Hey, it’s Gavin with your weekly recap of all things internet & money.

This week in fintech and crypto: Banks cutting off accounts willy nilly. SBF goes 7 for 7 on guilty verdicts. Citigroup chooses the absolute worst codename for layoffs. And more.

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STORIES OF THE WEEK

1) Account Access Denied 🚫

The New York Times put out an article this weekend on sudden bank account closures that an increasing number of Americans are facing. I wanted to explore it a bit further, because it touches on some trends we’ve been talking about lately.

A patchwork of laws (e.g. the Bank Secrecy Act, the Patriot Act) and regulations require banks to combat fraud, money laundering, and other illicit activity. Which makes sense: those things are bad. To fight those bad things, banks are required to report suspicious activity: things like questionable transfers or suspicious withdrawal patterns. 

There has been a major increase in the number of Suspicious Activity Reports (SARs) that banks have filed over the past few years. SARs climbed to 1.8 million in 2022, a 50% jump from two years earlier. If a customer is flagged enough times, they can be permanently booted from their bank. And when that happens, it’s not just a minor nuisance. In many cases, customers can struggle to find a new place to bank, lose access to their funds, and fail to make payroll.

• 📊 Digits: Banks filed over 1.8 million suspicious activity reports in 2022 alone

• 💬 Words: "You feel like you're walking around wearing this scarlet letter." — Caroline Potter, (former) Citibank customer

What it means →

The NYT article is a fairly searing look at the human impacts of machine-led system: a system that relies heavily on automated processes and AI decision-making. The triggers for these account closures are often algorithmically generated, flagging unusual patterns like consistent cash deposits just below reporting thresholds or international wires that could suggest nefarious activities. In many cases, bank customers engaging in legitimate activities have their accounts terminated with little recourse. They often don’t even know why their accounts were shut down (banks are prohibited by law from disclosing too much information).

Patrick Mckenzie has a good article on this, where he says the quiet part out loud:

On the one hand, it must feel incredibly frustrating and patently unfair to people who have their bank accounts suspended through no fault of their own. Why should a bank get to tell me how I can and can’t spend my money? I have a sense that repeatedly coming face-to-face with an unfeeling (and seemingly unthinking) bureaucracy is what causes many consumers to hate banks, why fintechs with slicker customer experience and less friction tend to do well, and why many people continue to advocate for crypto.

On the other hand, we as a society have decided that things like money laundering or terrorist financing or tax avoidance are bad, and that—as the frontlines of those crimes—banks need to try to prevent them or be penalized. So the question then becomes how do we give banks tools to fight fraud and crime in all its sordid flavors, while making the system human and thoughtful enough to prevent everyday people from having their lives upended through no fault of their own?

2) SBF is Guilty ⚖️

Almost exactly a year ago to the day, CoinDesk journalist Ian Allison upended the crypto landscape with a report linking the financial activities of FTX and Alameda Research. This set off a chain reaction, leading to the unraveling of Sam Bankman-Fried’s (SBF) crypto empire. FTX, which had become a colossus in the crypto exchange market with daily trading volumes hitting $21 billion, was the golden child of the last bull market. At its peak, FTX's valuation soared to $32 billion, and with it, SBF's status skyrocketed, earning him the title of "The World's Richest 29-year-old" by Forbes. But Sam flew too close to the sun, and his empire was swiftly incinerated.

And at least in this case, cash incineration means real incarceration.

The judicial hammer came down hard on SBF last Friday. A New York jury convicted Bankman-Fried on seven counts, including wire fraud, conspiracy to commit wire fraud, and money laundering. The U.S. Attorney Damian Williams did not mince words, branding SBF as “one of the biggest financial fraudsters in American history.” 

Looking forward, SBF's sentencing is scheduled for March 28, 2024, where he faces a maximum of 110 years in prison. However, with the likelihood of concurrent sentencing, the actual time served may be capped at 20 years. 

• 📊 Digits: $32 billion — the valuation of FTX at its peak.

• 💬 Words: “I fucked up” — Sam Bankman Fried

What it means → 

Since we still have sentencing, the SBF guilty verdict isn’t quite the end of this chapter. But it’s the beginning of the end. And more broadly, it’s the culmination of a pretty bad run for the crypto landscape. Countless pounds of ink have been spilled on headlines bashing FTX, SBF, his enablers, and the entire ecosystem. In the eyes of the general public, SBF was the poster child for everything wrong with crypto.

But the funniest and most misunderstood thing about this whole saga is that it wasn’t fundamentally about crypto. While FTX and Alameda both dealt in crypto, the firms were not leveraging blockchain technology itself in any unorthodox ways to skirt regulations or reserve ratios. Rather, it was a lack of regulation coupled with severe grift on the part of SBF that resulted in this meltdown. To be sure, there’s a whole lot of garbage in the broader ecosystem that helped enable this debacle, but at its heart, this was a classic case of fraud. 

Hopefully, SBF’s sentencing (and other similar ones) will make it clear that crypto is no longer a wild corner of the internet where anything goes. Hopefully it will deter the next wave of fraudsters and scammers. And most importantly, hopefully regulators and the crypto ecosystem can come together to establish nuanced regulation that provides clarity, fuel, and consumer protection for the crypto-sphere.

Byte of Bliss

From the NYT article on bank account closures, but it feels like this could apply to much of fintech customer support today:

Hope you enjoyed this week’s episode. As always, let us know if there’s anything you’d like us to cover next week.

Gavin + Malcolm