Operation Choke Point could be Crypto’s biggest regulatory battle
The crypto industry remains on the edge of potential overarching regulation and scrutiny from regulators around the world. This is especially true in the US, where federal watchdogs are trying to crack down on crypto in an operation referred to as ‘Choke Point 2.0’.
In 2022, the crypto industry suffered several institutional collapses that wiped billions of dollars off the market. This led to many customers of these platforms losing everything they had, forcing regulators to step in and crack down on the industry.
Elliptic, a blockchain analytics firm, published a report detailing its prediction for crypto regulations this year. The firm said 2023 would see increased sanctions in the crypto space as global regulators tightened regulations on the industry – and it was right on the money.
The development of Operation Choke Point
The US government in particular has begun to accelerate its crackdown on the crypto industry. Regulators across multiple departments are joining forces to reign in crypto projects and companies.
This coordinated ongoing attack is being referred to as ‘Operation Choke Point 2.0′, a term coined by Castle Island Ventures’ partner Nic Carter.
For those unfamiliar, the original Operation ‘Choke Point’ was a coordinated attack on companies deemed high risk by US regulators. Their primary tactic was to pressure the banking sector to stop doing business with companies in certain industries, even though most operated within the confines of the law.
The operation began in 2013, and many companies linked to firearms, drugs, loans and other risky industries lost access to banking services in the United States. Choke Point was controversial mainly because it was never formally voted on by US politicians and was something of a rogue operation.
It is believed to originate from the Department of Justice (DOJ), which allegedly acted on the orders of then-President Barack Obama.
The raging war on crypto
Interestingly, Operation Choke Point was probably to blame for why crypto companies had trouble accessing banking services in the early days. This is because the operation was launched around the same time crypto saw its first notable wave of growth and adoption in the early to mid-2010s.
Carter explains that the crypto industry’s inability to access onshore banking quickly led to the rise of offshore alternatives. Most notably, this includes Tether’s USDT stablecoin.
Likewise, a more targeted approach appears to be being implemented today. There is speculation that this second phase, ‘Operation Choke Point 2.0’, started sometime in early 2022.
One of the earliest examples of this was in early 2022 when JPMorgan suddenly closed the bank account of Uniswap founder Hayden Adams.
Former head of the Commodity Futures Trading Commission (CFTC) Brian Quintenz responded with one comment. He suggested that this was likely “shadow-de-banking of crypto by the Federal Reserve and OCC bank examiners.”
The FTX Collapse lit a fire under regulators
This raises the question of who gave the go-ahead for this action. Carter feels that Joe Biden’s administration and the Democratic Party were the ones who set this plan in motion. Any questions that if Choke Point 2.0 began in 2022, why has it only affected the crypto industry recently? This may be because anti-crypto politicians are preoccupied with the mid-term elections in 2022.
The collapse of Terra and its algorithmic stablecoin, the implosion of Three Arrows Capital and the insolvency of Celsius attracted the attention of all American politicians. But FTX and the Alameda meltdown were the icing on the cake that regulators needed to turn up the heat.
Unlike the other three crypto fiascos mentioned above, the collapse of FTX and Alameda also affected Silvergate, a massive US bank. Soon, Signature, another crypto-friendly bank, announced it would cut deposits from crypto customers, forcing them to withdraw their money or potentially have their accounts closed.
New problems in the new year
January 3 appears to have been the official start of the operation’s second iteration. On this day, the Federal Reserve, the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC) released a joint statement. suggesting that banks are stopping holding crypto and shying away from the sector.
In January, the Fed introduced a policy that would make it harder for crypto banks to get started. On the same day, the Biden administration published a cryptocurrency roadmap, which recommended that pension funds stay away from crypto.
The visible crackdown on crypto-friendly banking firms affected the crypto industry. Binance, the largest exchange, suspended USD bank transfers to and from the exchange. This came just weeks after Binance announced that its banking partner (Signature) would not accept transfers to and from the exchange of less than $100,000.
Crypto projects in danger?
As for which projects, protocols and companies are most at risk, the simple answer is all of them.
Nic Carter emphasized in his blog post that this operation’s purpose is to regulate offshore crypto entities indirectly.
As powerful as the US is, it cannot crack down on crypto projects or companies outside its jurisdiction. However, it can stop their access to banking services – and that is exactly what is happening.
On the other hand, other jurisdictions and countries are bidding to promote these “refugee” crypto businesses. The UAE and Hong Kong are among those at the top of this list.
Talking to BeInCrypto about the matter, Chris Burniskea partner in a crypto-friendly venture capitalist (VC) fund, stated:
“Poor choices by the US government can slow progress, but by design no government can stop crypto. Meanwhile, jurisdictional arbitrage will only put the US behind on crypto innovation until sensible lawmakers take the helm.”
Final thoughts
Despite the potential for increased regulation, many in the crypto community are optimistic about the future of the industry. It is becoming increasingly mainstream as more institutional investors and large companies get involved. Many also believe that increased regulation will ultimately lead to greater adoption and acceptance of cryptocurrencies.
At this point, increased regulation in the crypto space is no longer a matter of if, but when. This is likely to continue to cause short-term volatility in the markets. But on the plus side, it can also lead to a more stable and reliable industry. This, in turn, will be more inviting for ordinary and institutional investors.
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