Crypto firms push hard to find US banking partners as industry blames ‘Operation Choke Point 2.0’
Cryptocurrency firms are struggling to find new banking partners following the closure of three of the largest crypto-friendly banks in the US. Stakeholders and market observers tell Discard that this may be the result of a coordinated regulatory effort to liberate the industry.
The theory, or “Operation Choke Point 2.0,” a term coined by Nic Carter, a general partner at Castle Island Ventures, suggests that regulatory actions against Silvergate Bank, Silicon Valley Bank (SVB) and Signature Bank are part of a broader strategy of to decline the crypto industry. The Washington-based law firm Cooper & Kirk supported Carter’s claims in a recent white paper. The law firm sued the U.S. Department of Justice’s original Operation Choke Point initiative that began in 2013 as a coordinated effort to arm the banking industry against unsavory industries such as gun shops, payday lenders and tobacconists.
Adrienne Harris, superintendent of the New York Department of Financial Services, has dismissed the theory as “ridiculous,” but some industry participants are concerned about the impact of the regulatory breach on crypto.
Harris’ remarks came almost a month after Signature Bank, the largest surviving crypto-focused bank in the US, was shut down by regulators due to what they called a “systemic banking failure”, days after the collapse of SVB and Silvergate.
– The closure of Signature Bank, despite its solvency and relatively low levels of unrealized losses, raises questions about the motivation behind regulatory actions. The decision to shut down the bank can be interpreted as a message to discourage people from participating in the crypto industry,” wrote Luke Lombe, a core developer at Spool, a decentralized finance application for yield generation.
The US wing of Binance, the world’s largest crypto exchange, has struggled to find banking partners to act as fiat on-ramps since the closure of Signature Bank. Some USD deposit services have been temporarily suspended since April 2 due to Binance.US “transitioning to new banking and payment service providers.”
“Regulators don’t like crypto, and even the word decentralization makes them nervous, but they’re not stupid – they want to know that no amount of opaque legalese and strongarming will make crypto disappear,” Vadim Yarmak, CEO of blockchain marketing firm PRMR said to Discard. “The short-term goal is to keep crypto out of traditional banks so that the idea of crypto doesn’t become normalized.”
Signature Bank: Why did regulators shut down a solvent financial institution?
Among the closings of the three banks, Signature Bank was the most controversial, according to Carter, as it still accommodated withdrawal requests and had less unrealized losses than many other banks.
“It appears that these banks, especially Signature, were victims of an opportunistic campaign to decapitate banks serving the crypto industry. Not only was the banking operation opportunistically exploited by regulators to shut down Signature, but it may even trace the origins of Choke Point 2.0,” Carter wrote in a March 23 blog post.
According to former Congressman and Signature Bank board member Barney Frank, the bank’s closure meant that “regulators wanted to send a very strong anti-crypto message.”
“The statement from Frank marries the data,” Jamie Douglas Coutts, a senior market structure analyst at Bloomberg Intelligence, wrote in a research note shared with Discard. “Based on the most recently reported numbers, unrealized losses from held-to-maturity assets for Signature Bank were 27.4% of book value, below the S&P 500 bank average of 36.6%.”
The NYDFS denied Frank’s claims and said Signature’s shutdown had nothing to do with crypto. The regulator added that the decision was “based on the current status of the bank and its ability to do business in a safe and sound manner.”
Will crypto innovation leave the US?
Crypto industry leaders are concerned that the US government’s tough regulatory actions could drive innovation out of the country. Ripple Labs president Monica Long said the Asia-Pacific is leading the development of global cryptocurrency regulations that favor innovation, which US regulators should also consider.
According to Kadan Stadelmann, CTO of blockchain infrastructure firm Komodo, Europe is also ahead of the US in crypto regulation with its Markets In Crypto Assets framework.
“The US has generally not taken a loving approach to crypto. At least we see Europe moving forward with a regulatory framework – Markets In Crypto Assets (MiCA). In the US, executive law enforcement agencies remain tasked with crypto regulation through enforcement,” Stadelmann wrote.
The MiCA bill is scheduled for a final reading in the European Parliament on April 18, with the final vote on April 19, according to the parliament’s agenda.
In the US, Senator Elizabeth Warren and Representative Alexandria Ocasio-Cortez sent letters to BlockFi, Circle and 12 other non-crypto firms on Sunday, asking about their relationship with SVB. Circle CEO Jeremy Allaire and BlockFi CEO Zac Prince will be required to provide details of their deposits with SVB, the relationship between the company’s executives and any “reciprocal kickback arrangements” between the two firms. The companies must respond by 24 April.
The letters suggest that more regulatory scrutiny may be on the way for crypto firms that partnered with the three crypto-focused banks. The ongoing US crypto banking crisis is likely to leave many other crypto firms struggling to find banking partners in the world’s largest economy.
See related article: Circle’s Disparte talks about de-risking crypto from banking risk
