Operation Choke Point 2.0 Could Be Bitcoin’s Biggest Banking Crackdown And Regulatory Battle

Updated: 4-3-2023: Are U.S. agencies conspiring to “un-bank” crypto and put Binance out of business? Operation Choke Point 2.0 Could Be Bitcoin’s Biggest Banking Crackdown And Regulatory Battle

Unwinding The Hyperbole: Are US-Based Crypto Firms Really Being ‘Choked’?

An extended market price drawdown (crypto winter) throughout 2022 has tested the crypto industry’s mettle, and more recently, a crackdown by United States regulators on some prominent entities like Coinbase, Binance and Kraken has further shaken the sector.

So maybe it’s only natural for the industry to employ colorful, vivid language to describe what’s been happening. There’s a notion making the rounds that the U.S. government is out to “un-bank” or “de-platform” the crypto sector. This process even has a name: “Operation Choke Point 2.0.”

U.S. President Joe Biden’s administration is using the financial rails “as an extra-judicial political cudgel” to crack down on the crypto industry, wrote Castle Island Ventures’ Nic Carter, who described it as a coordinated, multi-agency effort to discourage banks from dealing with crypto firms.

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Operation Choke Point 1.0

According to Carter, this alleged strategy follows a template used earlier by the Obama and Trump administrations. In 2018, under federal pressure, “Bank of America and Citigroup de-platformed firearms companies, and BoA began to report client firearm purchases to the federal government,” he wrote.

In late March, Quantum Economics’ Mati Greenspan told Cointelegraph that this so-called un-banking could “already be underway,” particularly in light of the recent collapses of crypto-friendly banks like Silvergate, Silicon Valley Bank and Signature Bank. In Greenspan’s view:

“Crypto is seen as a ‘threat’ to the U.S. dollar’s dominance in global trade — a significant and long-standing benefit to the U.S.”

In that same article, attorney Michael Bacina warned that the “regulation by enforcement model” being practiced in the U.S. would simply “drive crypto-asset innovation offshore,” and on April 1, the CEO of a French digital assets data provider told The Wall Street Journal that U.S. agency actions could “shift the center of gravity of crypto assets trading and investments” toward Hong Kong.

A Coordinated Effort By Regulators?

It’s time to step back and ask: Are these fears justified? It is sometimes difficult to separate the truth from the tight knot of hyperbole in the crypto space, but are U.S. regulators really seeking to “de-platform” crypto?

“I don’t think there’s necessarily a concerted or intentional effort by regulators to ‘de-platform’ crypto,” David Shargel, a partner at the Bracewell law firm, told Cointelegraph. “But, the crypto ecosystem has moved from a niche product to the mainstream, and regulators are playing catchup.” Regulators also recognize that crypto isn’t going anywhere, he added.

Does the suggestion that cryptocurrencies represent a threat to the U.S. dollar’s dominance in global trade provide a further incentive to ban them?

Crypto may indeed have the potential to disrupt global trade flows — at least to some minor degree — but the dollar is more threatened by other geopolitical factors “such as the U.S.’ own waning influence on the global stage, the rise of China, and Western sanctions on Russia,” Zhong Yang Chan, head of research at CoinGecko, told Cointelegraph.

Recently, International Monetary Fund experts said, “Crypto assets, including stablecoins, are not yet risks to the global financial system.”

“The general consensus seems to be that the dollar remains well entrenched as the world’s dominant currency, and that the use of cryptocurrency, standing alone, won’t change that — barring some other major political or economic shift,” Bracewell’s Shargel added.

“A Perfect Storm Brewing”

Still, the administration in Washington may be getting nervous about the U.S. dollar, said John Deaton, a managing partner at Deaton Law Firm, who also runs the CryptoLaw website, and has supported Ripple in its litigation with the U.S. Securities and Exchange Commission (SEC).

“China and Russia have agreed to trade oil and gas in the Chinese yuan, not U.S. dollars. Kenya’s president has told his people to dump their USD. Saudi Arabia may agree to trade oil in non-USD denominations.”

At the same time, the U.S. government needs to print more money, adding to an already high inflationary environment, leading people to look at gold, silver and Bitcoin as alternatives. “The fear isn’t just about crypto — it’s that a perfect storm is brewing against the U.S. dollar,” Deaton said.

Deaton deems the Operation Chokepoint 2.0 scenario plausible, but he also has a nuanced view of crypto regulation and U.S. regulators.

“If we are being honest, the crypto industry has caused itself quite a few self-inflicted wounds, and the industry is to blame for giving itself a black eye when it comes to public perception.” Many in the crypto industry, like himself, “don’t oppose regulation; we seek it,” he said, adding:

“We just want smart, tailored legislation that protects investors from fraud but provides entrepreneurs with clear rules and guidance, and fosters innovation.”

Dealing Binance A ‘Fatal Blow’?

Deaton was asked about another suggestion heard last week that the U.S. Commodity Futures Trading Commission (CFTC) is “attempting to strike a fatal blow to Binance” with its recently announced lawsuit against the world’s largest cryptocurrency exchange. Is that really the commission’s end game?

1/23

Oh boy https://t.co/2JnbfirRrp

Case is up and it’s bad.

This is the CFTC attempting to strike *fatal* blow to Binance, and at first read through… I think they actually have really strong chances here of succeeding in toppling the Binance empire.

— Adam Cochran (adamscochran.eth) (@adamscochran) March 27, 2023

“If you look at the CFTC’s case against Binance in a vacuum, I would agree that it is hyperbole to suggest that it is a regulatory attempt to cause a death blow to Binance,” said Deaton. “Binance, like many other entities that grew very fast and very quickly, may have cut corners. If so, they will pay a big fine and move on.”

The problem is that the Binance suit comes after Coinbase received a Wells notice from the SEC, and the government’s seizure of Signature Bank, with reports that the Federal Deposit Insurance Corporation wanted all crypto depositors out before it would allow a sale of that bank.

“When you add those things together, it appears like coordination, not coincidence,” Deaton told Cointelegraph.

“Hyperbole seems to drive the crypto news cycle,” commented Bracewell’s Shargel when asked about the industry’s response to the recent CFTC action against Binance. “The CFTC’s lawsuit is certainly serious, but it’s probably too soon to call it a fatal blow.”

In its complaint, the CFTC asked the court to impose several penalties, including a permanent bar on Binance and its CEO, Changpeng Zhao, from the commodities markets. “But, for now, the complaint is just a complaint, and the outcome of the case — whether through settlement or otherwise — remains to be seen,” said Shargel.

The View From Abroad

Viewed from overseas, recent U.S. regulatory actions are sometimes difficult to fathom. Syren Johnstone, executive director of the compliance and regulation program at the University of Hong Kong — and author of the book Rethinking the Regulation of Cryptoassets — has been disappointed with the U.S. SEC’s seeming attempt to label everything a security.

“None of the regulatory approaches I’m seeing globally truly promote innovation,” Johnstone told Cointelegraph. “Dumping everything crypto into a financial markets context is straight-jacketing the greater potential for the technology.”

Other countries are closely following recent U.S. regulatory actions, though not necessarily approvingly. “Overseas regulators are looking at the U.S. approach to crypto assets as a situation they want to avoid,” Johnstone noted.

“Globally, there are concerted efforts to bring greater regulatory oversight to crypto,” added CoinGecko’s Chan. “However, each country has its own legal system, and different countries may take different paths toward regulating crypto activities.

This may include placing crypto under the ambit of securities, but there may also be other possible paths such as classifying crypto as payments instruments, or commodities.”

Time To Cool Down The Hype?

If the industry continues to use the language of persecution, could it potentially hurt — rather than support — crypto adoption? Shargel commented:

“I’m not sure if hyperbole serves the wider cause of crypto or blockchain adoption, but it might help to coalesce the crypto community, especially as regulators seem to be expanding their enforcement dragnet.”

“I do not believe it is hyperbole to say the U.S. government has initiated a war or campaign against crypto,” opined Deaton. “Operation Chokepoint 2.0, which Nic Carter warned people about, has been proven accurate.

Some said he was a conspiracy theorist or engaging in hyperbole. He wasn’t either.

The regulators protect the status quo, which means they protect the incumbents in power from the disrupters who are gaining traction or market share. That’s what we are witnessing.”

A Downbeat President’s Report

Elsewhere, many in the crypto community were disappointed by the Biden administration’s recent economic report, which devoted 35 of its 507 pages to digital assets.

Dan Reecer, chief growth officer at decentralized finance platform Acala Network, called it “an attack on crypto,” adding that it was released “just days after Operation Chokepoint 2.0 was executed on crypto-friendly banks.”

Admittedly, the report wasn’t exactly a ringing endorsement of cryptocurrencies. “Crypto assets currently do not offer widespread economic benefits. They are largely speculative investment vehicles and are not an effective alternative to fiat currency,” it declared.

However, there is nothing in the report that describes crypto as threatening U.S. dollar dominance in global trade or about a pressing need to “de-platform” crypto entities.

On the contrary, the report acknowledged that cryptocurrencies “underlying technology may still find productive uses in the future as companies and governments continue to experiment with DLT [distributed ledger technology].” It conceded that “some crypto assets appear to be here to stay.”

The eighth chapter of the report, which focuses on digital assets, is primarily a rehash of things that people working in the field have known for years — how Bitcoin is mined, the risks of algorithmic stablecoins, the crypto sector’s role in ransomware, its volatility and its unsuitability as a medium of exchange, etc. But one major shortcoming is that it fails to recognize the technology’s future possibilities.

All in all, U.S. regulators face a balancing act. The government has every right to crack down on bad actors, but it shouldn’t kill innovation in the process. The SEC can’t expect to regulate everything in the crypto space — not everything is a financial security.

For instance, if the agency declared Ether a security — because the Ethereum network uses ETH in its staking consensus mechanism — then that would rightly be considered regulatory overreach.

“In the aftermath of FTX, it’s no surprise that regulators are inclined to act,” Chris Perkins, president of crypto venture firm CoinFund, and a member of the CFTC’s Global Market’s Advisory Committee, told Cointelegraph. “And, they should be empowered to pursue enforcement actions to prevent other ‘FTXs.’ But, it’s important that we don’t throw the baby out with the bathwater.”

Updated: 4-5-2023

NYDFS Chief Dismisses ‘Choke Point 2.0’ Theory of Signature’s Closure As ‘Ludicrous’

Adrienne Harris, the superintendent of the New York Department of Financial Services, said the decision to close the bank was instead due to a “new-fashioned bank run.”

Signature Bank’s takeover last month was not a part of any “Operation Choke Point 2.0,” according to Adrienne Harris, superintendent of the New York Department of Financial Services (NYDFS), who called the idea “ludicrous.”

Speaking to the audience at blockchain analytics firm Chainalysis’ Links conference in New York on Wednesday, Harris said the decision by her office to step in and shut down Signature was totally unrelated to crypto.

“The idea that taking possession of Signature was about crypto, or that this is Choke Point 2.0 is really ludicrous,” Harris said. “I mean, I just have no other way to say it – what we saw was a new-fashioned bank run.

When you have a high percentage of uninsured deposits, and you don’t have liquidity management protocols in place, you end up in a place where you cannot open on Monday in a safe and sound manner.”

Signature was shuttered on March 12, two days after the collapse of Silicon Valley Bank, and four days after Silvergate Bank announced it would close. All three banks were closely tied to the crypto industry.

The closure of the banks, along with the Federal Reserve Board’s decision to reject crypto-friendly Custodia Bank’s membership application, has fueled theories that there is a coordinated effort among U.S. regulators to cut the crypto industry off from the banking system – popularly dubbed Operation Choke Point 2.0.

That’s a reference to an earlier effort by U.S. federal agencies to cut off legal but controversial businesses from banking services.

But Harris said Wednesday the idea that regulators are trying to de-bank crypto is “silly.”

“If you look at our rules, if you look at our guidance, they necessitate our virtual asset companies having a strong banking partnership with well-regulated banks,” Harris said. “So the idea that we don’t want those banks to exist just doesn’t make any logical sense.”

Harris added that her department’s rules – despite being considered onerous by some in the industry – have the benefit of providing a clear road map for crypto companies wishing to operate in New York.

“When you have rules on the books, when they are transparent, when it’s in black and white, and everybody knows what they are, that is the best way,” Harris said. “And, frankly, it’s the fastest way to grow a robust and responsible ecosystem that can innovate, that can integrate with traditional financial services system, that can serve customers, and make our markets more efficient.”

Updated: 4-13-2023

‘Nothing Is A Coincidence With The Government,’ Claims US lawmaker On Operation Choke Point 2.0

Speaking at NFT.NYC 2023, United States Congressperson Byron Donalds hurled criticism at recent crypto regulatory initiatives.

United States Congressperson Byron Donalds criticized the country’s regulatory agencies on April 12 at NFT.NYC 2023 conference in New York. According to Donalds, agencies such as the Securities and Exchange Commission, the Commodity Futures Trading Commission and others are being used to activate “Operation Choke Point 2.0” by limiting crypto business access to banking services.

Operation Choke Point 2.0 describes the U.S. government’s alleged coordinated effort to discourage banks from working with crypto firms under the guise of ensuring safety and stability.

Crypto industry commentators believe government attempts to restrict access to the crypto sector have ramped up in 2023.

“What I’ve seen in my short time in Congress is that nothing is a coincidence with the government agency,” the legislator said during a keynote speech, referring to the U.S. government’s recent crackdown on crypto. “They are talking across lines a lot more than they ever used to. They are finding various ways to squeeze an outcome that they want.”

Along with efforts to limit the banking system’s exposure to crypto, Donalds believes the Federal Reserve is “laying the foundation for a CBDC,” or central bank digital currency, with recent enforcement actions being part of plans for a digital dollar.

The Floridian congressperson also noted that the U.S. government doesn’t have enough knowledge about the crypto industry to regulate it properly and, through its agencies, is relying on a “legacy framework of 100 years” to create rules and regulations for today’s needs.

“To bring us into lay terms, […] This will be like asking a sixth-grade basketball player to ref the NBA finals,” he said before urging an updated regulatory environment for digital assets.

Donalds also labeled SEC Chair Gary Gensler as “a very arrogant individual,” claiming, “He believes he is the smartest person in every room.” Donalds continued:

“Old Washington, which is basically Washington today, loves having the alphabet soup agencies […] They’re all relics of a time when you had to fax in before fax machines. This is when the regulatory agencies were built. Old Washington, like anybody else, doesn’t like moving off the thing that they created.”

Helping regulators understand the nuances of digital assets, blockchain and crypto more generally are necessary for a better crypto environment in the country, according to the congressperson.

U.S. authorities appear to have resurrected past enforcement tactics to impose restrictions on cryptocurrency firms and banks serving them.

The alleged strategy consists of isolating the traditional financial system from the crypto market by relying on “multiple agencies to discourage banks from dealing with crypto firms,” with the goal of leading crypto businesses to become “completely unbanked,” sources told Cointelegraph in early February.

Recent reports reveal that the U.S. arm of global crypto exchange Binance has faced challenges in establishing a new bank partner to serve as a fiat on-ramp and off-ramp for its clients in the country. The recent failures of Silvergate and Signature Bank left Binance.US without banking services, depending on intermediary banks to store funds on its behalf.

Operation Choke Point 2.0 Could Be Bitcoin’s Biggest Banking Crackdown And Regulatory Battle

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