Crypto businesses in the United States are facing challenges with regard to access to banking services. According to a recent white paper published by Washington D.C. law firm Cooper & Kirk, PLLC, U.S. bank regulators are attempting to “drive crypto businesses out of the financial system” through an alleged operation named “Operation Chokepoint 2.0.” The paper claims that after labeling lawful businesses as “reputationally risky,” federal bank regulators, with the help of state officials, have been purging their accounts from banks under their supervision.
The first iteration of the alleged operation, “Operation Chokepoint 1.0,” began by labeling legal and law-abiding crypto entities as “reputationally risky.” The second stage, “Operation Chokepoint 2.0,” attempts to squeeze the crypto industry by restricting access to on and off-ramps. According to the Cooper & Kirk paper, “in the back rooms of banks around the country, bank examiners explained that those financial institutions that continued to serve customers that the federal regulators had labeled ‘reputationally risky’ would suffer the consequences.”
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The Cooper & Kirk authors further detail that the Federal Deposit Insurance Corporation (FDIC) got involved on April 7, 2022. At that time, the FDIC issued a letter to all institutions under its supervision, asking for information concerning their interest in serving the crypto industry and banks that are already engaged with businesses of this nature. The law firm argues that “Operation Choke Point 2.0 deprives businesses of their constitutional rights to due process in violation of the Fifth Amendment…violates both the non-delegation doctrine and the anti-commandeering doctrine, depriving Americans of key structural constitutional protections against the arbitrary exercise of governmental power.”
The crypto industry believes that the U.S. government aims to eliminate access to cryptocurrencies. The failures of three major U.S. banks that had connections with the crypto industry and the comments from Signature Bank board member and former politician Barney Frank, who suggested that Signature’s seizure was meant to be an “anti-crypto” message, are causes of concern for the crypto community.
Crypto businesses have faced challenges in the past with regard to access to banking services, but it is possible that Operation Chokepoint 2.0 is more extensive than previous measures. For instance, firms involved in crypto derivatives trading could be particularly vulnerable to such restrictions. Moreover, it is a US-centric issue, putting the country at a disadvantage from an innovation perspective. Countries like Singapore, Switzerland and Malta have been particularly welcoming of crypto start-ups, which has contributed to their growth in innovation and investment in the sector.
Crypto businesses are looking to take legal action, while others are seeking alternative solutions such as developing their own banking systems. With the increasing attention on CBDCs, the regulatory framework for crypto in the U.S. is sure to come into question, as centrally issued digital currencies are seen as a potential threat to decentralized cryptocurrencies. As the crypto industry continues to grow and innovate, it is imperative that governments around the world recognise their importance and give them room to flourish.
In conclusion, Operation Chokepoint 2.0 is a new challenge for US-based crypto businesses, adding to previous restrictions on banking services. The situation is causing concern within the crypto community, and legal action is being considered by some. An alternative solution may be to develop new banking systems specifically tailored for the crypto industry. From an innovation perspective, the US is at a disadvantage compared to countries that have been more welcoming to crypto start-ups. With the rise of CBDCs, it is only a matter of time before the regulatory framework for crypto comes under scrutiny. Ideally, governments should recognise the potential of the crypto industry, and regulate it accordingly, while allowing it to flourish.
