in a way that consumers could reasonably misinterpret it as being a FDIC-insured savings account when, in reality, the company used its customers’ funds to finance risky super jumbo mortgages. Tellus ultimately earned a rebuke from outgoing Senate Banking Committee ranking member Sherrod Brown (D-OH), who urged the FDIC to investigate the company’s practices.
Wise, formerly known as TransferWise, is now publicly traded but previously took investment from a16z, which led a $58 million round into the company. Wise has facilitated transfers to organizations with links to Hamas and been linked to “pig butchering” crypto schemes. Wise abruptly parted ways late last year with one bank partner, Evolve Bank & Trust, and has run into issues with another bank partner, CFSB.
LendUp, an online payday lender, also counted a16z as an investor. The company repeatedly ran into regulatory issues, including with the California state regulator and the CFPB. The CFPB ultimately shutdown the company’s lending operations in 2021, with Director Chopra saying at the time, “We are shuttering the lending operations of this fintech for repeatedly lying and illegally cheating its customers.” The CFPB compensated impacted LendUp customers to the tune of nearly $40 million earlier this year. LendUp ultimately quietly liquidated in 2022. (Full disclosure: I worked at LendUp from 2014-2016.)
Cross River Bank attracted a16z’s attention by being an early mover in what would become banking as a service. a16z co-led a $620 million round into the New Jersey bank. But Cross River hasn’t been without its issues: it entered into a consent order with the FDIC in 2018, which was terminated in 2021, and another order related to its oversight of third-party partners and fair lending practices in 2023. Cross River was also one of several banks that came under scrutiny for higher rates of fraud in loans originated as part of its COVID-era PPP loan program.
Sky Mavis, better known as the parent company of play-to-earn game Axie Infinity, was the victim of one of the largest-ever crypto hacks, with attackers making off with over $600 million worth of cryptocurrency. It was later determined the attack originated from North Korea and that the proceeds likely helped fund the rogue nation’s nuclear program.
Eco, whose first iteration was a USDC stablecoin-powered neobank, launched at a time when interest rates were near zero. Eco memorably positioned its lack of deposit insurance as a feature, arguing that, whether you live paycheck-to-paycheck or are highly affluent, “FDIC insurance doesn’t matter.” Reporting by Fintech Business Weekly revealed that the company marketed to users that it generated yield by lending USDC to “tier 1 institutions” like “Fidelity and Goldman,” when Eco actually worked to generate yield by transferring user assets to BlockFi and Wyre (both of which have since shutdown) and highly risky DeFi protocols like MakerDAO and Compound.

Regulatory Pendulum May Be Primed To Swing Back To A Lighter-Touch Approach

Andreessen seems to believe that the government, writ large, and banking regulators, particularly the CFPB, are pressuring financial institutions to “debank” individuals and companies linked to crypto because they, in Andreessen’s words, “challenge big banks.”

In Andreessen’s telling, individuals and companies have been forced out of the crypto space due to being debanked, prosecuted, or facing other legal threats.

Yet, crypto has continued to make inroads, both with consumers and in the formal financial system.

Major companies that include household names like PayPal/Venmo, Block/Cash App, Robinhood, and even Fidelity now offer crypto trading. Earlier this year, the first bitcoin ETF was approved. And some companies that had backed away from crypto, either out of fear of regulatory repercussions or a seeming lack of use cases, are taking a second bite at the apple — hardly consistent with some sort of universal “debanking” campaign targeting all companies and individuals associated with the industry.

Now, this isn’t to say the pendulum hasn’t swung; for years, both crypto and fintech were small enough so as to be inconsequential to the systemic safety and soundness of the American banking and wider financial system.

The crypto winter, which saw the collapse of firms like FTX, BlockFi, Three Arrows Capital, and TerraLuna, and the subsequent failure of Silvergate, Silicon Valley, and Signature banks justifiably drew prudential regulators’ attention to how stress in crypto markets could be transmitted into and dramatically impact the “tradfi” banking system.

In fintech, there has been legitimate debate about whether or not the regulatory scrutiny of bank-fintech partnerships and banking as a service is appropriately matched to the risk such operating models actually present. But the collapse of Synapse, while hopefully an extreme outlier, demonstrates the worst-case scenario of what can go wrong and the potentially catastrophic impact on end users.

This is all to say, there are clear and (in my opinion anyway) generally valid reasons why bank regulators have been paying closer attention and may view many crypto and fintech activities as potentially higher risk. That isn’t to say that a regulatory backlash against “innovation” in financial services hasn’t, at times, driven questionable public policy choices.

Still, with Trump’s reelection, the pendulum seems primed to swing back toward a less muscular regulatory approach — at least, until the next crisis or catastrophe.

Credit Builders: Assessing Signal v. Noise Of New Kinds of Tradeline Data

I’m excited to announce the second installment of the Taktile Expert Talks series, examining the topic of credit builders. While the category has long existed, like much of consumer fintech, credit builders have exploded in popularity in recent years, including various new “innovative” takes on helping consumers build or repair their credit history.

However, not all tradeline data is created or treated equally, so to speak. In this session, I’ll be joined by industry experts Jason Capehart (Mission Lane), Chris LaConte (Self Financial), Alex Johnson (Fintech Takes), and Jesse Silverman (Troutman Pepper), in what promises to be an enlightening and entertaining conversation on Assessing the Signal vs. Noise of New Kinds of Tradeline Data.

Join us on Tuesday, December 3rd, at 12:00pm Eastern / 9:00am Pacific for this can’t-miss session.

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