Operation Choke Point Could Be Crypto's Biggest Regulatory Battle

In Brief

• For crypto firms, obtaining access to the banking system has always been a challenge.
• Beginning around 2013, Operation Choke Point sought to marginalize specific industries by applying pressure via the banking sector.
• Banks today don't have much choice in how they let their customers interact with crypto.

The crypto industry remains on the cusp of potential overarching regulations and scrutiny from regulators across the globe. This is especially true in the United States, where federal watchdogs are trying to clamp down on crypto in an operation referred to as ‘Choke Point 2.0.’

In 2022, the crypto industry suffered multiple institutional collapses that wiped out billions of dollars from the market. This caused many customers of these platforms to lose 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 in the industry—and it was right on the money.

The Evolution of Operation Choke Point
The U.S. government has especially begun accelerating its crypto industry crackdown. Regulators across multiple departments are banding together to reign in crypto projects and companies.

This coordinated ongoing assault 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 crackdown on companies considered high-risk by U.S. regulators. Their primary tactic was to pressure the banking sector to stop doing business with companies in specific industries, even though most were operating within the bounds of the law.

The operation began in 2013, and many companies related to firearms, drugs, loans, and other risky industries lost access to banking services in the USA. Choke Point was controversial mainly because it was never formally voted on by U.S. politicians and was somewhat of a rogue operation.

It is believed to originate with the Department of Justice (DOJ), allegedly acting on the orders of then-President Barack Obama.

The Raging War on Crypto
Interestingly, Operation Choke Point was likely to blame for why crypto companies had difficulty accessing banking services in the early days. This is because the operation was initiated around the same time that crypto saw its first notable wave of growth and adoption in the early to mid-2010s.

Carter explains that the inability of the crypto industry to access onshore banking services quickly led to the rise of offshore alternatives. Most notably, this includes Tether’s USDT stablecoin.

In a similar vein, a more targeted approach appears to be being carried out 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 Commodity Futures Trading Commission (CFTC) head Brian Quintenz responded with a comment. He suggested that this was likely ‘shadow de-banking of crypto by the Federal Reserves and OCC bank examiners.’

FTX Collapse Lit a Fire Under Regulators
This begs the question of who gave the go-ahead for this crackdown. Carter feels that Joe Biden’s Administration and the Democratic Party were the ones to set this plan in motion. Some question that if Choke Point 2.0 began in 2022, why has it only affected the crypto industry recently? This might be due to anti-crypto politicians being busy with the 2022 midterm elections.

The collapse of Terra and its algorithmic stablecoin, the implosion of Three Arrows Capital, and Celsius’ insolvency all attracted U.S. politicians’ attention. But, the FTX and Alameda co-collapse was the cherry 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 U.S. 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 Troubles in the New Year
Jan. 3 seems 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) put out a joint statement. suggesting that banks stop holding crypto and shy away from the sector.

In January, the Fed introduced a policy that would make it harder for crypto banks to get off the ground. On the same day, the Biden Administration published a cryptocurrency roadmap, which recommended that pension funds stay away from crypto.

The visible crackdowns on crypto-friendly banking firms directed affected the crypto industry. Binance, the largest exchange, suspended USD bank transfers to and from its exchange. This came just weeks after Binance announced that its banking partner (Signature) wouldn’t accept transfers to and from the exchange of less than $100,000.

Crypto Projects at Risks?
As to which projects, protocols, and companies are most at risk, the simple answer is all of them.

Nic Carter underscored in his blog post that this operation’s purpose is to regulate offshore crypto entities indirectly.

As powerful as the U.S. is, it can’t crack down on crypto projects or companies outside its jurisdiction. However, it can choke off their access to banking services—and that’s exactly what’s happening.

On the other hand, other jurisdictions and countries are making bids to foster these ‘refugee’ crypto businesses. The UAE and Hong Kong are among those at the top of this list.

Speaking to BeInCrypto on the matter, Chris Burniske, a partner at a crypto-friendly venture capitalist (VC) fund, stated:“Poor choices from the US government may slow progress, but by design, no government can stop crypto. Meanwhile, jurisdictional arbitrage will just place the US behind on crypto innovation until sensible lawmakers take the helm.”

Final Thoughts
Despite the potential for increased regulations, many in the crypto community are optimistic about the industry’s future. It is becoming increasingly mainstream as more institutional investors and large corporations get involved. Many also believe that increased regulations will ultimately lead to greater adoption and acceptance of cryptocurrencies.

At this point, increased regulations in the crypto space are no longer a question of if but when. This will likely continue to cause short-term volatility in the markets. But on the plus side, it could also lead to a more stable and trustworthy industry. This would, in turn, be more inviting to mainstream and institutional investors.

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