According to venture capitalist and longtime crypto supporter Nic Carter, the recent crackdown on the US crypto industry can be dubbed “Operation Choke Point 2.0.”
Carter argues that inter-governmental organizations are working to suffocate and destroy the crypto industry.
Carter’s post, titled “Operation Choke Point 2.0 Is Underway, And Crypto Is In Its Crosshairs,” presents a series of negative news stories that, when combined, suggest a deliberate, government-led attempt to discourage traditional financial institutions from supporting the crypto industry.
What is Operation Choke Point?
In 2018, the Conservative Washington political news outlet The Hill published an op-ed by Frank Keaton, former President of the American Bankers Association, entitled “Operation Choke Point reveals true injustices of Obama’s Justice Department.”
Operation Choke Point, Keaton said, was a relatively unknown program conducted by President Obama’s Department of Justice (DOJ). According to Keaton, it unjustly targeted small businesses without any consequences for those involved, with the program utilizing federal officials to pressure banks into closing the accounts of companies solely because of ideological differences:
“Operation Choke Point had more in common with a purge of ideological foes than a regulatory enforcement action. It targeted wide swaths of businesses with little regard for whether legal businesses were swept up and harmed. In fact, that seemed to be the goal.”
Keaton said the program operated unchecked for years, noting that officials at both the OCC and FDIC threatened banks with regulatory consequences if they did not comply with their demands. As a result, legitimate businesses such as gun and ammunition dealers and payday lenders suddenly had their accounts terminated by banks with little explanation.
“The role of DOJ in aiding and abetting this program is especially troubling. During my tenure, it would have been unthinkable for us to develop a targeted campaign against lawful businesses simply because we objected to their existence.”
Keaton said its primary objective was to suffocate payday lenders and other high-risk businesses, as implied by its name:
“As the former president of the American Bankers Association, I am appalled at the brazen threats levied against banks during Operation Choke Point […] Banks should answer to federal and state law, not to the whims of individual regulators with a vendetta against lawful businesses.”
In 2017, the Trump administration made headlines when it was said to have eliminated Operation Choke Point. However, according to Carter, since the Biden administration came into office, the news seems that TradFi top-tier banks and institutions have been given top-down directions to reimplement Operation Choke Point, perhaps under a different name or guise.
“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.”
Operation Choke Point 2.0
According to Carter, Crypto Choke Point 2.0 diverges from its predecessor in several crucial ways. While the original Choke Point relied on informal guidance and backdoor conversations, which primarily threatened investigations by the DoJ and FDIC if financial institutions didn’t adopt the administration’s risk standards, this was arguably unconstitutional and gave Republicans the leverage they needed to repeal the program ultimately.
Choke Point 2.0, according to Carter, is unfolding in plain sight through written guidance, rulemaking, and blogs. The current regulatory crackdown on crypto is being presented as a safety and soundness concern for banks rather than simply a matter of reputational risk.
Jake Chervinsky of the Blockchain Association calls this “regulation by blog post,” a process by which federal regulators can create policies (and expand their scope and mandate in the case of the Fed) simply by releasing guidance that discourages banks from dealing with crypto, rather than requesting new laws from Congress. Caitlin Long, CEO of Custodia, characterizes the Fed’s rejection of her application as “shooting the stallion to scatter the herd.”
Carter says that crypto-facing banks present higher risks, different from collateralizing assets, and less ability to insurable rates. Labeling crypto-facing banks as “high risk” has four direct effects, Carter says: “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.”
Carter ultimately predicts that with more regulatory oversight and crackdown in the US, it will be up to other jurisdictions like Dubai, Singapore, Switzerland, Hong Kong, and the UK to pick up the slack.
“If bank regulators continue their pressure campaign,” Carter says, “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.”