Increased regulations and uncertainty is prompting some industry experts to call the crypto crackdown "Operation Choke Point 2.0." Could a third crypto war be underway?
TL;DR:
- The crypto industry faces increased regulatory pressure. This is evidenced in lawsuits against firms like Coinbase and the case of Protego, which was denied a national trust charter.
- Counter arguments presented by regulators emphasize the need for consumer protection and preventing illicit activities.
- The expanding role of larger banks, such as JPMorgan Chase and Citi, in servicing the crypto industry may change the situation for the better.
- There is growing discontent over regulatory processes and firms are fighting back with lawsuits of their own.
- Congressional hearings and legal challenges signal increased engagement from the legislative and judicial branches.
- The impact of regulatory decisions, legal challenges and evolving banking relationships leaves the industry’s position in the United States in an uneven balance.
The Second Crypto War is not even over yet, but one cannot help but wonder whether the Third Crypto War has already begun.
As the US seeks to balance innovation and consumer protection, the regulatory landscape surrounding cryptocurrencies has become increasingly convoluted. Unfortunately, it is also growing increasingly hostile towards the cryptocurrency industry.
The regulatory crackdown, dubbed Operation Choke Point 2.0, poses new challenges for the industry’s survival in the US.
Through a comprehensive analysis of the current state of crypto regulation and its implications on businesses operating in this sector, this article will provide valuable insight into the future prospects and potential hurdles for the crypto industry in the United States.
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Challenges and Accusations
The crypto industry in the United States has faced a series of obstacles in recent times:
- Lawsuits on several fronts
- Denied applications
- General animosity towards the industry
For instance, Protego Trust, a digital asset firm, was denied a national trust charter by the OCC despite having met the necessary requirements and investing $80 million in regulatory capital. The company has been significantly impacted by this denial, forcing it to lay off most of its staff and leaving its future uncertain. Unsurprisingly, the company felt unfairly treated:
Operation Choke Point 2.0
The crypto industry has accused federal bank regulators of purposefully restricting access to the banking system for digital asset firms. Nic Carter dubbed this treatment "Operation Choke Point 2.0" — a reference to a past problematic initiative that targeted certain industries like firearms dealers and payday lenders, believed to be of high risk for fraud and money laundering.
Carter alleged in a blog post that regulators are considering using choke points to control the cryptocurrency industry and prevent collapses like the recent FTX debacle. By limiting access to fiat currency, regulators want to marginalize the industry and avoid direct regulation. This crackdown is happening publicly through rulemaking and written guidance, instead of backdoor conversations like in the past. The current approach is being marketed as "safety and soundness" and the regulators are dissuading banks from doing business with crypto.
SEC Crackdown on Crypto Companies
The Securities and Exchange Commission (SEC) has ramped up its focus on the crypto industry since October 2020, charging and warning digital asset companies almost weekly. This intense scrutiny has left the industry at a point of crisis, as many companies find themselves struggling to meet heightened regulatory demands which have, in some cases, significantly hindered their operations. Even though SEC Chairman Gary Gensler claimed clear rules for the industry already exist, companies like Coinbase beg to differ. Coinbase is fighting back against the SEC by filing a lawsuit of its own.
Regulatory Counter Arguments
The regulatory authorities in the United States have come forward to address the allegations put forth by the cryptocurrency industry, emphasizing that their actions aim to balance risk management and consumer protection rather than deliberately targeting crypto businesses. Regulatory bodies such as the SEC, OCC and CFTC have countered the accusations by the crypto industry, maintaining that they are focused on managing risks related to cryptocurrencies rather than targeting the industry specifically.
Adrienne Harris, superintendent of the New York Department of Financial Services (NYDFS) called the allegations “ludicrous.” She refuted accusations that the department trying to eliminate crypto businesses in the United States, offering alternative explanations for the closure of Signature Bank:
“The idea that taking possession of Signature was about crypto, or that this is Choke Point 2.0 is really ludicrous. I mean, I just have no other way to say it – what we saw was a new-fashioned bank run. When you have a high percentage of uninsured deposits, and you don’t have liquidity management protocols in place, you end up in a place where you cannot open on Monday in a safe and sound manner.”
According to the NYDFS, the closure of Signature Bank was primarily due to poor management and a lack of understanding of the risks involved in serving crypto businesses, rather than being part of a hidden agenda aimed at eradicating the industry.
The Role of Larger Banks
Despite the ongoing challenges and regulatory scrutiny faced by the cryptocurrency industry in the United States, there are indications that larger banks are starting to reconsider their stance on digital assets.
JPMorgan Chase, one of the largest banking institutions in the United States, has recently begun providing banking services to well-established cryptocurrency exchanges, such as Coinbase and Gemini. Citi, another major financial institution, has also expressed interest in extending services to cryptocurrency businesses and has been actively researching the potential of digital assets within the traditional financial ecosystem.
These decisions by top-tier banking institutions suggest a potential change in attitude and growing acceptance of cryptocurrencies in the banking sector.
This could signal increased support for the crypto industry within the traditionally conservative banking sector and lead to further expansion and integration between the banking and cryptocurrency ecosystems. It may also lay the groundwork for improved dialog and cooperation with regulatory authorities to help shape more inclusive and supportive policies for crypto businesses in the United States.
The Effects on Crypto Companies
The uncertain regulatory landscape in the United States has had a significant impact on cryptocurrency companies operating within its borders.
Coinbase has reportedly been exploring an international move to mitigate regulatory concerns and hindrances in the United States. This relocation highlights the increasing pressure on US-based crypto firms grappling with the evolving and complex regulatory environment.
Other cryptocurrency companies in the US continue to face various challenges as they navigate the ever-changing regulatory landscape. The federal bank regulators' crackdown on crypto firms may drive more exchanges and their customers to offshore banks in Puerto Rico, Bermuda, and the Bahamas, aggravating risks and harm to the financial system.
On the other hand, the companies that choose to remain in the United States may have to endure significant hurdles in their operations, including limitations on their access to crucial banking services or being forced to comply with a constantly shifting regime of rules and guidelines. Oliver von Landsberg-Sadie, founder and CEO of crypto banking firm BCB Group, called the situation “the SEC's chemotherapy for a giant gap, for a $14 billion Ponzi cancer.”
This shifting landscape suggests that the future of the US cryptocurrency industry remains uncertain.
Congressional Hearings and Legal Actions
The US Congress and judiciary are becoming increasingly involved in the discussion surrounding cryptocurrency regulations. A recent Congressional hearing featured testimony from SEC Chairman Gary Gensler and made crypto proponents happy, as Gensler struggled to clarify his position:
Other hearings have summoned numerous cryptocurrency executives, who presented their perspectives on the challenges and opportunities associated with the industry.
On the legal side of things, Protego, a cryptocurrency firm, has filed a lawsuit against the Federal Reserve alleging irregularities and unequal treatment in the bank charter application process. This legal action, as well as the lawsuit Coinbase filed against the SEC, signals broader discontent among crypto firms, as well as the will and means to fight back.
The legislative and judicial branches in the United States are increasingly paying attention to regulatory issues surrounding the cryptocurrency industry, which could lead to changes in the regulatory landscape in the form of new laws.
The Future of Crypto in the US — a Third Crypto War?
Would it be justified to call this a “Third Crypto War?” That depends on who you ask. For instance, Rob Leshner, founder of Compound Labs, recognized the concerted effort and bemoaned the lack of mainstream legal infrastructure for the industry to interact with the banking system. He said:
“The map was wiped clean in an incredibly short amount of time due to government action in an unanticipated way…There’s an effort to de-bank crypto and it’s been – unfortunately – incredibly effective.”
Mike Novogratz struck a similar tone. The CEO of Galaxy Digital sees a “widespread crackdown” against the industry. At the same time, he remains hopeful the “system of checks and balances” in the form of the judiciary will reign in potential overreach by the regulatory authorities.
But not everyone is bearish on crypto in the United States. Lou Kerner of the Crypto Oracle Collective called the regulatory crackdown “blatantly illegal” but also “irrelevant in the long run.” While that may drive crypto overseas in the short run, he remains hopeful “the U.S. will get its crypto act together.” He called on the industry to #BUIDL, a rallying cry for focusing on new products and services instead of becoming bogged down by political fights.
Ultimately, it may depend on the industry itself whether it can strike a compromise with politicians. There is certainly something to be said for a crackdown on crypto companies — and even more so on those that have been following the alleged rules like Coinbase. On the other hand, even crypto advocates cannot deny that the fallout from the collapse of FTX and several big funds in 2022 did not spread to other industries.
That indicates the existing ties between crypto and the traditional financial system were already weak, and authorities are trying to isolate crypto altogether. While that may not be to the liking of crypto companies, one can see the logic behind it, especially considering the ongoing banking crisis.
While this may not be a full-blown “Third Crypto War” yet, it increasingly looks like a “Cold War” between US regulators and the industry.
Check out the first crypto war, which occurred in the early days of the internet where privacy advocates battled against government agencies.
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