The Breakdown - Operation Chokepoint 2.0 Finally Has Smoking Guns

Episode Date: January 7, 2025

Updated compliance with a Coinbase FOIA request shows not only how extensive the FDIC's campaign against crypto business was, but also shows how many novel digital asset products from banks were strangled in the crib. Sponsored by: Ledn Need liquidity without selling your Bitcoin? For 6+ years, Ledn has been the trusted choice for Bitcoin-backed lending. With transparency, security, and trust at our core, we help you access your BTC’s wealth while HODLing. Discover what your Bitcoin can do at ledn.io/borrowing. 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, January 6th, and today we are kicking off the true new year of breakdown coverage with a slate of updates around Operation Choke Point. Before we get into that, however, 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. com slash breakdown pod. All right, friends, one more time,

happy new year and welcome back to the 2025 edition of The Breakdown. We did one episode last week, but it was really more catch-up on what was going on at the end of 2024 than anything else. Today, we are starting to look forward, although in a very best disinfectant-is-sunlight kind of way, because Coinbase have received full, unredacted documents from the FDIC,

demonstrating exactly what banks were told during Operation Chokepoint 2.0. For several months, of course, Coinbase has been fighting the banking regulator to force them to comply with freedom of information laws. In particular, Coinbase was seeking a full record of so-called pause letters, which directed banks to cease offering crypto products. The FDIC released some of the letters dating all the way back to March 2022. That was a full year before the shutdown of signature and Silvergate banks, and demonstrated that Operation Chokepoint began much earlier than previously believed. However, these letters were redacted to the point they contained no pertinent information other than proving that they existed.

In mid-December, the judge overseeing the case made it clear her patience was wearing thin. She warned the FDIC to, quote, make more thoughtful redactions and be prepared to legally defend each and every one of them. On Friday, Coinbase received all 25 pause letters sent to banks between March 2022 and May 2023. They are lightly redacted only in relation to commercial information that identifies people, products, and partnerships. But all the relevant details are there, including the precise reasoning used by the FDIC to put the brakes on the crypto industry during the past three years. Coinbase Chief Legal Officer Paul Grewell gave a high-level summary, tweeting,

we finally got the unredacted OCP 2.0 letters from the FDIC. Took a court order, but you can now read them for yourself. They show a coordinated effort to stop a wide variety of crypto activity, everything from basic Bitcoin transactions to more complex offerings. Note that the FDIC magically found two more pause letters in this search, after saying before it had complied with an earlier court order. It's hard to believe in their good faith when their sweater further unravels every time we pull on the thread. The new Congress should launch hearings on all of this without delay. Nick Carter of Castle Island Ventures and Jack Miller

of Cosimo Capital prepared a summary of the activities the FDIC objected to. They found a plurality of letters related to a product that would offer Bitcoin and Ethereum exposure directly in banking apps. This is believed to be a product built by NIDIG that was reportedly ready to launch in early 2022. The product was designed as a pass-through service with the banks not required to touch crypto in any way. Carter came to the obvious conclusion that, quote, the FDIC was trying to inhibit retail access to Bitcoin. The FDIC also issued pause letters related to a wide range of other crypto products. These included an internal blockchain-based payment network between clients, a bank issued stablecoin consortium, using a public blockchain to settle internal customer

transfers, holding reserve deposits for stablecoins, a Bitcoin rewards debit card, and Bitcoin collateralized lending. One bank was even targeted for purchasing less than $25,000 worth of NFTs, a trivial sum for even the tiniest regional bank. Importantly, some of these banks had already launched these services with full prior knowledge of the FDIC. This was a clear change of policy dictated from the top of the agency. The FDIC also released an internal memo first published in June of 2022. It described how the regional offices should handle crypto products within the banking system. They were directed to track every instance of crypto activity being proposed by a bank and warn the institutions that these activities, quote, may pose significant safety and soundness and consumer

protection risks, as well as financial stability concerns. Regional offices were instructed to take these steps in close collaboration with the Washington office, which would be reviewing the tracking data. Interestingly, the memo was clear that these oversight actions were related only to the actions of the bank, not the customers in most cases. The memo said crypto-related activity does not include, quote, providing deposit accounts used for the business's operations of crypto-related companies in which the bank does not hold the funds of the crypto-related company's customers. Evidently, something changed at some point, though, as most crypto companies and funds were debanked even if they fit this description.

Stuart Alderati, the chief legal officer at Ripple, gave some context on how severe the chilling effects from these letters would have been, writing, as a former bank general counsel, these letters scream one message, shut down everything crypto-related ASAP, not just the products and the services mentioned. Writing directly to the board is a rare and deliberate step. These letters are crafted to send shockwaves through the bank. The letters didn't directly tell any of the banks they weren't allowed to offer these products. Instead, the FDIC made vague statements that they were reviewing the crypto products and would inform the banks once they had determined regulatory requirements. Almost three years since the first letter was sent, the FDIC has not followed

up to make the requirements clear. The closest we got was the joint statement issued by banking regulators in January 2023. It described an extremely narrow pilot program that seemed to come with the implication of heavy regulatory scrutiny if any bank took part. This was one of the more insidious parts of issuing indefinite pause letters rather than formal rulemaking. It's nearly impossible to sue a regulator for asking for a pause in activities, even if that pause stretches on for years. The FDIC even tried to argue that the letters weren't subject to a freedom of information request because they were part of an ongoing investigation, an argument which, by the way, the judge found entirely unconvincing. The Office of the Inspector General had picked up that the review of crypto-related activities

seems to be dragging on for too long. In October of 2023, it recommended the FDIC should set clear timeframes in scope of the reviews so that banks have certainty on how the matter is likely to proceed. The FDIC agreed with this criticism of its process and agreed to update them. Four months later, in February 2024, the FDIC updated the memo to regional offices. It now included language about providing a timeline for responses but no instruction to actually prioritize closing the reviews. Bankreg blog, a regulatory commentator, wrote, four months to add five non-committal sentences is kind of nuts, even if, as I am, you are sympathetic to the FDIC's views on the risk of these activities. If you've been around Bitcoin for long enough, you've heard the term

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That's LEDN.com.i.o slash borrowing. Please visit ledden.com slash legal for product terms and disclosures. Product availability varies by jurisdiction. Rich Wildman, the head of Web3 strategy at Google and a professor at Northwestern Law, tried to impress how much of an impact these letters would have had. He wrote, I've shared my experience serving as a board member of a nationally chartered bank with some folks in the crypto space, but never on X. Read these letters, please. They may not look alarming at first, but as a director or officer of a bank, you would know if you received a letter like this, it implies a world of hurt for your bank. The letters are always written in the Orwellian double-speak that was common in Chokepoint 2.0. The regulators made these community banks the whipping boys of

fintech industry's failures to follow compliance guidelines and rules. For smaller banks in the U.S., the entire regulatory regime around banking is a Gordian knot that binds the hands of bank management and their investors when it comes to building a business. Yet in the same turn, regulators will often pester banks about their capital ratios and client growth numbers in the same examinations. And regulators wonder why these banks so often leaned into newer fintech-related growth opportunities? In 2025, we need a movement to support little banks with national and state charters. Many of these banks can and should be catalysts for responsible innovation in a sector that greatly needs an overhaul. Caitlin Long of Custodia Bank noted that almost all of the

banks subjected to this treatment from the FDIC were state-related. It's also noteworthy that one of the products that was shut down sounds remarkably similar to J.P. Morgan's Onyx private network, which has processed more than $1.5 trillion in transactions since it was launched in late 2020. The disclosure of these letters really draws a fine point on the relative lack of adoption of blockchains in the banking system. Austin Campbell, banking veteran, and CEO of WSPN payments commented, For those who continually ask me why banks are not using public blockchains, I believe Paul Grewell has your answer,

courtesy of the incredible legal powers of FOAI. They wanted to but could not. The answer is because the regulators stonewalled them. And this is one of the really big points coming out of this saga. For years, the industry has dealt with claims that Bitcoin and blockchains have no demonstrated use case. These letters, though, don't represent idle inquiries from banks. Each represents a service that was in the process of being built,

with some very close to being launched or already in operation. We now know that banks were poised to adopt crypto in a big way in 2022, but were actively prevented from doing so. One key example is the consortium of banks that were preparing to launch a stablecoin called USDF. Mike Cagney, the CEO of Figure Markets, reflected on that product writing, Back in late 2021, we were working with a group of banks to build a public blockchain tokenized deposit product called USDF.

This had the potential to eliminate ACH, Leapfrog Fed now, and seriously challenged the interchange monopoly, while putting the U.S. in the forefront of FinTech. The FDIC killed it. Thank you, Paul Grewell and Coinbase team for pushing this effort to make these documents public. Gruenberg's war on public blockchain was bad for consumers and basically killed banking innovation over the last four years. Let's hope the next four are very different. It's fairly staggering to think about how dramatically different the banking system could look

if these initiatives were allowed to go ahead. With the benefit of four years of building, we could have had a near instant and nearly free blockchain-based replacement for the ACH system. It would have also sent the message that governments want to see innovation in payments tech, likely leading to a wave of competition. Ironically, it looks like the payments world is finally starting to catch up from the four-year delay in Stablecoin adoption. Stripe recently acquired a stablecoin infrastructure startup for a billion dollars, their largest acquisition to date. Throughout the last year, Stripe has been doubling down on stable coins as a way to offer

truly global dollar payments in a cost-effective way. In other words, instead of promoting a thriving competition for the next generation of payments, the FDIC appears to have stifled all the first movers. Stripe is awesome, but them being in the only position to compete is not good for anyone. regulators have also managed to push stablecoin infrastructure outside of the banking system, putting it firmly outside their regulatory perimeter. The clear implication from the letters is that a change in government is likely all that's needed for a wave of crypto products to proliferate through the banking system. They seem to suggest that crypto adoption in the financial industry was more regulatory

than about practical issues. Lightspark CEO David Marcus was shocked at how brazen the government action was, tweeting, the level of coordinated sabotage, for the lack of a better word, of Bitcoin and crypto by key federal regulators under political influence is now clear as day. Change is coming. Marcus was previously the head of Meadow's Libra Stablecoin initiative and has complained about the government stonewalling the project until it was abandoned, a story which I have heard numerous times personally as well. Nick Carter raised the point of how much banks want to get involved with crypto infrastructure and products, commenting,

something I've been trying to tell people. It's not crypto versus the banks. It's crypto and small and medium banks versus the U.S. government. The banks wanted to do crypto. There are dozens of examples, the FDIC told them all to stop and suicide at the ones that kept going. Yes, some large banks don't like crypto because Stables threaten some key monopolies, but many, many regional and community banks were extremely keen to do crypto stuff. Well over 100 signed up to do Bitcoin buy and sell with NIDIG. The FDIC killed it. Many banks wanted to be in the Stablecoin game, both as issuers and banking issuers. The FDIC and Fed killed it. The silence of the bank lobby on this matter has been deafening. The ICBA and ABA have totally failed to speak up for their members that wanted to do crypto and were stymied.

Ron Hammond, the Director of Government Relations at the Blockchain Association, agreed, adding, 100% and the evidence is in my inbox post-election. The institutional and trad-fi outreach is way more than expected, and I'm just the policy regulatory congressional side of things. So what happens next? The first and most obvious point is that we now have the smoking gun. Not only do we have a list of crypto products that were killed off before they could launch, but we also know this was a centralized effort coordinated out of the Washington office. There's also the telltale signs of attempting to shut down crypto activity without putting too much on paper. For example, the FDIC doesn't appear to have written down the widely reported 30% limit on crypto deposits. This verbal direction was the

likely cause of the wave of debanking that hit the industry in 2023, but the regulator avoided putting it in writing. It's now extremely clear that Operation Chokepoint 2.0 is not a conspiracy theory. It's conspiracy fact. Mike Dutas of Six-Man Venture sarcastically tweeted, but a bunch of fintech and banking quote-unquote experts told me that Operation Chokepoint 2.0 wasn't really a thing. Nothing special about crypto, just a high-risk sector facing normal bank-risk rejections. Others are more focused on what these letters say about the regulatory culture in Washington. Oman Malikon, an adjunct professor at Columbia Business School wrote, while the industry is rightly focused on what this bank censorship all means for crypto,

there's a larger issue being exposed. Any opaque, fractional dated banking system is only as good as its regulators. Choke Point has exposed ours as corrupt, dishonest, and incompetent. That means the banking system is not safe. I would extend this thesis to the securities markets. The SEC had its credibility damaged by an apparatchic chairman with no respect for Congress or the rule of law. Bad things likely developed far away from crypto under his watch, things we don't know about yet. The tradfai markets might be in good spirits, but there might be bodies beneath the surface. Many believe it's not enough for chokepoint to end, but that there needs to be a reckoning. Crypto lawyer John Deaton has put his hand up to lead an investigation, writing,

as a former prosecutor and special assistant United States attorney, I am very serious about volunteering to help lead a federal investigation into chokepoint 2.0. I would accept the task without salary. The American people deserve the truth a hell of a lot more than I or anyone else needs another taxpayer-funded paycheck. I've been fighting the SEC's gross overreach for four years pro bono, so doing the same to help uncover multi-agency coordination and possible corruption related to chokepoint 2.0 would be both an honor and a privilege.

Bringing in the Ripple and Custodia cases, he added that these issues, quote, go beyond digital assets, banking charters, or blockchain. It's about whether unelected bureaucrats can arbitrarily deny access to essential financial infrastructure, effectively picking winners and losers in the marketplace. It's about whether government agencies can wield unchecked power to restrict lawful businesses from accessing the critical financial infrastructure necessary to survive and thrive in a free market economy. If these actions go unchallenged, it creates a dangerous precedent where regulatory bodies can quietly suppress entire industries they disfavor, stifling innovation, competition,

and economic opportunity. More than anything, the reverberations contained in the letters speak incredibly strongly about what could be achieved in a new regulatory environment. Fox business journalist Eleanor Territ commented that the regulatory pause, quote, seems okay enough until you consider that those letters were written two, some almost three years ago, and there has been little to no movement since on banks being able to custody or offer products related to digital assets. Meanwhile, regulatory clarity has remained opaque at best. Was the FDIC hiding behind these letters and alleged review periods as a way to slow walk any integration of digital assets into the legacy banking system? It will be interesting to see by comparison what will be done in three

years under an administration that's open to crypto and blockchain technology. This was, of course, a key theme we touched on during our Christmas episode that made predictions for the next few years. We've never seen what the crypto industry looks like with both a drive for institutional adoption and a regulatory regime that will actually allow it. It now seems clear that the banks have been enthusiastic about upgrading financial infrastructure using blockchain for years. Some had even launched products that were later curtailed and shut down. Until now, the removal of the chilling effect around Operation Chokepoint 2.0 was viewed as mostly being about access to banking. Companies, funds, and individuals in the industry would be able to focus on executing rather than

worrying about losing their bank accounts. These letters, though, speak to an alternate pathway the industry could have gone down, one where every bank in America is offering Bitcoin-denominated accounts, and legacy rails have been swapped out for lightning-fast and cheap staple coin infrastructure. That version of the industry could have begun to emerge in 2023, if not for Operation Chokepoint 2.0. And so the question is, while that Cambrian moment for crypto was delayed, will it now arrive in 2025. That is the question I will leave you with for this episode. Appreciate you listening, as always. Until next. Next time, be safe and take care of each other. Peace.