An extended market price drawdown (crypto winter) throughout 2022 has tested the crypto industry’s mettle, and more recently, a crackdown by United States regulators on some prominent entities like Coinbase, Binance and Kraken has further shaken the sector.
So maybe it’s only natural for the industry to employ colorful, vivid language to describe what’s been happening. There’s a notion making the rounds that the U.S. government is out to “un-bank” or “de-platform” the crypto sector. This process even has a name: “Operation Choke Point 2.0.”
U.S. President Joe Biden’s administration is using the financial rails “as an extra-judicial political cudgel” to crack down on the crypto industry, wrote Castle Island Ventures’ Nic Carter, who described it as a coordinated, multi-agency effort to discourage banks from dealing with crypto firms.
According to Carter, this alleged strategy follows a template used earlier by the Obama and Trump administrations. In 2018, under federal pressure, “Bank of America and Citigroup de-platformed firearms companies, and BoA began to report client firearm purchases to the federal government,” he wrote.
In late March, Quantum Economics’ Mati Greenspan told Cryptox that this so-called un-banking could “already be underway,” particularly in light of the recent collapses of crypto-friendly banks like Silvergate, Silicon Valley Bank and Signature Bank. In Greenspan’s view:
“Crypto is seen as a ‘threat’ to the U.S. dollar’s dominance in global trade — a significant and long-standing benefit to the U.S.”
In that same article, attorney Michael Bacina warned that the “regulation by enforcement model” being practiced in the U.S. would simply “drive crypto-asset innovation offshore,” and on April 1, the CEO of a French digital assets data provider told The Wall Street Journal that U.S. agency actions could “shift the center of gravity of crypto assets trading and investments” toward Hong Kong.
A coordinated effort by regulators?
It’s time to step back and ask: Are these fears justified? It is sometimes difficult to separate the truth from the tight knot of hyperbole in the crypto space, but are U.S. regulators really seeking to “de-platform” crypto?
“I don’t think there’s necessarily a concerted or intentional effort by regulators to ‘de-platform’ crypto,” David Shargel, a partner at the Bracewell law firm, told Cryptox. “But, the crypto ecosystem has moved from a niche product to the mainstream, and regulators are playing catchup.” Regulators also recognize that crypto isn’t going anywhere, he added.
Does the suggestion that cryptocurrencies represent a threat to the U.S. dollar’s dominance in global trade provide a further incentive to ban them?
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Crypto may indeed have the potential to disrupt global trade flows — at least to some minor degree — but the dollar is more threatened by other geopolitical factors “such as the U.S.’ own waning influence on the global stage, the rise of China, and Western sanctions on Russia,” Zhong Yang Chan, head of research at CoinGecko, told Cryptox.
Recently, International Monetary Fund experts said, “Crypto assets, including stablecoins, are not yet risks to the global financial system.”
“The general consensus seems to be that the dollar remains well entrenched as the world’s dominant currency, and that the use of cryptocurrency, standing alone, won’t change that — barring some other major political or economic shift,” Bracewell’s Shargel added.
“A perfect storm brewing”
Still, the administration in Washington may be getting nervous about the U.S. dollar, said John Deaton, a managing partner at Deaton Law Firm, who also runs the CryptoLaw website, and has supported Ripple in its litigation with the U.S. Securities and Exchange Commission (SEC). Speaking to Cryptox, he said there is a convergence of issues at play here:
“China and Russia have agreed to trade oil and gas in the Chinese yuan, not U.S. dollars. Kenya’s president has told his people to dump their USD. Saudi Arabia may agree to trade oil in non-USD denominations.”
At the same time, the U.S. government needs to print more money, adding to an already high inflationary environment, leading people to look at gold, silver and Bitcoin (BTC) as alternatives. “The fear isn’t just about crypto — it’s that a perfect storm is brewing against the U.S. dollar,” Deaton said.
Deaton deems the Operation Chokepoint 2.0 scenario plausible, but he also has a nuanced view of crypto regulation and U.S. regulators. “If we are being honest, the crypto industry has caused itself quite a few self-inflicted wounds, and the industry is to blame for giving itself a black eye when it comes to public perception.” Many in the crypto industry, like himself, “don’t oppose regulation; we seek it,” he said, adding:
“We just want smart, tailored legislation that protects investors from fraud but provides entrepreneurs with clear rules and guidance, and fosters innovation.”
Dealing Binance a ‘fatal blow’?
Deaton was asked about another suggestion heard last week that the U.S. Commodity Futures Trading Commission (CFTC) is “attempting to strike a fatal blow to Binance” with its recently announced lawsuit against the world’s largest cryptocurrency exchange. Is that really the commission’s end game?
1/23
Oh boy https://t.co/2JnbfirRrp
Case is up and it’s bad.
This is the CFTC attempting to strike *fatal* blow to Binance, and at first read through… I think they actually have really strong chances here of succeeding in toppling the Binance empire.
— Adam Cochran (adamscochran.eth) (@adamscochran) March 27, 2023
“If you look at the CFTC’s case against Binance in a vacuum, I would agree that it is hyperbole to suggest that it is a regulatory attempt to cause a death blow to Binance,” said Deaton. “Binance, like many other entities that grew very fast and very quickly, may have cut corners. If so, they will pay a big fine and move on.”
The problem is that the Binance suit comes after Coinbase received a Wells notice from the SEC, and the government’s seizure of Signature Bank, with reports that the Federal Deposit Insurance Corporation wanted all crypto depositors out before it would allow a sale of that bank. “When you add those things together, it appears like coordination, not coincidence,” Deaton told Cryptox.
“Hyperbole seems to drive the crypto news cycle,” commented Bracewell’s Shargel when asked about the industry’s response to the recent CFTC action against Binance. “The CFTC’s lawsuit is certainly serious, but it’s probably too soon to call it a fatal blow.”
In its complaint, the CFTC asked the court to impose several penalties, including a permanent bar on Binance and its CEO, Changpeng Zhao, from the commodities markets. “But, for now, the complaint is just a complaint, and the outcome of the case — whether through settlement or otherwise — remains to be seen,” said Shargel.
The view from abroad
Viewed from overseas, recent U.S. regulatory actions are sometimes difficult to fathom. Syren Johnstone, executive director of the compliance and regulation program at the University of Hong Kong — and author of the book Rethinking the Regulation of Cryptoassets — has been disappointed with the U.S. SEC’s seeming attempt to label everything a security.
“None of the regulatory approaches I’m seeing globally truly promote innovation,” Johnstone told Cryptox. “Dumping everything crypto into a financial markets context is straight-jacketing the greater potential for the technology.”
Other countries are closely following recent U.S. regulatory actions, though not necessarily approvingly. “Overseas regulators are looking at the U.S. approach to crypto assets as a situation they want to avoid,” Johnstone noted.
“Globally, there are concerted efforts to bring greater regulatory oversight to crypto,” added CoinGecko’s Chan. “However, each country has its own legal system, and different countries may take different paths toward regulating crypto activities. This may include placing crypto under the ambit of securities, but there may also be other possible paths such as classifying crypto as payments instruments, or commodities.”
Time to cool down the hype?
If the industry continues to use the language of persecution, could it potentially hurt — rather than support — crypto adoption? Shargel commented:
“I’m not sure if hyperbole serves the wider cause of crypto or blockchain adoption, but it might help to coalesce the crypto community, especially as regulators seem to be expanding their enforcement dragnet.”
“I do not believe it is hyperbole to say the U.S. government has initiated a war or campaign against crypto,” opined Deaton. “Operation Chokepoint 2.0, which Nic Carter warned people about, has been proven accurate. Some said he was a conspiracy theorist or engaging in hyperbole. He wasn’t either. The regulators protect the status quo, which means they protect the incumbents in power from the disrupters who are gaining traction or market share. That’s what we are witnessing.”
A downbeat President’s report
Elsewhere, many in the crypto community were disappointed by the Biden administration’s recent economic report, which devoted 35 of its 507 pages to digital assets. Dan Reecer, chief growth officer at decentralized finance platform Acala Network, called it “an attack on crypto,” adding that it was released “just days after Operation Chokepoint 2.0 was executed on crypto-friendly banks.”
Admittedly, the report wasn’t exactly a ringing endorsement of cryptocurrencies. “Crypto assets currently do not offer widespread economic benefits. They are largely speculative investment vehicles and are not an effective alternative to fiat currency,” it declared.
However, there is nothing in the report that describes crypto as threatening U.S. dollar dominance in global trade or about a pressing need to “de-platform” crypto entities.
On the contrary, the report acknowledged that cryptocurrencies “underlying technology may still find productive uses in the future as companies and governments continue to experiment with DLT [distributed ledger technology].” It conceded that “some crypto assets appear to be here to stay.”
The eighth chapter of the report, which focuses on digital assets, is primarily a rehash of things that people working in the field have known for years — how Bitcoin is mined, the risks of algorithmic stablecoins, the crypto sector’s role in ransomware, its volatility and its unsuitability as a medium of exchange, etc. But one major shortcoming is that it fails to recognize the technology’s future possibilities.
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All in all, U.S. regulators face a balancing act. The government has every right to crack down on bad actors, but it shouldn’t kill innovation in the process. The SEC can’t expect to regulate everything in the crypto space — not everything is a financial security.
For instance, if the agency declared Ether (ETH) a security — because the Ethereum network uses ETH in its staking consensus mechanism — then that would rightly be considered regulatory overreach.
“In the aftermath of FTX, it’s no surprise that regulators are inclined to act,” Chris Perkins, president of crypto venture firm CoinFund, and a member of the CFTC’s Global Market’s Advisory Committee, told Cryptox. “And, they should be empowered to pursue enforcement actions to prevent other ‘FTXs.’ But, it’s important that we don’t throw the baby out with the bathwater.”
