What is Choke Point 2.0?

The Joe Biden administration’s ongoing efforts to block cryptocurrency companies from accessing banking services have been dubbed Choke Point 2.0.

Operation Bottleneck Point Background

Operation Choke Point, launched by former President Barack Obama’s administration in 2013, aimed to combat fraud and illegal activity by blocking criminals’ access to the banking system.

By forcing financial institutions to cut ties with high-risk businesses, regulators hoped to “strangle” illicit actors from continuing to fund their activities.

Despite good intentions, there were concerns in the community that legitimate businesses were being unfairly targeted.

The program ended in August 2017, when the Justice Department announced the official end of its operation, claiming the Obama administration was harming legitimate businesses instead of preventing fraud.

What is known about Choke Point 2.0

Venture capitalist Nic Carter first announced the launch of Choke Point 2.0 in early 2023, following a series of moves by the Biden administration to isolate the cryptocurrency sector from the banking sector.

In his February 8, 2023 article, Carter discusses how small movements have turned into a complex, large-scale crackdown on the crypto industry.

For example, the presidential administration launched a coordinated multi-agency plan to discourage banks from doing business with crypto companies. The government’s efforts targeted both traditional banks that would serve crypto customers and crypto companies seeking banking licenses.

Main Features

Carter noted that the fate of banks that show even the slightest interest in cryptocurrencies is currently hopeless. Many financial institutions refuse to work with cryptocurrencies, calling them “toxic” and referring to the risks of interacting with this asset class.

Carter listed the consequences of ill-considered policies, including Signature Bank significantly reducing the volume of cryptocurrency deposits, the closure of the cryptocurrency department at Metropolitan Commercial Bank, the investigation into Silvergate in connection with the management of the accounts of the infamous Alameda Research, and Binance suspending USD wire transfers to its retail customers, to name a few.

The pressure from banking regulators was mainly due to the collapse of the FTX crypto exchange and its aftermath, which led them to look for ways to avoid another collapse. As an offshore exchange, FTX was not directly regulated by financial regulators and therefore outside their direct purview.

If they can cut off access to fiat money, they can marginalize the industry domestically and internationally without directly regulating it, Carter said:

In 2.0, everything is out in the open in the form of rule-making, written guidance, and blogs.

Choke Point 2.0 chronology On December 6, 2022, Senators Elizabeth Warren, John Kennedy, and Roger Marshall sent a letter to Silvergate. The letter criticized the bank’s service to FTX and Alameda and accused it of failing to disclose suspicious activity related to these customers. On December 7, 2022, Signature Bank announced that it would reduce its customer cryptocurrency deposits from $23 billion at its peak to $10 billion in order to exit the stablecoin business. On January 3, 2023, the Fed, the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC) issued a joint statement on the risks of banks dealing in cryptocurrency. They did not explicitly prohibit banks from holding cryptocurrency or dealing with crypto customers. However, they did not strongly recommend that they do so. On January 9, 2023, Metropolitan Commercial Bank announced that it was shutting down its crypto asset vertical entirely. On January 21, 2023, cryptocurrency exchange Binance announced that it would reduce its exposure to the digital asset market while Signature Bank would only process user transactions over $100,000. On January 27, 2023, the Federal Reserve rejected crypto bank Custodia’s two-year-old application to join the Federal Reserve System, citing “safety and soundness” risks. On February 2, 2023, the Justice Department’s Fraud Section announced that it had launched an investigation into Silvergate for its ties to FTX and Alameda. On February 6, 2023, Binance suspended USD wire transfers for retail customers. On February 7, 2023, the Fed’s January 27 statement was recorded in the federal register, converting the policy statement into a final rule without congressional review or a public notice and comment period. Banks were aware that public blockchain exposure was considered unacceptably risky.

A month after Carter’s article was published, Silvergate Bank went bankrupt. It was closed 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 picks up where the original project left off. This modernized version aims to achieve similar results by forcing banks and lenders to cut off financing and other financial services to industries deemed high-risk.

The increased regulatory interest in the cryptocurrency sector in recent years aligns with the concept of Operation Choke Point 2.0, in which U.S. regulators are attempting to make it as difficult as possible to access cryptocurrencies through traditional financial platforms and instruments.

The U.S. Securities and Exchange Commission, in particular, has increased its efforts to regulate and crack down on crypto companies that do not comply with securities laws.

An example of the so-called Operation Choke Point 2.0 is Staff Accounting Bulletin 121, published by the SEC in April 2022. The document includes recommendations for the storage of cryptocurrencies. In particular, banks should reflect them on their balance sheets. This makes the process expensive and limits the ability of institutions to provide custody services at scale.

Since the beginning of 2024, US government officials have repeatedly demanded that the provisions of the document be softened. At the same time, Biden vetoed SAB 121 in June, indicating that his administration will not support measures that threaten the well-being of consumers and investors.

At the same time, Bloomberg reported, citing sources in the department, that SEC employees have begun distributing advice among institutions and brokers on how to avoid reflecting cryptocurrencies on their balance sheets under the regulator’s rules. According to the agency’s source, several major banks have received a “green light” to bypass the regulations starting in 2023, ensuring that clients’ assets are protected in the event of bankruptcy.

Should Operation Choke Point 2.0 be completed?

Experts believe that trying to hinder the development of decentralized technologies in the United States, which is the world leader in technical innovation, is tantamount to treason. Yona Network CEO Max Sultakov said in a conversation with crypto.news:

In general, secret regulations that bypass legal procedures through manipulation of banking rules are a scourge in today’s US and Western countries. They betray their ideals for short-term gains. On the other hand, each such case further deepens the understanding of the importance of decentralized and permissionless finance, supported by blockchain technology that we are building today.

US presidential candidate Donald Trump also said that he would end the suppression of Bitcoin (BTC) if he is elected.

He opposes Operation Choke Point 2.0 implemented by the current government and vows to stop it immediately in order to ensure a level playing field for Bitcoin and fintech companies:

As President, I will terminate Operation Bottleneck 2.0 immediately.

But Trump’s comments that he would fire Biden-appointed SEC chairman Gary Gensler on the first day of his presidency drew the most significant backlash from viewers. That’s when viewers began chanting Trump’s name. Gensler is known for his tough stance against the crypto industry and supports Operation Choke Point 2.0.

Indeed, Trump’s speech at the conference gave hope that Operation Dargeçit 2.0 could end soon.