In the Era of Crypto Regulatory Game, America Is Falling Behind
Author: Michael Nadeau
Original compilation: Luffy, Foresight News
Author: Michael NadeauFrom the grievances between the SEC and Coinbase, where will the U.S. encryption regulation go?》。
From the grievances between the SEC and Coinbase, where will the U.S. encryption regulation go?
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Image credit: Coinflip
Operation Choke Point
The purpose of regulation should be to reduce fraud and punish bad behaviour, promote responsible innovation and protect investors. But some people claim that law enforcement operations can lead to more dangerous things. They call it "Operation Choke Point 2.0" (Operation Choke Point 2.0), which means that there was Operation Choke Point 1.0 before that.
overview
So what exactly is Operation Choke Point 1.0 (the government's official name)? Why is the initiative considered illegal and unconstitutional? How are today's cryptocurrencies similar? What can we learn from it?
overview
Operation Choking Point is an initiative started in August 2013 by the United States Department of Justice.
Essentially, this is a concerted effort to "kill" unfavorable industries (gun dealers, credit repair services, cigar manufacturers, dating services, telemarketing, online gambling, etc.) by cutting off access to banking services.
Don't like an industry? Send a message to the banker behind it.
- Former FDIC Chairman William Isaac 11/21/14 (in a scathing opinion piece in the Wall Street Journal)
I feel like the DOJ and FDIC activists are abusing their power and authority and punishing legitimate businesses, in effect, they are weaponizing the government to uphold their ideological beliefs.
- Sean Duffy, Chairman, House Financial Services Subcommittee, March 24, 2015
Operation Choking Point is "requiring banks to identify customers who are only doing things government officials detest. Then, cut off those customers' access to financial services and close their accounts."
- Frank Keating, American Bankers Association
While the government denies any wrongdoing, the email history paints a different picture. It turns out that the FDIC's top regulators are sending a message that they "can't stand" certain industries when they instruct banks to close the accounts of legitimate businesses.
It took more than 3 years of contentious litigation, several congressional investigations, and ultimately a change in presidential administration to end Operation Choke Point against legitimate American businesses.
Operation Choking Point officially ended in August 2017, with the FDIC settling multiple lawsuits with injured parties who were frozen out of the financial system.
In addition to monetary settlements, the FDIC promised Congress "to limit the power of FDIC personnel to close bank accounts."
Cryptocurrencies are suffering a similar blow
It's amazing that this has all happened within the last 10 years, something like this shouldn't be happening in the US. But it happened again, right under our noses.
Cooper & Kirk is the law firm representing injured parties during Operation Choking Point 1.0. According to their recent report on the topic, history is repeating itself. They outline the following similarities:
Democrats take control of the White House
FDIC Chairman Who Initiated Operation Choking Point 1.0 Returns
Banking relationships for specific industries
Prudential banking regulator issues informal guidance and engages in covert coercion, threats and behind-the-scenes pressure campaigns
Banks are afraid of regulators and therefore bow to their authority. "Kill customers we don't like, or we'll kill you with audits and inspections."
The current experience of cryptocurrencies is also different from that of a decade ago:
There is only one goal: cryptocurrency.
Global innovation industry.
More retail and sophisticated investors.
Cryptocurrencies are about vital financial and payment infrastructure.
The industry involves public companies and major financial service providers.
red warning
We try to avoid jumping to conclusions, but the circumstantial evidence does not look promising.
According to Cooper & Kirk, it wasn't just a single incident that indicated a coordinated effort by multiple regulators to "ban" businesses in unfavorable industries.
Having said that, we want to highlight the closure of Signature Bank.
Signature Bank was seized by the FDIC on March 12, 2023. The company is one of two banks serving large cryptocurrency companies to facilitate 24/7 global market liquidity. Another is Silvergate, which ceased operations on March 8.
Both banks operate real-time payments platforms that cater exclusively to the 24/7 liquidity needs of large cryptocurrency exchanges and market makers. This is the key infrastructure for fiat-to-crypto exchange, facilitating 24/7 global transactions of crypto-assets.
The FDIC sanctions action is strange for several reasons:
1. By the end of 2022, Signature has $110.36 billion in assets that can cover $88.59 billion in liabilities. The $10 billion deposit was withdrawn on March 10 as fears of contagion at SVB escalated. But by March 12, the date of the enforcement action, the bank's capital position had stabilized, deposit outflows had slowed, and the bank was solvent. Thus, the stated reason for the FDIC's closure of Signature Bank was "mismanagement," which the FDIC itself admitted was solvent at the time of its closure. Throughout the storied history of American banking, we cannot find another instance of a bank being seized for "mismanagement."
2. As revealed in Cooper & Kirk's investigation into Operation Choking Point 1.0, one of the FDIC's lead examiners threatened that if "one little ant, a $200 million bank fails," the FDIC wasn't worried at all.
3. Barney Frank (former Rep. who authored the Dodd-Frank Wall Street Reform and Consumer Protection Act) sits on Signature's board and suggests that Signature Bank is the victim of a political attack.
We are not a large tech industry lender. We are a large home loan lender in New York City. We don't hold cryptocurrencies as our own assets - we just allow two client businesses to trade cryptocurrencies with each other. We are a facilitator. Regulators want us to send a very strong anti-encryption signal.
4. According to two anonymous sources, the FDIC required bidders for Signature to agree not to bid on Signet — the payment infrastructure that facilitates liquidity in the global crypto market. This means that critical infrastructure serving the crypto market is now completely cut off, and many legitimate crypto companies no longer have banking partners. Given the circumstances of the bank, which was sold in a hurry, the Wall Street Journal argued that the FDIC’s actions “confirmed Frank’s and our suspicions that regulators’ animosity toward cryptocurrencies was the motivation for the Signature seizure.” Barney Frank said:This is worrying. I wonder, are we the first bank to close completely without going bankrupt? If so, why? I think NYDFS (New York Department of Financial Services) should answer this question. This is why I speculate that the FDIC is using us as victims to send a “stay away from crypto” signal.the interview
What's next?
, Cooper & Kirk, a law firm representing injured parties in Operation Choke Point 1.0.
What's next?
Cooper & Kirk called on cryptocurrency companies to come forward and share their experiences over the past few months.
If the allegations are true, we should expect Congress and the courts to crack down on abuses by unelected regulators. Severe punishment is necessary because it sets a dangerous precedent that political power can be wielded to keep politically disadvantaged legitimate businesses out of the financial system.
In terms of timelines, Cooper & Kirk expects it could take years to complete its investigation and bring the case to trial.
MiCA and the Regulatory Game
The US Congress is divided, with further disagreements between SEC and CFTC oversight. The FDIC’s unelected regulator enforced potentially illegal actions against the crypto industry. The White House has also expressed its attitude, and at least one senator is forming an "anti-encryption alliance." It's a bit confusing.
But that's not the case everywhere.
With the recent passage of the Markets in Cryptoassets Regulation (MiCA), the EU is showing the US that “your trash is our treasure”.
The regulatory game has already begun.
Why? excitation. If cryptocurrencies really have the potential we believe, the industry will create jobs and tax revenues around the world. So why not thoughtfully regulate the industry and attract the best entrepreneurs to your jurisdiction?
Not only Europe, the UK, Japan, and the United Arab Emirates are actively promoting it, hoping to become leaders in new industries; Singapore, Switzerland, and Australia have been following the wave.
Even China is now getting back into the game (via Hong Kong) just as the US has become more hostile to the industry.
But Europe is the first region to pass substantive legislation. Here are the key points about MiCA:
Passed by 500 votes to 30.
It is expected to come into force in July, and compliance for companies is expected to begin in 2024.
Initial focus on Centralized Crypto Asset Service Providers or "CASPs"
Involving exchanges, over-the-counter transactions, stable currency issuers, and token issuance.
DeFi and NFT are still being studied, and it is unlikely to see new rules before 2027.
The main focuses are: illicit financing, investor protection, and USD-denominated stablecoins.
The specific implementation remains to be seen, but we think this is a good start, focusing on stablecoins and centralized service providers, allowing DeFi and NFT to continue to innovate.
There is reason to believe that the UK wants to become a global crypto hub, and it is possible that Europe is providing a template for the UK and other jurisdictions to follow.
At the same time, the United States is falling behind in the scramble for politics and existing power structures.
possible outcome
America's tough stance on cryptocurrencies continues or gets worse. Entrepreneurs have difficulty innovating in the U.S. under these conditions; financial institutions cannot offer products or services that leverage transparent public blockchains; RIAs (registered investment advisors) cannot advise their clients on cryptocurrencies; crypto funds cannot raise capital , hindering capital formation within the industry.
That's the case for a bear market, but the odds are low, we estimate it to be less than 5%. Why? excitation. When the incentives of policymakers align with those of industry players, cryptocurrencies will thrive.
The attitude of the United States towards cryptocurrencies has turned positive. We think this is more likely. The FTX fraud case is only 6 months old, and the market rebound has been swift. But we think we may have seen the worst. Why? The answer is motivation. The unique diversity of crypto users will create challenges for policymakers who continue to use the “crypto bros” as scapegoats for other agendas. We think the next bull market will kick off with the return of market liquidity and regulatory developments outside the US. When that happens, America falls behind. Interestingly, as the U.S. has become more hostile to cryptocurrencies, China has become less friendly to cryptocurrencies. Policymakers have begun to realize this. As we said, this is a regulatory game.
The attitude of the United States towards cryptocurrencies has completely shifted. Coinbase or Ripple settled or won a lawsuit with the SEC, which admitted to taking illegal actions against crypto companies during Operation Choking Point 2.0. With the announcement, there was a backlash from policymakers and regulators, and the flames of the public's "lack of trust in institutions" were completely ignited. Gary Gensler resigns from the SEC. Congress introduces deliberate new legislation and signs it into law. It is widely believed that “cryptocurrency is the future”. We are seeing another wave of capital pouring into the US market. The stigma is officially erased, innovation flourishes, and the U.S. regains its leadership in crypto.
in conclusion
This is a bull case with a time frame of 3-6 years.
in conclusion
Regarding the series of reports on US policymaking and regulation of cryptocurrencies, our views are as follows:
The SEC wants to apply the framework created in 1933/1934 to cryptocurrencies; this won't work because cryptoassets are inherently different from securities.
We need a new crypto regulatory framework that ensures proper disclosure and investor protection. The framework will eventually come from Congress, and the SEC or CFTC will enforce the new rules.
The currently drafted legislation has made some progress in this direction. While the executive branch (and presidentially appointed regulators) have been hostile to cryptocurrencies, the legislative branch appears to support responsible innovation.
The SEC case against Coinbase and Ripple (and now Binance) is worth watching as the outcome could affect future policymaking.
The incentives will change attitudes within Congress. Because of the unique diversity and nonpartisan nature of cryptocurrency users, we believe it will be difficult for policymakers to oppose the industry.
Bitcoin and cryptocurrencies may become more politically relevant as we approach our next election cycle.
Cryptocurrencies desperately need regulation and weeding out bad actors. That being said, some actions by regulators appear to go above and beyond the law. We'll be keeping a close eye on Cooper & Kirk and what they're doing on behalf of the industry.
