Fintech

A failed bank for former slaves should give crypto hucksters caution

Crypto hype has made racial and underserved communities vulnerable to scams and a volatile market. The White House wants to make sure history doesn’t repeat itself.

NEW YORK, NEW YORK - FEBRUARY 08: A bitcoin ATM is seen inside the Big Apple Tobacco Shop on February 08, 2021 in New York City. Tesla announced on Monday that it purchased $1.5 billion worth of bitcoin. The car company also announced that it will start accepting payments in bitcoin in exchange for its products which include their electric cars and solar panels. (Photo by Michael M. Santiago/Getty Images)

The appearance of bitcoin ATMs in lower-income communities is, to some critics, a sign of crypto's potential for exploitation of the financially vulnerable.

Photo: Michael M. Santiago/Getty Images

In highlighting risks posed by crypto, the Biden administration drew particular attention to how the hype around digital currency could hurt underserved and minority communities.

The Treasury Department underlined that warning by citing a tragedy that happened nearly 150 years ago: the 1874 collapse of Freedman’s Savings Bank, which was set up to help formerly enslaved people but ended up devastating the Black community.

Crypto’s revolutionary set wants to overturn financial history, not learn from it. But the historical mention stood out for some critics who have grown increasingly concerned about the hype over crypto and welcome the Biden administration’s focus on its impact on poor and minority communities.

Bitcoin and other cryptocurrencies have drawn some evangelists from historically disadvantaged communities. As prices boomed before crypto winter set in, some saw an opportunity to rebuild generational wealth lost to decades of systematic discrimination. And crypto businesses saw opportunities to market their products to new audiences. Block and Jay-Z, who serves on the fintech company’s board, have backed bitcoin education programs meant to serve minority populations.

“The Freedman’s Bank comparison underscores a bit of the 'There's nothing new under the sun' perspective on financial products, regardless of their packaging,” Mark Hays, a senior policy analyst at the Americans for Financial Reform, told Protocol. “The current risks and harms that digital assets pose to consumers and investors — particularly low-income communities and communities of color — are many, serious and real.”

Brookings Institution fellow Tonantzin Carmona said the Biden administration’s special focus on poor communities “was very reaffirming” since the administration “is also seeing very similar risks.”

The risks are pronounced in the Black community.

The Freedman's Savings Bank on Pennsylvania Avenue in Washington, D.C. circa 1890 The Freedman's Savings Bank building on Pennsylvania Avenue in Washington, D.C. circa 1890. The bank failed after the Panic of 1873. Photo: Library of Congress; Wikimedia Commons

Black consumers are more likely than white consumers to own cryptocurrencies, a June Federal Reserve Bank of Kansas City report said. This has raised worries that a significant number of Black households — with median wealth of around $24,000 — are dangerously exposed to a highly volatile market, the report said.

The Kansas Fed warned that crypto holders “could simply lose their investments if the exchange goes bankrupt or gets hacked: a 21st century version of Freedman’s Savings Bank.” This was an analogy the Treasury Department would echo in its report.

Founded in 1865 with the abolition of slavery, the Freedman’s Savings Bank was created by Congress to provide banking and financial services assistance to newly freed Black people. But the bank collapsed as a result of poor management and the impact of a battered economy.

The trauma of the Freedman’s Bank’s collapse had a huge impact on the Black community, said Brookings Institution’s Carmona. “If you talk to members of the Black community, they will tell you [something] like this happened,” she told Protocol. “Those stories get passed down across generations.”

But the story of the Freedman’s Bank collapse also made many in the Black community more receptive to crypto.

Crypto is viewed by many in the Black community as “more trustworthy than traditional assets,” the Kansas Fed report said. Many Black consumers also “see cryptocurrencies as a relatively quick way to close the wealth gap with other races, particularly white consumers,” the authors added.

Shawn Wilkinson became one of the most successful Black entrepreneurs in crypto, which he called an “open terrain” that offers a lot of opportunities “especially for people of color” and entrepreneurs like him “who didn't necessarily come from money or generational wealth."

In a 2021 interview with Protocol, Wilkinson, the founder of the storage blockchain startup Storj, cited another historical tragedy, the Tulsa Race Massacre, when an Oklahoma community of predominantly Black entrepreneurs known as Black Wall Street was destroyed in an anti-Black riot. The crypto and blockchain industries, Wilkinson said, open up opportunities to build “generational wealth” that cannot be "bombed away and stolen away.”

He acknowledged that crypto holders have taken hits in the market crash. “I’ve definitely seen that,” he told Protocol. “I definitely know people who have gone quite down.”

But downturns are part of crypto, Wilkinson argued. “I've been in this space for 10 years — this is normal to me,” he said. “... Over the long haul, crypto is probably one of the best-performing assets of all time.”

Another Black entrepreneur, Edwardo Jackson, creator of Blacks in Bitcoin, agreed, noting that crypto offers a way to raise capital for communities that have “historically, institutionally been shut out from mainstream financial access.”

But Jackson acknowledged a point that was also raised by the Biden administration: Some communities clearly are vulnerable to crypto scams. The Treasury Department report warned that “crypto-asset products may be marketed in ways that obscure their level of risk, which could exacerbate the impact of targeted marketing on vulnerable communities.”

Signage advertising short-term loans stands in front of stores in Birmingham, Alabama, U.S., on Tuesday, Feb. 10, 2015. In Alabama, the sixth-poorest state, with one of the highest concentrations of lenders, advocates are trying to curb payday and title loans, a confrontation that clergy cast as God versus greed. They have been stymied by an industry that metamorphoses to escape regulation, showers lawmakers with donations, packs hearings with lobbyists and has even fought a common database meant to enforce a $500 limit in loans. Photographer: Gary Tramontina/Bloomberg via Getty Images Signage advertising short-term loans stands in front of stores in Birmingham, Alabama, U.S. Photo: Gary Tramontina/Bloomberg via Getty Images

Jackson pointed to what he called “a disturbing trend” in the Black community.

“We're targets,” he told Protocol. “We’re targets of every MLM [multi-level marketing] scam, every scamcoin, shitcoin, whatever it is. A lot of them have recently come home to roost.”

Carmona said the crypto crash underscores key lessons for underserved communities, particularly Black and Latinx people.

While many minorities still grapple with access to capital and traditional banking services, she said, “that doesn't necessarily mean that crypto is automatically the solution.” Despite all the talk about decentralization, “the growing concentration of the wealthy in these spaces demonstrates that not all cryptocurrency holders are created equal.”

The crypto crash also serves as a powerful reminder of other past financial services trends that promised financial inclusion and access, such as payday lending and subprime mortgages, which turned out to be disastrous for these communities.

The Treasury Department report actually cited the “prevalence of crypto-asset ATMs in lower-income neighborhoods that lack bank branches,” which Hays said “very much reminds me of payday lending storefronts proliferating in low-income neighborhoods.”

Carmona also cited a point that she said “was brought up again and again” in the Treasury Department report: “While crypto may present new opportunities, it also may present a new set of risks.”

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