Joe Biden administration’s ongoing efforts to deny cryptocurrency companies access to banking services have become known as Choke Point 2.0.
Operation Choke Point Background
Introduced by former president Barack Obama’s administration in 2013, Operation Choke Point was intended to combat fraud and illegal activity by denying criminals access to the banking system.
By forcing financial institutions to cut ties with high-risk businesses, regulators hoped to "choke off" how illicit actors could continue to fund their operations.
Despite the good intentions, there were concerns in the community that legitimate businesses were being unfairly targeted.
The program ended in August 2017, when the Department of Justice announced that the Obama administration’s operation was officially ending, claiming that it was harming legitimate businesses instead of preventing fraud as intended.
What is Known About Choke Point 2.0
Venture capitalist Nic Carter first announced the start of Choke Point 2.0 in early 2023, following a series of moves by the Biden administration to isolate the crypto industry from the banking sector.
In his Feb. 8, 2023 article, Carter discusses how small movements have become a sophisticated, large-scale crackdown on the crypto industry.
For example, the presidential administration has launched a coordinated plan across multiple agencies to discourage banks from doing business with crypto firms. The government’s efforts have targeted both traditional banks that will serve crypto clients and crypto firms seeking banking licenses.
Key Features
Carter noted that the fate of banks showing even the slightest interest in cryptocurrencies remains hopeless at the moment. Many financial institutions refuse to work with cryptocurrency, calling it “toxic” and citing the risks of interacting with this asset class.
In listing the consequences of ill-considered policies, Carter cited several examples: Signature Bank’s reduction in cryptocurrency deposits, the closure of Metropolitan Commercial Bank’s cryptocurrency department, the investigation into Silvergate for managing Alameda Research accounts, and Binance’s suspension of U.S. dollar transfers for retail clients.
The pressure from banking regulators was primarily due to the collapse of the FTX crypto exchange and its aftermath. FTX, as an offshore exchange, was not directly supervised by financial regulators, so it was outside their direct auspices.
Carter noted that if they can cut off access to fiat money, they can marginalize the industry within and outside the country without directly regulating it:
"In 2.0, everything is happening in plain sight, in the form of rulemaking, written guidance, and blogs."
Choke Point 2.0 Chronology
- On Dec. 6, 2022, senators Elizabeth Warren, John Kennedy, and Roger Marshall sent a letter to Silvergate, criticizing it for providing services to FTX and Alameda and accusing it of failing to disclose suspicious activity.
- On Dec. 7, 2022, Signature Bank announced it would halve its customer crypto deposits to $10 billion.
- On Jan. 3, 2023, the Fed, FDIC, and OCC issued a joint statement discouraging banks from dealing with cryptocurrency.
- On Jan. 9, 2023, Metropolitan Commercial Bank announced it was shutting down its crypto asset vertical entirely.
- On Jan. 21, 2023, Binance announced that Signature Bank would only process user transactions over $100,000.
- On Jan. 27, 2023, the Federal Reserve rejected crypto bank Custodia’s two-year application to join the Federal Reserve System, citing "safety and soundness" risks.
- On Feb. 2, 2023, the Justice Department’s Fraud Section announced an investigation into Silvergate over its dealings with FTX and Alameda.
- On Feb. 6, 2023, Binance suspended USD bank transfers for retail customers.
- On Feb. 7, 2023, the Fed’s Jan. 27 statement was filed in the federal register, making the policy statement a final rule.
Silvergate Bank went out of business a month after Carter’s article, shut down due to systemic risks following the closure of Silicon Valley Bank (SVB).
Is the Crypto Industry Still Experiencing Operation Choke Point 2.0?
Operation Choke Point 2.0 is picking up where the original project left off. This modernized version aims to achieve similar results by forcing banks and lenders to cut financing and other financial services to industries deemed high-risk.
The increased regulatory attention to the crypto industry in recent years fits well with the concept of Operation Choke Point 2.0. U.S. regulators are trying to make it as difficult as possible to access crypto through traditional financial platforms.
In particular, the U.S. Securities and Exchange Commission has stepped up efforts to regulate and crack down on crypto companies that do not comply with securities laws.
One example is Staff Accounting Bulletin 121, issued by the SEC in April 2022. Banks must reflect stored cryptocurrencies on their balance sheets, making the process expensive and limiting their ability to provide custodial services.
Since the beginning of 2024, officials have repeatedly asked to soften the document’s provisions. However, Biden vetoed SAB 121 in June, stating his administration would not support measures threatening consumers and investors.
Bloomberg reported that SEC employees began distributing recommendations among institutions on avoiding reflecting cryptocurrencies on their balance sheets. Several large banks have received permission to bypass the regulations, ensuring client asset protection in bankruptcy cases.
Should Operation Choke Point 2.0 Be Completed?
"Overall, hidden regulations that bypass legal procedures through the manipulation of banking rules are a scourge in today’s U.S. and Western countries. They are betraying their ideals for short-term gains. On the other hand, each such case only deepens the understanding of the importance of decentralized and permissionless finance powered by blockchain technology that we are building today."
U.S. presidential candidate Donald Trump also said that if elected, he would stop the suppression of Bitcoin (BTC).
He opposes Operation Choke Point 2.0, implemented by the current government, and promises to immediately stop it to ensure a level playing field for Bitcoin and financial technology companies:
"As President, I will immediately shut down Operation Choke Point 2.0."
Trump’s promise to fire SEC head Gary Gensler, known for his tough stance on the crypto industry, received significant applause. Gensler supports Operation Choke Point 2.0.
Trump’s speech gave hope that Operation Choke Point 2.0 could soon be over.
