Closing of ‘High-Risk’ Small Business Bank Accounts a Sign of a Bigger Issue

By Kyle Torpey Mar 30, 2015 10:29 AM EST

Operation Choke Point Bitcoin

Small business owners who were victimized by Operation Choke Point went to Washington last week, and they told stories of having their bank accounts shut down and lines of credit being revoked due to their involvement in business operations that are completely legal and legitimate. Gun shop and tobacco store owners were among the individuals who provided testimony to Congress last week. Businesses involved with pornography, drug paraphernalia, and escort services were also listed as “high-risk” by the FDIC in 2014. It was this original list of high-risk businesses that led many banks to close the accounts of business owners who had done nothing illegal.

Small business owners testify to Congress

Representative Sean Duffy of Wisconsin is the one who called the meeting of Operation Choke Point victims, as he wanted to display the personal effects of the program and question the FDIC about the operation’s legitimacy. The FDIC claimed that the unintended consequence of shutting down legitimate small business operations was due to a misunderstanding of the FDIC’s high-risk list by certain banks. Back in January, the FDIC sent a note to all banks saying that they should review each customer on a case-by-case basis and not simply block certain types of businesses from their banking services.

Of course, the small business owners who have been affected by the program were not satisfied with this altered recommendation from the FDIC. Gun shop owner Mike Shuetz was particular angered when his bank account was closed due to the nature of his business. He claimed, “It’s a sad day in America when our administration doesn’t respect the rights of Americans.”

Is bitcoin a solution here?

Many bitcoin enthusiasts will look at this story and say that the digital currency is the perfect solution to the situation, but it isn’t quite clear how bitcoin can help in this specific scenario. Business owners do not wish to hold bitcoin after a sale, and a bank account is needed to use a service that instantly converts bitcoin to dollars at the point of sale. There’s also the issue of not many consumers holding bitcoin. Simply accepting cash in these situations would make more sense, although that creates a new risk when it comes to where that cash will be stored.

One could argue that peer-to-peer lending via bitcoin could potentially help the small businesses who had their line of credit cut off, but it’s unclear whether that specific use case is mature enough to handle actual business loans at this time. While bitcoin could be a solution here in the future, it seems clear that the technology is not ready to help out in these kinds of situations today.

The issue at the root of the problem

Operation Choke Point is definitely a symptom of the main issue that bitcoin attempts to solve. At the end of the day, this sort of government operation would be much more difficult to execute in a peer-to-peer, bitcoin-based economy. The real issue is that banks and governments can decide to seize funds or censor certain transactions at any point in time.

With bitcoin, businesses are able to keep their funds secure without having to turn control of that money over to a third party. The removal of that third party was a key point that Satoshi Nakamoto wrote about often in the early days of the bitcoin experiment. As Global Hookah owner Grennan Appel stated in his remarks, “Basically, you can’t believe the banking system anymore.”

Featured image via GotCredit.

You can follow @kyletorpey on Twitter.

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