Is the crypto industry at risk? VC Nic Carter says Operation Choke Point 2.0 is well underway

According to venture capitalist and longtime crypto supporter Nic Carter, the recent crackdown on the US crypto industry could be called “Operation Choke Point 2.0.”

Carter argues that intergovernmental organizations are working to stifle 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 effort to discourage traditional financial institutions from supporting the crypto industry.

What is Operation Choke Point?

In 2018, the conservative political news outlet The Hill in Washington published an op-ed by Frank Keaton, former president of the American Bankers Association, titled “Operation Choke Point Exposes True Iniquities 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 unfairly targeted small businesses without any consequences for those involved, with the program using federal officials to pressure banks to close the companies’ accounts solely because of ideological differences:

“Operation Choke Point had more in common with a purge of ideological enemies than a regulatory act. It targeted large swaths of business without regard to whether legitimate businesses were swept up and damaged. In fact, that seemed to be the goal.”

Keaton said the program operated unchecked for years, noting that officials at both the OCC and the FDIC threatened the banks with regulatory consequences if they did not comply with their demands. As a result, legitimate businesses such as arms and ammunition dealers and moneylenders suddenly had their accounts closed by banks with little explanation.

“The role that the DOJ is playing in aiding and abetting this program is particularly troubling. During my tenure, it would have been unthinkable for us to develop a targeted campaign against legitimate businesses simply because we objected to their existence.”

Keaton said its primary goal was to strangle payday lenders and other high-risk businesses, as suggested by its name:

“As the former president of the American Bankers Association, I am appalled by the brazen threats 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 legitimate 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 took office, the news appears to be that top-level TradFi banks and institutions have received top-down instructions to re-implement Operation Choke Point, perhaps under a different name or guise .

“While neither the Fed/FDIC/OCC ruling—nor the NEC ruling a few weeks later—explicitly prohibits banks from serving crypto clients, the writing is on the wall, and the investigations into Silvergate are a strong deterrent to any bank considering alignment. with crypto. What is clear now is that issuing stablecoins or transactions on public blockchains (where they can circulate freely, like cash) is strongly discouraged, or indeed prohibited.”

Operation Choke Point 2.0

According to Carter, Crypto Choke Point 2.0 differs from its predecessor in several crucial ways. While the original Choke Point relied on informal guidance and backdoor talks, primarily threatening investigations by the DoJ and FDIC if financial institutions did not adopt the administration’s risk standards, this was arguably unconstitutional and gave Republicans the leverage they needed to ultimately repeal the program.

Choke Point 2.0, according to Carter, unfolds in plain sight through written guidance, regulations and blogs. The current regulatory crackdown on crypto is being presented as a safety and soundness concern for banks rather than just 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 guidelines (and expand the scope and mandate in the case of the Fed) simply by issuing guidance discouraging banks from handling crypto, rather than requiring about new laws from Congress. Caitlin Long, CEO of Custodia, characterizes the Fed’s rejection of her application as “shooting the stallion to disperse the herd.”

Carter says crypto-facing banks present higher risk, different from asset security, 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 overdraft), they face face restrictions on other business activities, and management risks a bad exam score with their regulators, which inhibits their ability to carry out mergers and acquisitions.”

Ultimately, Carter predicts, with more regulatory oversight and crackdowns in the US, it will be up to other jurisdictions such as Dubai, Singapore, Switzerland, Hong Kong and the UK to pick up the slack.

“If banking regulators continue their pressure campaign,” says Carter, “they risk not only losing control of the crypto industry, but ironically increasing the risk by pushing activity into less sophisticated jurisdictions, less able to handle real risks that may emerge.”