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The U.S. will be the biggest loser from Operation Chokepoint 2.0, say crypto proponents

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(Kitco News) - Anyone who has been paying attention to financial headlines in recent weeks knows that the world is currently undergoing the worst banking crisis since 2008, as numerous banks have already gone bankrupt while the contagion slowly spreads.

For crypto fans, the struggles with banking have been going on for some time, but a faltering financial system is not to blame in this case, as it has been the U.S. government that is the source of the difficulties.

Nic Carter, a partner at Castle Island Ventures, was one of the first to point out this development in a February 7 tweet: “I don't want to alarm, but since the turn of the year, a new Operation Choke Point type operation began targeting the crypto space in the US. It is a well-coordinated effort to marginalize the industry and cut off its connectivity to the banking system - and it's working.”

According to William Isaac, who served as Chair of the Federal Deposit Insurance Corporation (FDIC) from 1981 to 1985, chokepoint operations are designed “To target entire industries deemed undesirable by putting regulatory pressure on the banks that serve them.”

Operation Chokepoint (1.0) was an effort conducted by the U.S. Department of Justice under the Obama administration in 2013 to investigate the business that banks did with firearm dealers, payday lenders, and other companies believed to be a high risk for fraud and money laundering.

Carter provided evidence for his theory of an ongoing Operation Chokepoint 2.0 in a February 9 blog post, where he highlighted a Jan. 3 joint statement on crypto assets from the Federal Reserve, Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC), which warned that decentralized blockchain networks are “highly likely to be inconsistent with safe and sound banking practices.”

In the time since Carter first proposed the possibility of a stealth crackdown on cryptocurrencies, numerous crypto proponents have reiterated the accusations that the government has embarked on Operation Chokepoint 2.0 with a focus on cutting the crypto industry off from all banking services.

“At this point, it's hard to deny that the broader crypto industry is being targeted, regardless of the official comments provided by US regulators,” said John Haar, Managing Director at Swan Bitcoin, during a conversation with Kitco Crypto. “And there has been no legislation passed to authorize such action.”

Haar cited speculation that Signature Bank was actively shut down by regulators – as opposed to the bank failing on its own – as an example of undercover blackballing. “Reuters reported that the FDIC mandated the acquirer of Signature Bank give up all crypto customers upon acquisition,” Haar noted. “The FDIC denied this, but when it was announced that Flagstar Bank would acquire Signature Bank's assets, it excluded all deposits belonging to crypto companies.”

Swan Bitcoin has first-hand knowledge of the crackdown, according to Haar, as the firm was dropped by Citibank in 2022 “with no reason and will very little notice.”

“The fact that US regulators are denying the existence of Operation Chokepoint 2.0 in their official comments is consistent with what we saw in the first iteration, which happened under the Obama Administration,” Harr said.

“Thus far, it seems that the targeting of the broader crypto industry has been stealthy and arbitrary, as opposed to transparent and all-encompassing. This means that crypto companies may find themselves in a position where they are able to find banks who will work with them, but they will be selecting from a small and ever-changing list. If this is the case, it would be prudent for crypto companies to evaluate multiple banking partners and maintain multiple active banking relationships, because you never know exactly when a bank will stop serving the industry on short notice and provide no explanation as to why,” he advised.

Stoking a nonviolent revolution

These sentiments were echoed by Stefan Rust, CEO of on-chain data aggregator Truflation, who said, “There is no doubt that Operation Choke Point 2.0 is real. This is a concise, targeted effort to shut down on and off-ramps into crypto as they go through emergent banks that are not a part of the systemically important global banks.”

It’s no simple coincidence for Rust that, “All of a sudden, governments in Europe and the US are very sensitive to Silvergate, Signature, and also Deltec Bank, all being the on and off ramps for crypto in a now emergent $1 trillion industry.”

For Rust, these moves point to a concerted effort to ensure that all funds going into and coming out of the crypto ecosystem have to go through systemically important banks that regulators work with on a regular basis and can exercise a greater degree of control over.

“You can be sure that JP Morgan, Goldman Sachs, Barclays, Nomura, and UBS are all working with crypto desks, doing OTC trades for their high-net-worth individuals and potentially even building out on and off ramps for cryptocurrencies,” Rust said.

While many crypto proponents have lambasted the recent moves, Rust offered an alternative view, saying, “Either way, this is ultimately good for the crypto industry. Crypto evolved from being its own ecosystem to rapidly becoming a $1 trillion industry today; yet the community is strong, has faith in crypto and blockchain technology, and will continue to grow this ecosystem with or without banks. No doubt such bridges will emerge again, though, as the trade between crypto and Fiat is extremely lucrative.”

Rust suggested that the latest moves by the Securities and Exchange Commission (SEC), Federal Reserve, and other regulators only serve to cultivate stronger energy and cohesion among the crypto community “where the sense of nonviolent rebellion is being stirred up and continuously stoked.”

Rather than being a negative for the crypto community, Rust said it was unfortunate for the U.S. economy. “Historically, the US has been the leader in innovation that is open to new ideas, and disruptive change - it has thrived on that philosophy. Indeed, it is now only crypto that represents that spirit in its truest form.”

He went on to say that the current global cohort of leaders, many of whom are above 60-70 years of age, “is concerned largely with protecting the status quo,” noting that the boomer generation was “raised in a period of almost unparalleled economic prosperity, [and] has accumulated a huge and vast amount of both wealth and debt.”

The debt, Rust said, is now “being layered onto the next generations, especially very young people in their 20s and 30s. This generation is going to have to carry this burden going forward - a burden of debt, fear, uncertainty, protectionism, and scarcity.”

The Truflatoin CEO chastised the current cohort of leaders, saying that “Rather than encourage and cultivate new, emergent industries that can generate strong economic growth that can help younger generations pay off horrific student debt and build some level of wealth, these leaders are crushing such industries in favor of protecting a banking system that serves very, very few.”

The U.S. is the biggest loser in Operation Chokepoint 2.0

Rust called for governments to return to a focus on entrepreneurship and lift pioneers who are willing to take on risks to evolve the system forward. “This is the kind of hope that we need to bring back to business rather than this market-driven fear we now find ourselves in.”

Aggressive moves to limit crypto innovation in the U.S. has led to “an increase in jurisdictional arbitrage,” he said. “Countries like Dubai, Singapore, and Hong Kong, are all trying to find a foothold in attracting crypto talent to their respective jurisdictions with favorable tax regulatory frameworks that are clear and accessible.”

In the end, this only hurts the forward-looking prospect of the U.S. and limits the ability of U.S. citizens to capitalize on the future growth of the blockchain industry.

Ashton Addison, founder and CEO of Crypto Coin Show, reiterated this point, saying, “Operation Chokepoint… is not good for digital assets inside the USA. However, cryptocurrencies and digital assets are global assets, and limiting US citizens' access to crypto won't stop crypto adoption from happening globally.”

Addison said the move is “only concerning for Americans because they will miss out on technology that is going to positively change the world and global finance as we know it. These limits will only leave the USA behind in global tech adoption, and countries that embrace Web3 technologies will gain an advantage as technology continues to grow exponentially.”

Despite the heavy-handed efforts by U.S. regulators, Addison sees these restrictions as having little effect on the direction of the market and merely affecting the market to a small degree on a day-to-day basis. “Bitcoin cannot be stopped, and more countries are bound to adopt it, so the USA needs to play their cards right to remain competitive on the global front.”

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.