‘Operation Choke Point 2.0’ is here

The Biden administration and federal regulators appear to be using any means necessary to cut off the cryptocurrency industry from banking services. Critical observers have dubbed this alleged effort “Choke Point 2.0” after a similar push by the Obama administration to cut off unwanted but legal industries from the financial system.

US officials have so far uniformly denied the existence of any such coordinated agenda. But whether it’s an active extralegal conspiracy or just an amalgamation of motivations, the evidence is increasingly clear that crypto is in the crosshairs.

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Figures including Brian Brooks, former head of the Office of the Comptroller of the Currency (OCC), claim that this has led to banks being targeted for closure, in part because they serviced cryptocurrency customers. It would have no anchoring in existing law, may conflict with recent FDIC reforms, and may have caused collateral damage by creating instability in the banking sector.

A new report, authored by the White House Council of Economic Advisers, devotes a lot of space to crypto, and certainly confirms the negative sentiment in the US executive branch. A former financial regulator described this report to CoinDesk as “a damning indictment of the space that creates [the Biden administration’s] political position crystal clear.”

The report follows a wave of bank closures that some have claimed was triggered not only by concerns about financial stability, but by the broader push to stifle cryptocurrency businesses – despite the lack of enabling legislation. Former US Representative Barney Frank has explicitly claimed that the closure of Signature Bank was intended “to send a message to get people away from [banking] crypto.” Frank is a member of Signature’s board, so he is motivated to argue that crypto, rather than mismanagement, was to blame for the bank’s failure.

There is other support for the idea of ​​an undisclosed agenda for crypto strangulation. Reuters reported late last week that the Federal Deposit Insurance Corporation (FDIC) required Signature’s buyers to divest Signature’s crypto customers in the sale. The FDIC initially dismissed that report, but as with other recent events, the actions appear to confirm it. Signature Assets will now become part of Flagstar Bank, but the deal, announced March 20, did not include about $4 billion in deposits belonging to digital asset firms, according to the FDIC.

As no less than the Wall Street Journal editorial argued earlier this week, this appears to confirm that the FDIC is not only actively pursuing an anti-crypto agenda, but lying to the public about it.

Nic Carter of Castle Island Ventures appears to have been the first to label this alleged initiative “Choke Point 2.0”. It refers to Operation Choke Point, an effort by the Obama Justice Department to crack down on banks that served arms manufacturers, payday lenders and other legal but undesirable industries.

Although executed under the guise of anti-money laundering efforts, several critics, including former regulators and the House Financial Services Committee, ultimately condemned the original Operation Choke Point as an abuse of power, further concluding that it had harmed legitimate financial services providers. The Ministry of Justice launched an investigation into the effort.

Ultimately, new limits were placed on the power of the FDIC in the wake of Choke Point, in part to settle lawsuits brought by victims of the crackdown. These restrictions were imposed in 2018 and included limitations on the FDIC’s ability to interfere with banks’ customer relationships, and a requirement that any attempt to terminate such relationships be expressed in writing. Informal or unwritten proposals were also restricted, likely a major reason why regulators and others continue to deny what is quite clearly a targeted attack on a legitimate industry.

In a statement announcing a 2019 settlement in the lawsuit against the FDIC, payday lender Advance America said the lawsuit “revealed how some FDIC executives and officials conducted a campaign motivated by personal contempt for our industry, contempt for our millions of customers and blatant disregard for This settlement will help prevent this deprivation from happening again – for our business or any other legal, regulated business.”

It seems highly plausible that similar targeted bias is at play in the FDIC’s recent actions. That could mean the agency faces a new wave of official and legal backlash for its unauthorized initiative. But the damage – both intentional and accidental – has already been done.

The apparent inter-agency push to turn down crypto firms comes at a moment that is politically expedient but financially fraught. The wave of crypto scams and collapses in 2022, especially the alleged multifarious crimes of Sam Bankman-Fried and his FTX associates, have made crypto an easy target.

But at the same time, rapid interest rate hikes in response to inflation have led to widespread anxiety about the banking sector – anxiety that may have been heightened by the very moves meant to target crypto. In particular, the collapse of Silvergate Bank under regulatory pressure and attacks from people including Sen. Elizabeth Warren (D-Mass.) may have created fears that then led to a run on Silicon Valley Bank, which in turn led to even broader fears.

There are other clear ironies here. Attempts to defund legal, regulated crypto companies in the US would not have prevented FTX or other offshore scams that have made the hack politically palatable. Meanwhile, the Securities and Exchange Commission and other agencies had more power to protect victims of US-based alleged scams like the Celsius Network, but failed to do so.

As CEO of Binance Changpeng Zhao observed, the intervention has already had unintended consequences that do not particularly make Americans safer. An immediate effect has been to push users away from the US-regulated and widely trusted stablecoin USDC, and towards tether (USDT), an unregulated offshore service whose stability is an eternally open question.

The same offshoring effect looks set to continue: Banks in Europe and the Caribbean have reported increased interest from crypto firms looking for alternatives. That could lead to crypto firms being pushed out of US jurisdictions entirely.

It would have many effects – but it is not at all clear that protecting Americans would be one of them.