The Breakdown - FOIA Requests Prove Operation Choke Point 2.0 is Real

Episode Date: December 10, 2024

NLW covers the first Bitcoin weekly close over $100,000, plus looks at Coinbase's FOIA requests that show the pressure put on banks by regulators. Enjoying this content? SUBSCRIBE to the Podcast: https://pod.link/1438693620 Watch on YouTube: https://www.youtube.com/nathanielwhittemorecrypto Subscribe to the newsletter: https://breakdown.beehiiv.com/ Join the discussion: https://discord.gg/VrKRrfKCz8 Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW

Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the Big Picture Power Shifts remaking our world. What's going on, guys? It is Monday, December 9th, and today we are doing all sorts of stuff. We're checking in on the price. We are talking about Coinbase. We're doing a little macro in the Hot Jobs report. But before we get into all of that, if you are enjoying the breakdown, please go subscribe to it. Give it a rating, give it a review. Or if you want to dive deeper into the conversation, come join us on the Breakers. Discord. You can find a link in the show notes or go to bit.ly slash breakdown pod. All right, friends, we are digging deeper into December closer to the end of the year,

and we're kicking off the week with a little bit of a price check-in. After a pretty choppy weekend, Bitcoin heads into its first Monday trading near $100,000. A brutal liquidation cascade on Thursday set the stage for a volatile weekend. Bitcoin traded both 102K as well as 99K, but the trend was generally a little bit of a drift upwards. Still, in all of that volatility, we got the highest ever daily and weekly close at 101,000 on Sunday afternoon. Thursday's price action generated one of the largest Darth Mall candles in years reminiscent of the Bitmax era. Price plunged to almost 92K with over 560 million in liquidations on both sides of the market that day. Rachel Lucas,

an analyst at crypto exchange BTC Market said, market makers and large players often use these conditions to their advantage, first pushing the price above 100K, attracting retail enthusiasm, and then reversing it sharply to liquidate leveraged positions on both sides, long and short. Still, overall, weekend liquidations were extremely mild. Both funding rates and open interests have reset to level from before the 100K break. The reset could mean traders are less eager to lever up the next breakout, leading to a more sustainable move above 100K. The liquidation also revealed a voracious appetite for discounted Bitcoin. Dip buyers immediately bid the price back up to 96,000, suggesting strong support around the 95K mark in current conditions. Still, there is a prevailing fear that we could be approaching atop, either in the short term or even a cycle-ending high-water mark.

Raal Paul is calling for a local top of 110,000 in early January. He's basing this call on the global liquidity cycle, which turned down substantially in October. Bitcoin tracks global liquidity remarkably well with a three-month lag, putting the top in during the new year period. He believes this will only be a local top with plenty of additional liquidity to show up next year once the new administration begins. Andre Dragosh of Bitwise noted this downturn on liquidity was largely driven by recent dollar strength. This provides a fairly simple metric to track changing liquidity conditions moving forward. The dollar index is only just coming the highs over the past week. Continued dollar weakness could give a sign of clear sailing ahead after

some turbulence in early January. Less nuanced top collars are out in force in the comments. It's easy to see why with potential top signals everywhere. Dino coins from the last cycle ripping, retail metrics soaring, and Donald Trump releasing a gold watch emblazoned with the words crypto president. Then again, research firm Kaito noted their sentiment metrics which show, quote, CT calls the top basically all year round. Experienced traders see a lot of upside remaining and are in fact, using the relentless top calling as a signal. BDB wrote, Bitcoin has gone up only for three months straight and I don't think there's been a single day I've logged on here and not seen someone trying to call a top. Ansom tweeted, think a lot of people are going to call top early this time.

Loma pointed out news that Amazon is joining Microsoft in taking Bitcoin adoption to a shareholder vote. He commented, don't worry, guys, 100K was the top. Sell now, thumbs up emoji. Retail interest is clearly back in full swing, but judging from the last cycle, that can persist for months, not just days. Overall, CryptoCred thinks hunting the top is a fool's errand. He wrote, There's a huge opportunity cost to hunting the top. If you're wrong and the trend remains intact, you miss out on some of the best periods of crypto trading. Those periods have much more upside than nailing a short. Expressing your concerns via tightening up your risk and

still having the ability to benefit from upside if you're wrong is much better than playing hero mode, flip and short everything. More money is lost via terrible trading after the top than during the top itself. Crypto Jack thinks this would have been the strangest top he's ever seen, writing, just notice Bitcoin has spent almost a full month above 90K. If you're looking to sell quote-unquote the top, you're getting a generous window of time to act. Unless maybe it's not the top. Another interesting warning sign is continued selling from long-term holders. This cohort has sold off over 250,000 Bitcoin over the past few days.

Though elevated crypto-quant head of research, Julio Moreno says, this is a normal phenomenon during Bitcoin bull markets and the profit-taking is still far from extreme levels. Assuming that this isn't the top, the next few months could get very interesting. Many are calling for a short-term top on inauguration day, which seems to line up with a timing from Rao Paul's liquidity-based thesis. After that, there's two very different paths for how the cycle can play out. In one version, the inauguration of the crypto president is the last major catalyst. In the other, really big picture changes start to happen. We could see multiple top 10 companies adopt Bitcoin. Nation states could compete

to fill up their Bitcoin reserves. This could be the cycle that achieves hyper-bitcoinization. Honey-Rashwan, CEO of 21 shares, said, We're seeing an inflection point in the global order for the first time in a long time. We're seeing a threat to the reserve currency status of the U.S. dollar. We've seen it with the Eurobond, with the oil crisis, and it's weathered through it. So we're entering a period of probably five to 20 years where a lot of people make a lot of moves, and we'll see how it ends up. At the moment, it feels like the market is simply trying to price this very uncertain path forward.

Now, moving off of price for a minute, Coinbase has received another round of documents from their Freedom of Information lawsuit against the FDIC. The banking regulator revealed heavily redacted copies of Paa's letter sent to 23 banks. Sent between March 2022 and May 2023, the letter said, quote, at this time, the FDIC has not yet determined what, if any, regulatory filings will be necessary for a bank to engage in this type of activity. As a result, we respectfully ask that you pause all crypto-asset related activity. The regulator said it would notify banks at a later date once supervisory expectations had been set. Coinbase chief legal officer Paul Grewell said,

the letters show Operation Chokepoint 2.0 wasn't just some crypto conspiracy theory. The FDIC is still hiding behind way over broad redactions, and they still haven't produced more than a fraction of them. But we finally got the pause letter. Law-abiding American businesses should be able to get access to banking services without government interference. The incoming administration has the opportunity to reverse so many poor crypto policy decisions. Chief among them, the politically motivated regulatory decisions like Operation Shockpoint 2.0. He said that Coinbase will continue to push to get more documents and remove redactions from the ones already provided. The profile of this issue has been raised massively

over the past few weeks, but the reaction from people outside the industry shows there's still a lot of work left to do. The Washington Post ran an explainer article over the weekend, end, claiming that, quote, regulators don't tell banks whom they can and cannot provide services to. They do tell them what to look for, potentially illegal activity, and enforce rules requiring that banks know whom they are doing business with and what those customers are doing. And of course, this is part of the reason Operation Showpoint 2.0 was so pernicious. The regulators didn't provide banks with a direction to remove crypto clients because they didn't have to. In early 2023, regulators announced that crypto activities are, quote,

highly likely to be inconsistent with safe and sound banking practice. This very specific language sends chills up a bank manager's spine. The FDIC has the ability to strip insurance from any bank found not to be conducting, quote, safe and sound practices. With no definition of crypto activities provided, banks were forced to take the broadest view possible to avoid the wrath of regulators. That's why it wasn't just crypto exchanges and token projects being debanked. It was also personal accounts of founders, employees, and family members of people associated

with the industry. There seems to be a public perception that the industry deserved to be debanked. But few critics have recognized this wasn't just about high-risk business accounts, but about the mass blacklisting of individuals. We're ultimately unlikely to get a smoking gun out of the FDIC documents. It's widely believed the direction to limit crypto clients was delivered verbally, likely as a means to avoid freedom of information requests. Keep in mind, this is the second time the FDIC has attempted this strategy, with the first

coming to an end as a direct result of an FOIA request. Chris Lane, the former CTO of Silvergate Bank, recently went on the record about how the bank was, quote, killed by regulators despite surviving a 70% bank run. The entire threat is worth reading, but he confirmed some details by writing, regulators came in sometime in spring 2023 and severely limited the amount of U.S. dollar deposits we could hold for digital asset clients. Thankfully, it seems like Congress is taking this issue extremely seriously.

There seems to be a groundswell of action following last week's hearing. Custodia Bank CEO Caitlin Long wrote, status quo regime seems nervous. I'm sure they thought this would fly under the radar screen. Nope. It's not just credible to question whether debanking is real. I'm on the way to D.C. now, someone for what I learned today will be a bipartisan working session on debanking.

What's more incoming crypto-NAIs are David Sacks also has the issue on his agenda, tweeting, There are too many stories of people being hurt by Operation Chokepoint 2.0. It needs to be looked at. One additional thing that I'll note, again, these letters were sent between March 22 and May 23. Because a lot of the most egregious stuff happened in the wake of FTX, particularly that safe and sound banking practices note, there was largely an assumption that it was due to regulators freaking out after the downfall of SBF. These letters show, though, that this was in place and happening well before that. Speaking of mainstream discussion, the prospect of a U.S. Bitcoin's strategic reserve is beginning to garter a lot of attention

in mainstream circles. The topic was a major discussion point at the New York Times Deal Book Summit last week. Riot Platforms Director of Public Policy Sam Lyman and Steelman the policy in a weekend op-ed for fortune. He wrote, The Game Theory Dynamics of Nation State adoption would spark a digital gold rush, slowing and even possibly reversing the flight to physical gold. U.S. policymakers could thereby use Bitcoin as a tool of economic statecraft, counterbalancing China and Russia's attempt to move away from the dollar towards precious metals. And which country's balance sheet would benefit the most in this scenario? The United States. Still, the higher profile op-ed came from

former New York Fed President Bill Dudley. In a Bloomberg opinion piece entitled a Bitcoin Reserve would be a bad deal for Americans, he argued that the only point of the policy is to pump our bags. He wrote, What's in it, though, for the government are the people who don't hold Bitcoin, nothing good. There's no exit strategy, so the purpose must be to push prices higher, not create value for the government, which would be stuck holding volatile tokens that produce no income. To fund the purchases either the Treasury would have to borrow, driving up debt service costs, or the Federal Reserve would have to create money fueling inflation. The latter would be the little different than the Fed monetizing U.S. government debt, as would directing the Fed to tap the government's gold

reserves as the congressional legislation proposes. The piece wasn't completely anti-crypto, with Dudley suggesting reforms to stable coins and market structure could be a good thing to drive the industry forward. Still, it was littered with the old trite complaints about Bitcoin that it's too slow and expensive to buy coffee, as well as being prone to users losing their wallets. Veteran economic advisor Larry Summers also checked in. He acknowledged that regulatory reform is necessary, but added, some of what is being said, the idea that we should have some kind of national Bitcoin reserve is crazy. I understand why we need a national oil reserve. I understand why we accumulated gold in Fort Knox. But of all the prices to support, why would the government

choose Bitcoin? There's no reason to do that other than to pander to generous special interest campaign contributors. While Dudley and Summers clearly believe what they're saying, the state of alarm being raised over this policy seems completely out of proportion. The Trump plan, the position he campaigned on, is merely to hold on to the Bitcoin that's already been confiscated. This clearly won't ignite inflation and barely moves the needle on anything given it's only around $19 billion worth, much less if BitFinex successfully claims their stolen coins. The much more ambitious Lummis plan to purchase $1 million Bitcoin over five years is a different story. That's around $100 billion worth of current prices. However, even at a million dollars per BTC, it's still

only a trillion dollars over five years. For context, the U.S. Gold Reserve currently stands at around 700 billion, and the U.S. government currently spends almost $7 trillion per year. So even the Lummus plan executed at a million dollars per Bitcoin would be $200 billion annually, less than 3% of the current budget. For reference, the infrastructure bill authorized $1.2 trillion in spending since 2021, and the national broadband rollout, which has so far failed to connect a single home, was projected to cost up to $350 billion. The point is, the size of the Bitcoin Reserve just isn't enough government spending to drive inflation all by itself. The U.S.-based Bitcoin ETFs accumulated over a million BTC this year, and while it had a strong impact on price, it certainly wasn't

outrageous. Llamas also proposed an explicit exit strategy, hold the Bitcoin for 30 years and then use it to pay down national debt. Frankly, the whole debate is reminiscent of the furor over the El Salvador Bitcoin purchase. The country has spent around 270 million on Bitcoin since 2021, a move that mainstream outlets claimed would bankrupt the country and impoverished the people if the bet went sour. The purchase was just 1% of the nation's annual budget each year. Even the country's officials have admitted it was more of a marketing stunt than an economic policy. The main benefit was a massive increase in GDP from tourism, which far outweighed the Bitcoin gains. Even if you grant Dudley's point that the Strategic Reserve has no exit strategy,

and serves only to supercharge the crypto industry, it also still has precedent in U.S. history. Sometime in the 20s and 30s, the government began buying milk and cheese to support the dairy industry. By the early 1980s, every cold storage facility in the country was full, so President Reagan established massive storage facilities in caverns. Another competing idea at the time was to simply dump the excess cheese in the ocean. The cheese stockpile has tripled in size since then and now stands at 1.5 billion pounds, roughly $7.5 billion worth at the supermarket. In other words, is there an exit strategy for the government's strategic cheese stockpile, or a wide-ranging benefit for U.S. citizens? Or is this simply a policy

designed to prop up a strategically important industry? Quite rightly, policy folks don't spend a lot of time thinking about the government cheese stockpile. It's a rounding error in the context of the U.S. government, just like the Bitcoin Reserve would be. And of course, we're just talking about the lack of real costs of a Bitcoin strategic reserve and not giving any credence to the potential benefits. One more interesting one, as I mentioned a little earlier, Amazon could be considering buying Bitcoin. The National Center for Public Policy Research at DC-based Think Tank has submitted a shareholder proposal to the board for their April 2025 meeting. They suggest the company's $88 billion in cash is being debased at a dramatic rate, and Amazon should consider switching some

of it to buy Bitcoin. The pitch is a carbon copy of the one that Michael Saylor delivered to Microsoft last week, which will go to a vote on Tuesday. It suggests a 5% to $5,000, Bitcoin allocation out of treasury assets to hedge debasement risk. And while Amazon and Microsoft shareholders are, of course, very unlikely to adopt the Bitcoin standard, these are the kind of headlines this cycle could throw up. The market is nowhere near pricing a situation where multiple big tech firms are scrambling to establish a Bitcoin reserve. And it seems obvious to point out, but given enough time, inevitably one of these shareholder proposals will go through. Luke Brools of the Bitcoin Advisor wrote, sure, Microsoft, Amazon, the U.S. government, Putin,

10 U.S. states, and a handful of other countries are all considering Bitcoin acquisition, but I'm going to hold some USD on the sidelines waiting for a 15% drop in Bitcoin price. That is going to do it to start our Bitcoin Crypto Week. Appreciate you listening as always, and until next time, be safe and take care of each other. Peace.