Continuing the Barack Obama tradition: What is Choke Point 2.0?

As a seasoned observer of financial markets and technologies, I find myself deeply concerned about the ongoing saga of Operation Choke Point 2.0. Having witnessed the rapid evolution of finance from the days of paper checks to digital transactions, I can’t help but feel that this modernized version of Operation Choke Point threatens to stifle innovation in one of the most promising areas: cryptocurrencies and blockchain technology.

As a crypto investor, I’ve been closely following the recent developments regarding the Biden Administration’s initiatives that seem to limit cryptocurrency firms’ ability to use traditional banking services, often referred to as “Choke Point 2.0.” This is a continuation of past policies aimed at tightening financial controls over digital currencies.

Operation Choke Point Background

Launched under the administration of former President Barack Obama in 2013, Operation Choke Point aimed at preventing fraud and unlawful activities by restricting criminals from utilizing the banking system.

Regulators aimed to prevent illicit actors from funding their activities further by compelling financial institutions to sever connections with risky businesses. In simpler terms, they wanted to stop the money flow to these illegal actors.

Although people understood the motive behind it, there was a worry in the community that honest enterprises might be unjustly accused.

The operation run by the Obama administration concluded in August 2017, following the Department of Justice’s declaration that the program was causing damage to legitimate businesses rather than preventing fraud as originally intended.

What is known about Choke Point 2.0

As a researcher, I found myself delving into the latest developments in the cryptocurrency sphere during the early months of 2023, when Nic Carter unveiled the commencement of Choke Point 2.0. This significant announcement followed a strategic series of actions taken by the Biden administration, aimed at distancing the crypto industry from the traditional banking system.

On February 8, 2023, Carter’s article explores how small actions have evolved into a complex, widespread enforcement action targeting the cryptocurrency sector.

As a seasoned banker with over two decades of experience, I’ve witnessed the evolution of financial services from the rise of online banking to the advent of cryptocurrencies. In my opinion, the recent move by the presidential administration to discourage banks from doing business with crypto firms is a step backward for our industry.

Key Features

At present, Carter observes a grim outlook for banks with any inclination towards cryptocurrencies. Numerous financial establishments choose not to engage with cryptocurrencies, labeling them as “harmful” and pointing out the potential hazards associated with dealing in this investment category.

Carter provided instances of negative outcomes linked to hasty policy decisions, such as Signature Bank seeing a substantial decrease in cryptocurrency deposits, Metropolitan Commercial Bank shutting down its cryptocurrency division, investigations into Silvergate regarding Alameda Research’s account management, and Binance temporarily halting U.S. dollar bank transfers for individual clients.

The fallout from the FTX cryptocurrency exchange’s collapse significantly increased pressure on banking regulators, leading them to explore methods to prevent a similar incident in the future. Since FTX operated offshore and thus fell outside the purview of financial regulators, it lacked direct oversight.

Carter pointed out that by limiting access to traditional currency, they could weaken or isolate the industry both domestically and internationally, without needing to enact specific regulations.

In version 2.0, events are transparently unfolding through rule-making, explicit instructions, and blog posts.

Choke Point 2.0 chronology

On Dec. 6, 2022, senators Elizabeth Warren, John Kennedy, and Roger Marshall sent a letter to Silvergate. The letter criticized the bank for providing services to FTX and Alameda and accused it of failing to disclose suspicious activity related to these clients.
On Dec. 7, 2022, Signature Bank announced it would halve its customer crypto deposits from $23 billion at its peak to $10 billion to exit its stablecoin business.
On Jan. 3, 2023, the Fed, Federal Deposit Insurance Corporation (FDIC), and Office of the Comptroller of the Currency (OCC) issued a joint statement on the risks to banks dealing with cryptocurrency. They did not explicitly prohibit banks from holding cryptocurrency or dealing with crypto clients. However, they strongly discouraged them from doing so.
On Jan. 9, 2023, Metropolitan Commercial Bank announced it was shutting down its crypto asset vertical entirely.
On Jan. 21, 2023, crypto exchange Binance announced that Signature Bank would only process user transactions over $100,000 as it scales back its digital asset market exposure.
On Jan. 27, 2023, the Federal Reserve rejected crypto bank Custodia’s two-year application to join the Federal Reserve System, citing “safety and soundness” risks.
On Feb. 2, 2023, the Justice Department’s Fraud Section announced an investigation into Silvergate over its dealings with FTX and Alameda.
On Feb. 6, 2023, Binance suspended USD bank transfers for retail customers.
On Feb. 7, 2023, the Fed’s Jan. 27 statement was filed in the federal register, turning the policy statement into a final rule without congressional review or a public notice and comment period. Banks were aware that public blockchain exposure was considered unacceptably risky.

Approximately a month after Carter’s article was made public, Silvergate Bank ceased operations. This move was prompted by systemic risks that arose after the collapse of Silicon Valley Bank (SVB), leading to its shutdown.

Is the crypto industry still experiencing Operation Choke Point 2.0?

In simple terms, Operation Choke Point 2.0 continues from where its predecessor ended. Its updated form seeks to attain comparable outcomes by persuading or compelling banks and lenders to restrict financial support, including loans, to sectors considered risky.

Over the past few years, the growing scrutiny of the cryptocurrency sector by regulatory bodies aligns nicely with the notion of Operation Choke Point 2.0. This modern interpretation suggests that American regulators aim to create substantial barriers for users looking to engage in cryptocurrencies through conventional banking methods and financial tools.

Specifically, the U.S. Securities and Exchange Commission is intensifying its actions to enforce regulations and penalize cryptocurrency businesses that violate securities legislation.

An illustration of what’s been referred to as Operation Choke Point 2.0 involves Staff Accounting Bulletin 121, published by the SEC in April 2022. This document offers guidelines for managing cryptocurrencies, specifically requiring banks to list these digital assets on their financial statements. Consequently, this process becomes costly and restricts large-scale institutional provision of custodial services.

Starting from January 2024, U.S. government representatives have continuously requested changes to make the document’s terms more lenient. Meanwhile, President Biden rejected SAB 121 in June, explaining that his administration would not endorse measures that jeopardize consumer and investor welfare.

As a researcher, I’ve come across information, some of it originating from within my department and corroborated by reports from Bloomberg. The insights suggest that SEC employees have been advising institutions and brokers on strategies to exclude cryptocurrencies from their balance sheets in compliance with regulatory standards. Interestingly, according to our sources, several large banks are said to have received approval to circumvent these regulations starting from 2023. This supposedly allows them to safeguard their clients’ assets during potential bankruptcy scenarios.

Should Operation Choke Point 2.0 be completed?

It’s argued by experts that impeding the growth of decentralized technologies, given the U.S.’s global leadership in technological advancements, could be considered a form of betrayal. Max Sultakov, CEO at Yona Network, spoke about this with crypto.news.

In essence, secretive regulations exploiting banking loopholes to sidestep legal processes are a significant issue in modern U.S. and Western nations, undermining their core principles for immediate advantages. However, every instance of this only underscores the value of our current efforts to develop decentralized finance based on blockchain technology – a system that aims to minimize such abuses.

If elected as U.S. President, Donald Trump expressed his intention to halt any efforts aimed at restricting or controlling Bitcoin (BTC).

He opposes Operation Choke Point 2.0, implemented by the current government, and promises to immediately stop it to ensure a level playing field for Bitcoin and financial technology companies:

As President, I will immediately shut down Operation Choke Point 2.0.

On the other hand, Trump’s statement about dismissing SEC head Gary Gensler, appointed by Biden, on his first day in office drew the loudest reaction from the crowd. At that instant, the crowd started cheering for Trump. Known for his hardline approach towards the cryptocurrency sector and backing Operation Choke Point 2.0, Gensler is this figure.

Thus, Trump’s speech at the conference gave hope that Operation Choke Point 2.0 could soon be over.

2024-08-03 01:30