Cryptocurrency: Prophesized War Against Crypto Is Now Here, Fight Back re CBDC WarOnCrypto WarOnCash

grarpamp grarpamp at gmail.com
Fri Mar 24 22:58:58 PDT 2023


Operation Choke Point 2.0 Is Underway, And Crypto Is In Its Crosshairs

https://www.piratewires.com/p/crypto-choke-point

detailing the Biden Admin's coordinated, ongoing effort across
virtually every US financial regulator to deny crypto firms access to
banking services
Nic Carter
Feb 9

The Biden Administration is quietly trying to ban crypto. Nic Carter
explains in an explosive guest post for Pirate Wires.

-Solana

What began as a trickle is now a flood: the US government is using the
banking sector to organize a sophisticated, widespread crackdown
against the crypto industry. And the administration’s efforts are no
secret: they’re expressed plainly in memos, regulatory guidance, and
blog posts. However, the breadth of this plan — spanning virtually
every financial regulator — as well as its highly coordinated nature,
has even the most steely-eyed crypto veterans nervous that crypto
businesses might end up completely unbanked, stablecoins may be
stranded and unable to manage flows in and out of crypto, and
exchanges might be shut off from the banking system entirely. Let’s
dig in.

For crypto firms, obtaining access to the onshore banking system has
always been a challenge. Even today, crypto startups struggle mightily
to get banks, and only a handful of boutiques serve them. This is why
stablecoins like Tether found popularity early on: to facilitate fiat
settlement where the rails of traditional banking were unavailable.
However, in recent weeks, the intensity of efforts to ringfence the
entire crypto space and isolate it from the traditional banking system
have ratcheted up significantly. Specifically, the Biden
administration is now executing what appears to be a coordinated plan
that spans multiple agencies to discourage banks from dealing with
crypto firms. It applies to both traditional banks who would serve
crypto clients, and crypto-first firms aiming to get bank charters. It
includes the administration itself, influential members of Congress,
the Fed, the FDIC, the OCC, and the DoJ. Here’s a recap of notable
events concerning banks and the policy establishment in recent weeks:

    On Dec. 6, Senators Elizabeth Warren, John Kennedy, and Roger
Marshall send a letter to crypto-friendly bank Silvergate, scolding
them for providing services to FTX and Alameda research, and
lambasting them for failing to report suspicious activities associated
with those clients

    On Dec. 7, Signature (among the most active banks serving crypto
clients) announces its intent to halve deposits ascribed to crypto
clients — in other words, they’ll give customers their money back,
then shut down their accounts — drawing its crypto deposits down from
$23b at peak to $10b, and to exit its stablecoin business

    On Jan. 3, the Fed, the FDIC, and the OCC release a joint
statement on the risks to banks engaging with crypto, not explicitly
banning banks’ ability to hold crypto or deal with crypto clients, but
strongly discouraging them from doing so on a “safety and soundness”
basis

    On Jan. 9, Metropolitan Commercial Bank (one of the few banks that
serve crypto clients) announces a total shutdown of its
cryptoasset-related vertical

    On Jan. 9, Silvergate stock falls to a low of $11.55 on bank run
and insolvency fears, having traded as high as $160 in March 2022

    On Jan. 21, Binance announces that due to policy at Signature
bank, they will only process user fiat transactions worth more than
$100,000

    On Jan. 27, the Federal Reserve denies crypto bank Custodia’s
two-year application to become a member of the Federal Reserve system,
citing “safety and soundness” risks

    On Jan. 27, the Kansas City Fed branch denies Custodia’s
application for a master account, which would have given it the
ability to use wholesale payment services, and to hold reserves with
the Fed directly

    On Jan. 27, the Fed also issues a policy statement which
discourages banks from holding cryptoassets or issuing stablecoins,
and broadens their authority to cover non-FDIC insured state-chartered
banks (a reaction to Wyoming Special Purpose Depository Institutions
(SPDIs) like Custodia, which can hold crypto alongside fiat for its
banking customers)

    On Jan. 27, the National Economic Council releases a policy
statement not explicitly banning banks from serving crypto clients,
but strongly discouraging banks from transacting with cryptoassets
directly or maintaining exposure to crypto depositors

    On Feb. 2, the DoJ’s fraud unit announces an investigation into
Silvergate over their dealings with FTX and Alameda

    On Feb. 6, Binance suspends USD bank transfers for retail clients
(Binance US was not affected)

    On Feb. 7, the Jan. 27 Fed statement is entered into the federal
register, turning the policy statement into a final rule, with no
Congressional review, or public notice-and-comment period

    As of Feb. 8, Protego and Paxos’ applications to follow Anchorage
and obtain full approval to become National Trust Banks are still
outstanding (past the 18 month deadline), and appear likely to be
imminently denied by the OCC

In sum, banks taking deposits from crypto clients, issuing
stablecoins, engaging in crypto custody, or seeking to hold crypto as
principal have faced nothing short of an onslaught from regulators in
recent weeks. Time and again, using the expression “safety and
soundness,” they’ve made it clear that for a bank, touching public
blockchains in any way is considered unacceptably risky. While neither
the Fed/ FDIC/ OCC statement — nor the NEC statement a few weeks later
— explicitly ban banks from servicing crypto clients, the writing is
on the wall, and the investigations into Silvergate are a strong
deterrent to any bank considering aligning itself with crypto. What is
clear now is that issuing stablecoins or transacting on public
blockchains (where they could circulate freely, like cash) is highly
discouraged, or effectively prohibited. It is equally evident that a
bank-issued fiat token would only be acceptable to regulators if it
were domiciled on a surveilled, private blockchain. No ‘unhosted’
wallets allowed.
1
And perhaps most damagingly, the Fed’s devastating denial of Wyoming
SPDI bank Custodia, as well as their policy statement, effectively
ends any hopes that a state-chartered crypto bank might get access to
the Federal Reserve system without submitting to FDIC oversight.

Why might crypto entrepreneurs be wary of the FDIC? It traces back to
Operation Choke Point. Some in the crypto space believe that the
recent attempts to ringfence the crypto industry and cut off its
connectivity to the banking system are reminiscent of this
little-known Obama-era program.

Beginning in 2013, Choke Point was a scheme which sought to
marginalize specific industries operating legally — not through
lawmaking, but by applying pressure via the banking sector. The Obama
DoJ had already cut its teeth with its successful effort to sideline
the online poker space in 2011 and 2012 with threats issued to banks
supporting poker companies. With Choke Point, the Department decided
to scale up its efforts and target other industries, starting with
uncontroversial targets like payday lenders. Then, the DoJ coordinated
with the FDIC and OCC to pressure member banks to “redline” —
determine as too risky to do business with — certain legal but
politically disfavored sectors, chief among them firearms
manufacturers and adult entertainment
2
. Banks and payment processors internalized this guidance, and even
after the program was formally shuttered under Trump in 2017, its
shadow lingered. Today, banks simply ascribe a higher risk to
activities that they suspect might draw the government’s ire, even if
no specific guidance exists.

Since Choke Point nominally ended, using financial rails as an
extra-judicial political cudgel has only become more popular. Under
pressure, a number of banks walked away from the Dakota Access
Pipeline in 2017. In 2018, Bank of America and Citigroup deplatformed
firearms companies, and BoA began to report client firearm purchases
to the federal government. In 2019, AOC announced her intent to
marginalize private prisons through her seat on the House Financial
Services Committee.

Financial regulators are being asked to advance progressive causes,
too. In 2021, the Democratic House passed the “Federal Reserve Racial
and Economic Equity Act,” which would have required the Fed to aim to
“eliminate disparities across racial and ethnic groups with respect to
employment, income, wealth, and access to affordable credit.”
Gensler’s SEC now maintains a controversial climate agenda, as does
the Fed (at smaller scale). Kamala Harris has deputized banks to
advance a racial equity agenda, effectively imposing uneven
demographic standards for credit provision.

Today it’s even commonplace for explicitly conservative organizations
like Gab or Parler, and various malcontents and dissidents who fall
afoul of regime politics, to find themselves deplatformed from banks,
fintech, and payment processors that they rely on to do business. For
those who support this, I would invite you to imagine what financial
inclusion (or exclusion) under a similarly zealous DeSantis
administration might look like. “Just build your own bank,” right?
Well, not if the Fed has anything to say about it. As evident with the
stillborn Wyoming SPDI, the crypto industry tried that path and was
utterly stymied.

Banks are highly regulated public-private partnerships in an
environment where new charters are excruciatingly hard to obtain, and
as such remain de facto arms of the state. It has been and remains
trivial to deputize them to carry out political objectives. If there
was any doubt, it’s now evident that the Obama administration and its
successor in Biden’s regime are comfortable circumventing the First
Amendment by engaging nominally private companies to do their dirty
work. Anyone paying remote attention would have noticed the oddly
close revolving door between monopolistic big tech firms and Obama/
Biden security state officials. And ever since Elon Musk leaked the
Twitter Files, it’s nakedly clear that the US government and its
security apparatus used proxies at Twitter for overt censorship and
narrative control. Twitter is “just a private company,” though, right?

In 2017, Trump and Republican lawmakers like Rep. Luetkemeyer were
able to put a stop to Choke Point for a time, but it didn’t last. One
of the first moves from Biden’s OCC was to undo Brian Brook’s Fair
Access rule that prohibited political discrimination in banking.
Biden’s deputies picked up where Obama’s regulators had left off. And
now, after the time it took to digest Biden’s Executive Orders,
regulators are tightening the screw.

Today, the outlook for banks remotely interested in crypto is
precarious. Bankers tell me that crypto is toxic and the risks of
engaging with the asset class aren’t worth it. In the wake of the
Custodia decision, obtaining a new charter for a crypto bank looks
extremely unlikely. Banking innovations at the state level, like
Wyoming’s SPDI for crypto banks, appear dead in the water. Federal
Charters for crypto firms with the OCC also look dead in the water.
Traders, liquid funds, and businesses with crypto working capital are
nervously examining their stablecoin portfolios and fiat access
points, wondering if bank connectivity might be severed with little
notice. Privately, entrepreneurs and CEOs in crypto tell me that they
sense a regulatory noose tightening. As crypto-facing banks ‘derisk,’
younger and smaller firms will struggle to get banking, taking us back
to the 2014 to 2016 period when fiat access for crypto businesses was
at an extreme premium. Exchanges and other businesses that rely on
fiat onramps are concerned that their few remaining bank partners will
shut them off or institute draconian standards for scrutiny. As a
venture capitalist operating at the early stage, I am directly
witnessing the chilling effects of this policy in action. Founders are
reckoning with new uncertainties around whether they’ll be able to
operate their businesses at all.

So why the push by bank regulators now? The FTX collapse and its
ensuing effects, particularly on Silvergate, provides much of the
answer. Financial regulators weren’t interested in FTX while the fraud
was underway (with the exception of the SEC and its chairman Gensler,
who had oddly close ties to the organization), but ever since the
exchange failed in spectacular fashion, they are now contemplating
ways to avoid the next such collapse. FTX as an offshore exchange was
not directly supervised by financial regulators (aside from FTX US,
which was a marginal stub), so it was outside of their direct aegis.
However, regulators believe that they might have a silver bullet in
the fiat on- and off-ramps on which the industry relies. If they can
choke off fiat access, they can marginalize the industry — on and off
shore — without regulating it directly.

In some key respects, Crypto Choke Point 2.0 differs from the
original. It appears that the administration has learned from the
efforts of its predecessors. In Choke Point 1.0, guidance was mainly
informal and involved backdoor, off-the-record conversations. Its main
tool was the threat of investigation from the DoJ and FDIC if
financial institutions didn’t internalize the administration’s risk
standards. Because this was patently unconstitutional, it gave
Republicans the collateral to ultimately repeal the program. In 2.0,
everything is happening in plain sight, in the form of rulemaking,
written guidance, and blogs. The current crypto crackdown is being
sold as a “safety and soundness” issue for banks, and not merely a
reputational risk issue. Jake Chervinsky of the Blockchain Association
calls it “regulation by blog post.” No need to ask Congress for new
laws if federal regulators can simply make policy (and in the case of
the Fed, grow their scope and mandate) by publishing guidance which
dissuades banks from doing business with crypto. Custodia’s Caitlin
Long calls the Fed denial of her application “shooting the stallion to
scatter the herd.”

As a consequence, the only banks willing to touch crypto at this point
are smaller, less risk-averse ones, with more to gain from banking the
industry. However, this means that crypto deposits and flows end up
being substantial relative to their core business, which introduces
concentration risks. Banks prefer not to have excessive exposure to
single counterparties, or a depository base that is highly correlated
in its flows. Silvergate felt this acutely with the bank run it
suffered — and survived — post FTX. While it’s impressive that they
were able to honor a 70% drawdown in their depository base, that
episode will dissuade any banks looking to serve crypto clients that
might face the same.

And practically speaking, labeling crypto-facing banks “high risk” has
four direct effects: it gives them a higher premium with the FDIC,
they face a lower cap rate with the Fed (which inhibits their ability
to overdraw), they face restrictions on other business activities, and
management risks a poor examination score with their regulatory
supervisors, which inhibits their ability to do M&A. So while some
analysts like Wilson Sonsini’s Jess Cheng have pointed out, somewhat
optimistically, that banks are not explicitly barred from providing
crypto custody or onboarding crypto clients, they still stand to get
labeled high risk — and face serious business hurdles as a result.

Some might be sympathetic to regulators’ attempts to insulate the
banking system from the vicissitudes of the crypto space. But thus
far, crypto’s various disasters haven’t produced any meaningful
contagion. The industry had a full-blown credit crisis in 2022, with
virtually every major lender going bankrupt, but the damage was
contained. The worst fallout in the banking space was suffered by
Silvergate, which suffered an $8b drawdown, but survived. No onshore,
fiat-backed stablecoin suffered any meaningful adverse effects,
despite the massive crypto selloff in 2021 and 2022. They functioned
as intended. And no contagion spilled into traditional finance via
mass selling of Treasuries, something officials have historically felt
might be a key transmission channel.

As Biden enters the second half of his term, his crackdown on crypto
banking has deflated hopes for a regulatory rapprochement in the US.
Many crypto entrepreneurs now tell me that they’re waiting for 2025
and a putative DeSantis regime for things to turn. Some can’t wait
that long, and are shuttering their plans for businesses which involve
any type of regulatory approval, especially with regards to bank
charters. Regulators are effectively picking winners — with larger,
more established crypto firms able to hang on to their bank
relationships, while newer ones are shut out. Meanwhile, other
jurisdictions are making a bid for their business. Hong Kong has
adopted a friendlier tone once again, as has the UK. The UAE and the
Saudis are looking to attract crypto firms. And US regulators can
scarcely afford to forget what happened with FTX, in which they
curtailed the business activities of onshore exchanges, effectively
pushing US individuals into the waiting claws of SBF. If bank
regulators continue their pressure campaign, they risk not only losing
control of the crypto industry, but ironically increasing risk, by
pushing activity to less sophisticated jurisdictions, less able to
manage genuine risks that may emerge.

-Nic Carter

Author’s note: Thanks to Austin Campbell for his feedback on this story.
Image: Public domain
1

If you’re wondering how using a stablecoin on-chain is substantively
different from a bank letting clients withdraw cash from an ATM and
using it to buy something from someone else, you’re not alone.
2

The FDIC at one point listed 30 different industries for banks to avoid.

Comment
Share
	
A guest post by
Nic Carter
Partner at Castle Island Ventures.
	
4 Comments
	
Jamie Selway
Feb 9·edited Feb 9Liked by Brandon Gorrell

Directly involved in one of the aforementioned projects. Nic is over
the target. Not only is this the wrong way to run a regulatory
lemonade stand -- non-transparent, limited democratic process
oversight, questionable due process -- it's surely a path to bad
outcomes for our country & citizens. Know-nothings & Luddites are
putting our historical leadership position in financial markets & tech
at risk. Innovators & builders need to fight this (abuse of) power.
Reply
	
tugordie
Feb 9

Great essay Nic, this is ridiculous but also par for the course in
clown world America
Reply
2 more comments…


https://www.piratewires.com/p/crypto-choke-point
https://substack.com/profile/882701-nic-carter
https://twitter.com/nic__carter/status/1622973966360133634
https://www.coindesk.com/business/2022/12/06/crypto-bank-silvergate-slides-further-after-letter-from-senator-warren/
https://finance.yahoo.com/news/signature-bank-sbny-reduce-crypto-130301487.html
https://www.fdic.gov/news/press-releases/2023/pr23002a.pdf
https://investors.mcbankny.com/news-events/news/news-details/2023/Metropolitan-Bank-Holding-Corp.-to-Exit-Crypto-Asset-Related-Vertical/default.aspx
https://www.bloomberg.com/news/articles/2023-01-22/binance-says-signature-sets-transaction-minimum-amid-pullback
https://www.federalreserve.gov/newsevents/pressreleases/orders20230127a.htm
https://www.mayerbrown.com/en/perspectives-events/publications/2023/02/federal-reserve-issues-policy-statement-further-restricting-crypto-asset-activities-and-addressing-uninsured-state-member-banks
https://www.whitehouse.gov/nec/briefing-room/2023/01/27/the-administrations-roadmap-to-mitigate-cryptocurrencies-risks/
https://archive.is/fF2i3
https://www.coindesk.com/business/2023/02/06/crypto-exchange-binance-to-suspend-us-dollar-deposits-this-week/
https://www.federalregister.gov/documents/2023/02/07/2023-02192/policy-statement-on-section-913-of-the-federal-reserve-act
https://archive.is/jnxFx
https://thehill.com/blogs/congress-blog/politics/415478-operation-choke-point-reveals-true-injustices-of-obamas-justice/
https://www.banktrack.org/article/three_banks_step_away_from_dakota_access_pipeline_backers_v
https://www.nytimes.com/2018/04/10/business/bank-of-america-guns.html
https://www.nraila.org/articles/20210216/report-bank-of-america-turned-weapons-related-purchase-data-over-to-the-feds
https://twitter.com/AOC/status/1085380063112105984
https://www.cato.org/blog/racial-equity-beyond-feds-scope
https://www.sec.gov/sec-response-climate-and-esg-risks-and-opportunities
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https://www.whitehouse.gov/briefing-room/statements-releases/2022/10/04/fact-sheet-vice-president-harris-announces-new-public-and-private-sector-efforts-to-advance-racial-equity-at-freedmans-bank-forum/
https://www.forbes.com/sites/ericfan/2022/06/21/revolving-door-riches-how-obama-biden-officials-cashed-in-during-the-trump-years/
https://www.piratewires.com/p/readable-twitter-files
https://www.coindesk.com/twitter-trump-private-company-fallacy
https://luetkemeyer.house.gov/news/documentsingle.aspx?DocumentID=398946
https://www.occ.gov/news-issuances/news-releases/2021/nr-occ-2021-14.html
https://www.piratewires.com/p/twitter-vs-the-cathedral
https://www.bloomberg.com/news/articles/2023-01-05/silvergate-tumbles-after-bank-posts-loss-fires-40-of-staff
https://www.washingtonpost.com/technology/2022/12/14/sec-gensler-crypto-ftx/
https://twitter.com/jchervinsky/status/1622979885143662592
https://www.wsgr.com/en/insights/demystifying-the-banking-regulators-recent-crypto-actions-key-takeaways-for-fintech-companies.html
https://archive.is/GeLLG
https://substack-post-media.s3.amazonaws.com/public/images/bfcda76c-f42e-4b51-b0f6-cdc554be501d_1678x1248.png
https://www.cei.org/wp-content/uploads/2014/08/Iain-Murray-Operation-Choke-Point.pdf
https://substack.com/profile/16132103-jamie-selway
https://www.piratewires.com/p/crypto-choke-point/comment/12629274
https://substack.com/profile/24836182-tugordie
https://www.piratewires.com/p/crypto-choke-point/comment/12630990


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