The Breakdown - The Evidence for Operation Choke Point 2.0, With Nic Carter

Episode Date: March 30, 2023

On today’s episode, NLW is joined by Castle Island Ventures’ Nic Carter. Nic was the first to identify the concerted effort to deplatform crypto from the banking system as “Operation Choke Point 2.0.” In their conversation, Nic discusses the original Operation Choke Point, how that operation came to an end, when he began to notice signs of a similar strategy targeting crypto and where the industry is now.  Enjoying this content?   SUBSCRIBE to the Podcast Apple:  https://podcasts.apple.com/podcast/id1438693620?at=1000lSDb Spotify: https://open.spotify.com/show/538vuul1PuorUDwgkC8JWF?si=ddSvD-HST2e_E7wgxcjtfQ Google: https://podcasts.google.com/feed/aHR0cHM6Ly9ubHdjcnlwdG8ubGlic3luLmNvbS9yc3M=   Join the discussion: https://discord.gg/VrKRrfKCz8   Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW   “The Breakdown” is written, produced and narrated by Nathaniel Whittemore aka NLW, with editing by Michele Musso and research by Scott Hill. Jared Schwartz is our executive producer and our theme music is “Countdown” by Neon Beach. Music behind our sponsor today is “Foothill Blvd” by Sam Barsh. Image credit: Paulozhgibesov/Getty Images, modified by CoinDesk.  Join the discussion at discord.gg/VrKRrfKCz8.

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Big Picture power shifts remaking our world. The breakdown is produced and distributed by CoinDesk. What's going on, guys? It is Wednesday, March 29th, and today we're talking with Nick Carter about the evidence for Operation Chokepoint 2.0. Before we get into that, a quick note. There are two ways to listen to the breakdown. You can hear us on the Coin Desk Podcast Network feed, which comes out every afternoon and features other great CoinDesk shows, or you can listen on the breakdown only feed, which comes out a few hours later in the evening. Wherever you listen, if you were enjoying the breakdown, I would so appreciate it if you would take the time to leave a rating or review.

It makes a huge difference. All right, guys, well, as I said today, I am joined by the one and only Nick Carter. Nick is a venture capitalist at Castle Island Ventures, but is also a prolific writer and commentator. on the broader crypto space. Since the beginning of February, Nick has been sounding the alarm on Operation Chokepoint 2.0. Indeed, he is the one who first identified it as such. On today's show, we dig deep into what that actually means, including the preceding Operation 1.0 that happened during the Obama administration, when Nick started to notice the inklings of Operation 2.0, and where it has left crypto now. So with that, let's dive in.

All right, Nick, welcome back to the breakdown, sir. How you doing? Doing good. Thank you. Thanks for having me back. Of course. Interesting times that we are cursed to live in, I guess. Excited to have you here. You know, obviously a huge part of the conversation this year has been around the regulatory sort of fallout from everything that happened last year. And it's taken on a pattern that you were early in identifying. And so what I wanted to do today is for folks who have sort of only heard me or others, mention this idea of Operation Chokepoint 2.0 in passing or maybe not sort of super gone deep on it. I want to kind of give a little bit of background context and current history that we're living through.

We're recording this literally as there's a Senate hearing discussing some of these issues, or at least the supervisory issues around the Silicon Valley Bank failure. So it's an opportune time. But I think where I'd like to start is actually choke point 1.0. you know, what it was, when did you sort of come into consciousness of it? Let's take it from there. Yeah, it actually really began with online poker. So if you remember online poker were shut down, I believe in 2011. I don't know if you played poker at all. I had a lot of friends who were in that community. So I had friends who, like, I knew all the folks who had started full tilt,

which was obviously, you know, a big, big piece of that. I was affected by it. Yeah. So I was a, I was a victim of choke.0. Choke 0.1.0. And, you know, 2.9, I suppose. So basically, the government is always looking for ways to tackle industries that they dislike. And sometimes you can't just pass a law outlawing them. They have to be really unpopular for that. What they realized was bank regulators realize they could start to marginalize otherwise legal industries by cutting off their bank access. This playbook was developed partially, initially to deal with the online poker sites, which then I think they were effectively outlawed, or at least it was a black Thursday. It was a black day of the week when basically all the

poker sites got taken down. But that was sort of the start. That's what people credit as the start. This is around 2011, 2012. And then following that, the playbook was actually put into effect in, I would say 2012, 2013 to target payday lenders. Now, no one likes payday lenders. Now, no one likes payday lenders. So, you know, they're not a very sympathetic target. But also, they weren't illegal. So the question was, how does the government tackle this industry? Well, they just went to the banks that the payday lenders used and told them, you know, we think that you're dabbling in an industry that is going to bring a lot of reputation risk on you the bank. And if you don't cut them off, we're going to investigate you. We're going to do a full audit, full investigation. And this was, the FGIC was the primary regulator.

doing this in conjunction with the Department of Justice. And because banks are highly regulated institutions, I would argue they're like basically part of the state. They can't really afford to piss off their regulator. And banks really did actually listen to this. And it was actually a lot of it was informal guidance. It wasn't really written down anywhere. It was private conversations between these regulators and bank executives. And so they did cut off the payday lending space largely. And then the folks in the Obama administration realized they could use this playbook on other industries they didn't like. And so this expanded to 30 different industries. And it was actually had a name.

It's called Choke Point. So that's not a name that sort of we gave it. That was the official name. It was an official operation. And gun manufacturing was another target, but not the only one. It wasn't exclusively a political thing. It was just industries that were sort of not really liked. and it extended to the adult entertainment industry, of course, infamously.

Ammunition manufacturing, in particular firearms, was a chief target. Folks, businesses that were operating legally in these industries, found themselves deprived of bank account access. Because banks were pretty terrified of defying their regulators. And this went on until, it went on in full force until about 2015, only really ended in 2017, when there were a number of, of congressional challenges raised. And of course, when the administration changed, that's when it really ended. So then it was kind of, it became implicit after that where the banks had internalized

this guidance, even though at this point the banking regulators weren't explicitly saying don't serve these industries. The banks had internalized at that point. So they continued to be really careful with quote unquote high risk industries. And then now, of course, in 2023, it's back in full force in a much more concerted way, arguably, an even more explicit way, I would say. And so that's why we call it 2.0. So a couple things that I want to dig into, because I think that they're super relevant. One is, I'm interested in your take on origins. Like, do you think that this was something that was a byproduct? I mean, effectively, was this an example of executive power being exerted because of an inability to get things through the normal channels.

Maybe not where it ends up, but where it starts as, you know, Congress is gridlocked, partisanship is increasing, and so screw it. We're going to use whatever means available to us. It's sort of like a weird, weirdly analogous to executive orders or governance by executive orders in some way. So I'm interested in your take on that. And then the second piece is, it's not so much a question, but just I think one of the things that's important to kind of recognize with this is,

Part of what makes it so pernicious is in the context of a, you know, a private enterprise that's just weighing, you know, costs versus risks, and that is inherently conservative on the nature of the business, it doesn't take much pressure for it to just become too costly or too likely costly, you know, from a political and compliance perspective to say, well, screw it, I don't care that much about that line of revenue. It's almost like, who's going to step up, what bank, what institution is going to say, oh, yeah, this is completely worth it. This business is a big and significant enough part of my bottom line that I'm going to actually fight for this. Yeah, that's precisely right. Banks are risk-averse. You wouldn't know this, given what happened

with the banks recently, but they're risk-averse by their very nature, especially as it concerns discussions with their federal regulators. I mean, banks are public-private partnerships. You exist at the behest of the state. It's not easy to get a bank charter. In fact, virtually impossible. So you really do have to listen to the guidance you're getting from irregulators, even if it's unconstitutional. So that's exactly right. You're not going to find champions for disfavored industries amid the banking sector unless, and we'll get to this. In the case of crypto, there were champions. Those champions met a grisly fate, tell you that. So yeah. Speaking of champions, actually, I guess before that, I wanted to talk about sort of the Brooks era, you know,

and the attempt to, you know, kind of codify this or, you know, the opposite of this into rules. But how much were legal challenges to Operation Choke Point part of the end of the first version of this? There were legal challenges that were brought. It really ended because Trump came into office. Turns out there's not that much you can actually do if the bank supervisory agencies get in their heads that they really hate a specific industry unless the Supreme Court steps in. We didn't really have the chance to see that. So what really happened was Congress stepped in and they started asking questions about it. In particular, Representative Luke Comeyer, I believe in Missouri, who's still in the House today, started asking

a lot of questions about this because it seemed partisan. Some of the industries that were under pressure were traditionally sort of associated with conservatives. And so there were congressional questions because, as you say, ultimately, this is a question of executive branch overreach. and there's only so much that legally regulators are allowed to do. They're not really allowed to pick and choose which industries are allowed to operate if those industries are legal. I think that will come into play at this time. That first time, it was more that Congress opened the kimono a little bit

and sent out subpoenas and started writing letters and demanded to know what exactly was going on behind the scenes, in particular at the FDIC. And so that embarrassed them a little bit. But ultimately, what actually happened was the administration turned over, and that is what brought an end to it. So that, I think, gets us to, you know, fast forward a few years. One of the bank regulators, obviously, is the Office of the Comptroller of the currency. Brian Brooks gets in there.

And, you know, obviously, there are a bunch of, you know, kind of rules, you know, that he put forth regarding crypto and banks being able to be involved with crypto. But sort of one of the big overarching things that he tried to do was to sort of enshrine this notion. I can't remember what the name of the rule was specifically. Fair access. Yeah, that banks could not deny companies service on the base of the industry that they were in if it was a legal industry. That was, I believe, the first thing that the new OCC did when they came in under the Biden administration was overturning or kind of controverting that rule. Is that correct?

Is that your understanding? That was one of the best things Brooks ever did. did was the fair access rule, saying exactly as you say that banks couldn't give disparate treatment to specific industries, certainly not on the basis of quote-of-quote reputational risk, which was how chug.1 was kind of handed down. They would describe an industry as being reputationally risky and then say banks can't do business with that industry. It was a little different with 2.0. 2.0 of the say, this industry is incompatible with safety and soundness of a bank. So safety and soundness is just a long-witted way of saying crypto, basically. So they kind of veil it in their

language that they use. Yeah, Brooks passed that rule. The other important thing he did was try and open up the federal charter regime. So you get the FinTech Charter or the crypto charter. So he tried to address it in two ways. One, to the existing banks, they couldn't disfavor particular industries. So he's basically giving a license to freely engage with clients of their choosing. That was a great rule. Two was to open up the charter regime to allow the market forces to clear. And if there were pro-crypto individuals that wanted to start banks and get charters, you want to create a path and then to do that. Both of those things were rolled back under the subsequent administration.

In fact, day one, Michael Sue, who's the new column controller, rolled back the Fair Access Rule. And there was a little preview of what we were going to get in the Biden admin. And then, of course, they also closed off the federal charter regime at the OCC. virtually impossible to get a charter now, a de novo charter. So that means that new champions cannot emerge. The market cannot clear through the new charter transmission kind of pathway. To your point, we saw the OCC overturned this rule immediately. So, you know, it gives a preview for what was coming. But when did that sort of start to coalesce into something that could reasonably be called, you know, an operation chokepoint 2.0 for you? Was it the sort of OCC Fed FDIC warning at the beginning

of this year? Was it earlier than that? You know, when did you? you kind of start to pick up on those signals? In 2021, it started to be clear that bank regulators had an issue with the crypto space. They kind of became obsessed with warning about the risks of crypto. I actually wrote a paper designed for the policymaker audience about the risks of crypto because I kind of regret it now. But I wanted the discussion to be an informed one. So I think I might have actually contributed to this in some weird perverse way because I wanted to explain what I thought the actual risks were, as opposed to the purported risks. But so the Fed in particular started writing, and the regional feds, they started writing a lot of

white papers about how crypto is risky in some way. And risky, if a bank interprets it, is just a code for don't touch it. And then in January of this year, it ratcheted up like crazy. And I think the reason for that is referring back to something you said, the executive branch realized they're going to be stymied through Congress. They knew that. that they weren't going to pass legislation one way or the other regarding crypto. And post-FTCS, there is a extremely strong desire to do something. And they knew that they were not going to do something through the congressional avenue because of that point the House had gone Republican.

And now we have gridlock in Washington. So the remaining channel through which to do something is financial repression. So weaponizing the banks for policy objectives, which has always been using financial rails to achieve policy objectives. That's not just a Biden administration thing. The U.S. government loves to do that. That's what sanctions are, right? Using the preeminence of the dollar worldwide to achieve strategic, almost military objectives. This is just sanctions done on a domestic level. The SEC, they use their mandate, they've grown it, to pursue specific policy objectives. What's the number one objective of the SEC? It's actually climate. You might think that's not really that compatible with a securities regulator, but that is one of the

their major stated objectives is achieving climate goals through the regulation. So it's not exactly a surprise that other financial regulators were deputized to try and stamp out this particular disfavored industry. So it was January. I've now learned that a lot of this stuff started happening in November of 2022, I guess. That's when a lot of it began in earnest, but it came very apparent in January when you all of a sudden had cross-agency statements being released, calling out risks in the crypto space. You had the administration, the Biden and the admin, releasing statements, the National Economic Council. And you had these really intense actions. You had the Federal Reserve's denial of the custodia application, which is, as I said, that's closing off the channel for

entrepreneurs to create pro-crypto banking institutions. You had the OCC sitting on these charter applications from Anchorage or POTigo and Paxos. And then of course you have the inserted campaign by the SEC to attack onshore crypto industry here. But it was January that I noticed things were going deeply awry. So I started calling bankers and asking them for their experience. And they told me some terrifying stuff. Like they were being asked to clear all new crypto business with the FDIC directly, which is crazy.

That's an insane thing. Clear all new clients proactively up front with a regulator. Of course it's going to have a chilling effect. They were being asked to provide information as part of their routine data sharing agreements with the regulator regarding their crypto exposure. And then, of course, after I wrote that first piece, things went into total overdrive. We were talking about that. But it was January that I realized something was deeply amiss.

And that's why I called it choke point 2.0. Somewhat speculatively, now there's no questions whatsoever that remain. Some people called it a conspiracy theory then. It's like the lab leak. The lab leak was called a conspiracy theory. now people kind of generally accept it. For choke point two point I were at the stage of general acceptance now, I don't think you can really have any doubt. Yeah, I want to get into the reactions a little bit in a minute, but you know, connecting the dots between a couple pieces of this.

One that I think is interesting is this idea of, again, sort of the recognition that there wasn't necessarily a congressional path. It feels like stable coin legislation was their big hope for last year. And, you know, they just couldn't come to alignment on that. And so it's like, if that couldn't even get through, to your point, there's no realistic path in Congress. And so the White House and others feel like they have to, quote unquote, do something. The second part is, I think it's worth noting that in addition to the sort of specter of choke point 1.0, I think there's another specter that haunts certain federal regulators, which is the global financial crisis. And you've kind of always noticed this when regulators talk about crypto,

there's sort of two categories of discussion. If they're not talking about, like outlight criminality in terms of what they're concerned with. One is investor protections, and the other is systemic risk. And it was always like, you know, investor protections were at the forefront because it was the obvious thing. It was almost a sense of just waiting for there to be systemic risk, right? Every congressional testimony, you know, there was sort of this, this systemic risk lurking. And it feels like part of what happened over the course of the last few months is that they had for the first time plausible lines to draw with crypto becoming a systemic risk or being close enough. And that sort of just sent things into overdrive. And I guess a question that I kind of want to

follow up with is, you know, you got into this a little bit, but to what extent do you think that this set of actions was a direct response to FTX versus this sort of dormant impulse that was given room to breathe? And I guess maybe as an adjacent question to that, you know, do you see that the actors involved as having multiple categories? And what I mean by that is, you know, architects, let's call them, versus people who are sort of just perhaps even neutral, you know, generally to crypto, but who in the context of the sort of pressure coming down are going to flow to where the sort of loudest voices are driving it? So I think FTCS was an immediate catalyst. certainly a lot of the aggression began right on the heels of FTCS.

And in particular, the fact that some of these banks actually served FTCX and Alameda were clients of certainly Silvergate, possibly signature, I'm not 100% sure on that front. That was the smoking gun, so to speak, that the regulators needed. Because then they could connect FTCS, which was an offshore exchange, to the onshore regulated bank space, and they could basically declare that to be a transmission channel of risks. Also, the fact that Silvergate drew down so much in the credit crisis of 2022 that their deposits drew down, that was another channel that they were able to point to and say, we're inheriting systemic risks from the crypto space. The other thing that I'd considered in

my risks paper, so I considered the risk of banks, being overly concentrated with regards to their crypto exposure blowing up and affecting the broader banking space. If you go back and read the paper that's in there. The other thing I'd considered was stable coins, and this is something that IMF Fed types have always been intensely concerned about, which always cracked me up a little bit, is what if a stable coin unwinds and they've just sell all their treasuries at once? That was another risk that they were always really worried about.

And I thought that was kind of stupid, to be honest with you, because you're never going to have all of the stable coins being redeemed all at once. People want to hold stable coins. There's like a reason for that. You have a convenience yield of holding a stable coin. So you're never going to have that. And also the numbers are really small. At peak, all of the Fia back stable coins were about $150 billion. Compare that to the aggregate liquidity in the treasury market, which is in the trillions. It's never going to cause a massive disruption. Unless stable coins get into the trillions and then somehow crypto vanishes out of existence, people will redeem all the stable coins all at the same time, which is not likely. Then you might have an issue. But that was the other transmission

channel they were always worried about. So the banks and the stable coins. I would argue there was no inheritance of systemic risks from the crypto space to the bank sector. And I think we know that now. For a time in the immediate wake of the collapse of Silvergate and signature, and SVB to a smaller extent, people were kind of trying to make that case a little bit. and say, hey, it's actually the crypto space and, you know, the venture-backed tech space that kind of caused this bank crisis. I don't think anybody could plausibly make that case today, right? The obvious cause of the bank crisis is the Federal Reserve raising interest rates, 500 basis points in the space of a year. That wasn't even a scenario they contemplated in their stress testing, believe it or not. They'd never

even thought about that scenario. And of course, the ultimate cause of that was the enormous levels of fiscal spending, which is what caused the inflation, that caused the Fed to react. So the ultimate cause of this is not crypto. I think some of them in the government would have loved to make that case. And frankly, I think that's part of the reason that signature was taken down was to create like a Gulf of Tonkin type incident, you know, like a pretext. So you manufacture a crisis and then your answer to the crisis is more power and, you know, things like that. But I don't think it worked. I think everyone sees that the bank issue is a systemic issue, which is caused by poor oversight of the banks and, of course, whipsawing interest rates. That's the problem. I think some of them

would have loved to make the case that it was just the crypto industry causing wider reverberations in the financial system. That doesn't really stand up to scrutiny. And then regarding your second part of question. There's, you know, the main architects of chokepoint are universally people that just hate crypto and don't see need for it. And they see it only as having negative externalities on society and they just see it as a fundamentally bad thing. So they've always been biased against it, but then post-FTCs, they really got the opportunity to promote policies explicitly marginalizing the industry. So that's why I find it kind of funny that some people will say, yeah, this is a conspiracy theory, you know, chokepoint 2.0 is not real. But also, if it is real, then it's

good and you deserve it, which is some of the discourse that I'm seeing now. Join CoinDesk's Consensus 20203, the most important conversation in crypto and Web3, happening April 26th through 28th in Austin, Texas. Consensus is the industry's only event bringing together all sides of crypto, Web3, and the Metaverse. Immerse yourself in all that blockchain technology has to offer creators, builders, founders, brand leaders, entrepreneurs, and more. Use code breakdown to get 15% off your paths. Visit consensus.com or check the link in the show notes. Okay, so we're in this year now. You're the first note that I saw of you kind of naming this.

It was a little bit before the full article, but you had a tweet on February 7th. That was basically, that was the kind of first time it says, you don't want an alarm. It's since the turn of the year, new operation choke point type operation began targeting crypto space. Then you wrote the piece about it and first reactions, what were they? I think crypto people were pretty alarmed when I sent out the tweet that got a lot of impressions, but people basically said, well, where's your evidence? Then I wrote the piece in the next 24 hours, like Salana, Pirate Wires, offered to publish it. I actually didn't have a home for it. I was just going to put on medium, but they reached out. So they were the ones that got it. And people called me a conspiracy theorist,

for sure. And I sort of began to wonder myself, like, am I the Alex Jones of crypto now? Is that, is this my fate? Because I try to be pretty evidence-backed. But basically, the evidence going into that article, and I'm not really a journalist, so I'm not like bound by the sort of like, you know, journalistic integrity. I did used to be a journalist, though, so I know how it works. And my sources were bankers who were dealing with the FDIC and the OCC directly and relating to me their experiences. startups that I knew that were reaching out to get banks and were being given new excuses for why they couldn't be banked, new harsher excuses. So that was kind of the non-public stuff. And then the public information, which we knew at that point. It was a tapestry of information. You just needed to

put it all together. But it was all out there in the open. I actually wasn't even the first person to point the stuff out. There were some memos circulating from law firms, specifically focusing on the custodia denial, the cross-agency statement, the statement from the National Economic Council. So people were beginning to wake up to this stuff, but the information had to be packaged in the right format. Even after I wrote that piece, I think on Feb-9, people still didn't believe me. A lot of people, especially the cryptoskeptics. Now, I think it's very hard to dispute what's happening. And frankly, I think if you asked any of these admin officials directly, like Gruenberg at the FDIC, who, by the way, was the architect of Choker Pointe 1.0, who's currently

serving as chair of the FDIC. If you ask them, they'd probably say, Yeah, like we're, this is justified. It's not a conspiracy. Like, we're shutting out a industry, which is risky and poses risk to banks. So I don't even think they would deny it. I think they would just say that we're doing the world of favor. So I don't see how it could be called a conspiracy today, especially in the wake of signature, which is one of the biggest smoking guns ever. So this is what I wanted to ask next is a month or so. I mean, it's actually pretty much literally a month from, from this point when you write this. On a Wednesday, Silvergate says it's going to wind down. Friday of that week, Silicon Valley Bank goes under. Sunday of that week,

signature is shut down. What do each of these things contribute to sort of the clarity around what's going on in terms of this sort of coordinated effort? The Silvergate one contributed a certain amount of information. So there was a concerted campaign to get the specific partner to Silvergate, the federal home loan bank to cut them off from providing loans to Silvergate, which was Silvergate had survived their bank run. They were still alive. A few things happened, though. A number of senators started questioning their solvency, which is like a self-fulfilling prophecy, right? Which is, this actually happened back in 2008 with Chuck Schumer was credited with creating a confidence crisis that brought down a specific bank whose name I'm forgetting right now.

But so the exact same thing happened. Senators questioning the solvency of Silvergate, which if you're a senator, you should be pretty prudent around the noises you make around banks because they can become self-fulfilling prophecies. Silvergate came under investigation, whether that was warranted or not, they came under investigation for having served FTX. So it's probably my opinion that like everyone else, they were defrauded by FTX and San Bank, McFried and Alameda. So I consider them victims. But okay, perhaps their AML or KSC program or their risk monitoring wasn't perfect. We don't know what would have happened with those investigations.

So that happened. But then crucially, Silvergate was cut off from the FHLB facility. The FHLB themselves denied that there is any political motive to this. But it is factually the case that there is a massive campaign to get the FHLB to stop serving Silvergate. So that looked pretty suspicious to me. And that, cutting them off from that facility was the immediate cause of Silvergate, realizing that they were too screwed and they would have to voluntarily wind down. So that was one thing.

But then by far, the most telling thing was signature being shuttered on a Sunday night, which is not typically how it's done. Typically it's on Friday after the close of business. And then you have the weekend to try and negotiate an acquisition, which was what they were trying to do with SVB. they were in a better financial position than a lot of their peers, in particular First Republic and Pack West. First Republic, very beleaguered. They were in dire straits, but they were given time to save themselves. They were given time to raise money, and find a acquire, inject more liquidity,

sell things. Signature was not afforded that right whatsoever. So that was intensely sketchy. of course, then you'd Barney Frank on the board of Signature saying they were solvent when they were shuttered. The FDIC reportedly being surprised when DFS put them into receivership and handed them to FDIC. They were a huge number of questions around Signature. And also, Signature was a pretty large bank. They had over 100 billion in assets, much bigger than Silvergate. But at that point, they were the last remaining bank that had this piece of infrastructure for Fiat settlement. between their clients called Cignet.

Silvergate had Cynne. Signet was bigger than Cynne. So after the demise of Silvergate, signature was the last remaining institution, which was running this 24-7-365 Fiat Real-Time settlement infrastructure. And that was not included in the sale to forget the name of the bank that acquired them.

So that was another piece of evidence. The crypto business, the crypto infrastructure that they were running was not included in the sale. The FDIC has a legal obligation, obligation to maximize the value of the asset and to minimize the hit to taxpayers. By not including the crypto business in the sale, they defaulted on that obligation. So to me, all these things put together, made it very clear that signature in particular was executed. It didn't commit suicide. They died by murder. And they were done. They were put to death as a means to caution other banks

from doing this, from being an explicitly pro-crypto bank. So after Silver, and signature, there were no banks that had a meaningful share of their book that was attributable to crypto clients. And in fact, we will never, at least under this regime, we will never have another Silvergate or signature, because now the FDIC has gone to all these banks and said, you cannot exceed 15% of your deposits that retain to the crypto industry. So you'll never have a bank that is a validly pro-crypto that is happy to take deposits from the crypto sector. and that's running this Fiat settlement infrastructure with a vibrant network effect because no bank now can onboard enough of the crypto industry to create that network effect.

So that's one of the worst residual things here. We can never have another signet or son. You can rebuild the technology, but you cannot rebuild the network because it's de facto legal to as a bank onboard all the relevant folks in the crypto space to do this Fiat settlement stuff, which is really important. So that's where we are today. That week around signature was super weird because you had signature shut down on Sunday. Everyone in the crypto industry has these questions.

On Monday, Barney Frank comes out and basically says, yeah, I think it was the crypto thing and they were making a statement. Some people question him. And the counter critique is, well, if the New York Department of Financial Services says it's about management and he was part of management, he has an incentive. not to say this, but then there's enough pressure going on that the FDIC, you know, comes out and says, or Reuters, I guess, reported that the FDIC was saying no one could acquire the crypto book. And then the FDIC says, no, that's not true. But then it's sold without the crypto book. And this is all in the span of like seven days. Yeah, I mean, I remember, I think Sunday night I literally tweeted that signature was taken out so that they could blame the crisis on the

crypto industry. And then Monday morning, Bonnie Frank comes out and says they were targeted for their crypto exposure. Look, all these conspiracies have a weird habit of becoming true. I don't know what's going on. You know, it's interesting to see the FDIC deny that there might have been any anti-crypto animus, but then, of course, not sell on the crypto business. And in fact, that week, signature crypto depositors were given 24 hours to withdraw all their deposits from signature. I think post, um, receivership, there was $4 billion left of crypto deposits at Signature, and they were all told to leave. So there wasn't even a crypto business to sell, aside from Cigna, because they'd all been told to go. So the crypto portion of the bank was just dismantled.

One of the things that you said that's pretty interesting, I think, is the gap between the potential desire to blame the larger banking crisis on cryptocurrency. and what sort of markets and observers have come to accept as the case, which is the sort of fundamental problem of unrealized losses and duration mismatch and interest rate risk that wasn't properly dealt with. Do you think that in some ways Silicon Valley Bank happening in the midst of all this actually made it so that that sort of desired narrative of blaming it on crypto just wouldn't stick? practically speaking, Silvergate died for this reason as well. You know, certainly it had the beleaguered industry that was withdrawing deposits, but it was still the duration mismatch and having to sell securities

to pay back the FHLB loan, you know, it was the same underlying cause with different sort of circumstances around it. But I agree with you that I think that if you look now, you know, on this sort of Tuesday compared to two Tuesdays ago, there's just not as many people trying to. to make the case that this was about crypto. It sort of moved on from there, even for people who don't particularly like crypto. That's right. SVB's collapse through a wrench in this whole operation. I genuinely think that it was an objective of these financial regulators to fragileize the crypto banks and potentially induce them to fail. And if just Silvergate and signature had failed, then they would have been pretty satisfied with that.

SVB collapsing in the midst of all this, an unprecedented bankrun fastest bankground ever, totally threw a wrench in that because they realized they had a huge crisis on their hands. I mean, this is the second largest bank collapse in U.S. history. And they realized we're in a new regime here where bank runs can happen really fast. And also there's a structural factor of the losses in the bond portfolio, which is widespread across all banks. So I think that made the folks in Congress, in particular, they're agitating against these banks, realize, okay, we got to pump the brakes here.

It's not wise to encourage bank runs because this can get out of hand. And it did get out of hand. Now nobody trusts regional banks or community banks anymore. All this liquidity is being siphoned out of smaller banks and put into larger banks, or it's going directly into money market mutual funds, basically treasurer. The knock-on effects from that are going to be very considerable. All of lending is going to dry up at these smaller banks. That's where most real estate lending comes from. That's where small and medium-sized businesses to go to get loans. That's going to have a huge drag on GDP. And now, of course,

the Treasury and the Fed are agonizing over whether they shouldn't insure deposits at all banks and wondering about the cost of that, which would be incredibly large. So now they have a huge. So now they have a huge kind of structural crisis on their hands. And so I think what began as like a surgical maneuver to try and take down pro-crypto banks, maybe is a move against the whole industry or maybe just because they didn't like that there were these two banks. They were explicitly pro-crypto. That went way out of hand and it's now taken down Credit Suisse, maybe Deutsche Bank,

and God knows who next, you know, potentially in the U.S., I don't think the crisis is over. But yeah, I do think you're right. SVB going down took everyone by surprise and made some of these folks in the administration realized that the bank sector is pretty fragile overall. And it's not really a crypto thing. It's just these structural factors.

What is your sense of where the political discourse is? I mean, it seems to me that a lot of it has shifted to be about exactly what you just said, right? Yell it and testifying in front of Congress and not having any answers about regional banks and things like that. I mean, I guess one, is that, is that your sense? And then two, you know, to the extent that we are seeing any sort of political response from, from folks in Congress asking questions about Operation Choke Point 2.0, you know, is that happening? Who's kind of out there having those conversations and, you know, are they getting

any traction? It's challenging. People are now basically overlooking the crypto element. And that's why I wrote the second article because I didn't want, at that point, the discourse had already moved on into the morality of bailouts, moral hazard, how much the bank sector should we insure, is this contagious, you know, should we rethink how banks work? Do banks need to hold fundamentally higher amounts of liquidity because bank runs can be faster? We'd already moved way beyond the crypto conversation. And I just wanted to put up my hand and be like, hey, by the way, guys, this crisis was used to execute the two largest crypto banks, and this choke point thing they were talking about has intensified dramatically. So don't forget about us. And to their credit, some folks in Congress

did react to this, the usual champions, of course, Emmer, Senator Haggertie and the Senate, the Senate hearing right now. Unfortunately, they're all more focused on the supervisory failures, and in particular SVB. People aren't really focused on signature, which is surprising to me. But, you know, I was just watching the Senate hearing before we got on this. And they were very focused on the Fed's failure to identify the issues here. They certainly failed abjectly. I mean, it's tremendously embarrassing for them.

They didn't include the actual scenario that happened in their possible scenarios when they evaluated the stress tests. They failed to see the emerging issue of the health and matured, losses in the portfolios of these banks. And they failed to realize that these bank runs could happen faster than they thought because they thought that people still queue up outside of banks and ask for their dollars in cash. They didn't realize that laptops or mobile phones exist. I mean, ironically, they just didn't realize this is a thing. So most of the political discussion now is around what steps are we going to have to take to ensure confidence in the banking system on a go-forward

basis. Do we have to raise the FJIC thresholds? Do we have to ensure all unsecured deposits? And asking tough questions around what the Fed did and why they were distracted over, I mean, frankly, they were very distracted in particular focusing on the crypto industry, what the Fed did and why they failed to spot these issues. I mean, it's a huge failure of bank regulation and oversight, especially in the wake of the financial crisis, which is not long ago, you'd have thought that we would have been able to address these things and put it more than 13 years between financial crises. But so, yeah, that's the discourse today and the crypto conversation's been drowned out. Hopefully there's a reaction in Congress. That's one of the main ways we could address

this, but they're not at all focused on the crypto stuff right now. On that front, though, we're starting to see some amount of non-crypto actors continuing to hone in on this. So last night you shared a memo, a write-up, a report by Cooper and Kirk that was called Operation Chokepoint 2.0, the federal bank regulators come for crypto. And you gave a little bit of context. You said that these guys had been involved in some of the legislation against choke point 1.0. Yeah. I mean, I believe they were the main law firm that sued around 1.0. I don't think their lawsuits really resolved anything because the administration turnover happened. so we didn't really have the chance to see whether their challenges would have worked or not.

But the fact that they now bring their resources to bear on 2.0 and the fact that they wrote this detailed memo is really incredible. And it gives a ton of ammunition to the folks in the industry that need help on this. I think that you're right that right now there's sort of such a focus elsewhere because of the more sort of fundamental underlying structural questions. But I think that it's going to be paramount to keep a lens on this. particularly in the context of the SEC and the CFTC, not seemingly slowing down at all with their sort of, you know, attempts to go after the industry, I guess, but maybe just as a way of kind of

connecting those dots, how coordinated do you think the moves of those different agencies are? Is that part of this or is it sort of just separate reactions to the same stimuli? That's kind of an ongoing thing. I mean, we always knew that the SEC had a pretty hostile view of crypto. and I mean frankly having read the CFTC complaint against Bynance yesterday some of it I'm pretty sympathetic to so I'm not trying to sit here and just be you know condemn on a blanket basis every regulatory action it's CCC's right to interpret their mandate and go after things they consider unregistered securities and the CFDC's right to go after unregistered derivatives exchanges

is, you know, we can argue about whether the SEC is exceeding their mandate or whether they're doing this in the most prudent or efficient way. My main issue is with bank regulators that are stepping way beyond their authority, convincing the banks to discriminate against a lawful industry. That is clearly unconstitutional. The constitutional questions can be argued regarding the SEC and the CFTC's actions. For me, the real issue is the Fed, the FDIC, and the OCCCC. acting in a coordinated way to vastly grow the power of the executive and redline this industry. So there, there's no question as to the constitutionality. Where do you think we go from here? Do you have any sort of hope of actual potential for

a legal challenge of this, or is this a, you know, wait for two years and donate to opponents, basically? Yeah, I mean, ultimately electoral consequences are the only thing that can really change the status quo here. Even if we have some stray legal. wins, the Biden administration can still find ways to harass the crypto industry if they want. And I expect them to continue to do so, even if there's a reaction in Congress or in the courts. The crypto space right now is pretty disorganized and people are still shell-shocked. I mean, most firms, most entrepreneurs are just focused on getting new banking partners. So there's like immediate concerns that need to be met there.

But there are individuals and entities that were harmed by these actions and they have standing and they have a case, especially signature shareholders. We're talking about $4.3 billion of equity value that was vaporized overnight arbitrarily with no recourse. And of course, that equity value was far greater a couple weeks before. By, you know, a decree of the NYDFS, banks that or corporations that were served by these banks that were left unbanked, maybe going out of business, I think they have illegal claim here, too. So there's plenty of injured parties that could potentially bring a case here.

And reading this legal memo yesterday, like, I'm not a constitutional scholar at all, but I think there's plenty of, you know, angles you could use here to make the case that the regulators way overstepped their power. I think the states have a right to be aggrieved too. The states, places like Wyoming, they pass their specific charter for, you know, special purpose depository institution. That has been now rejected at the federal level. So the state's right to charter new banking institutions, which is historically one of the key rights that states have, has been closed off. I think the states can be aggrieved. I think there's due process questions over banking regulators stigmatizing specific industry. And then there's

very straightforward questions throughout the signature receivership. So I think there's a number of court cases that can be brought. And eventually I do expect this is the kind of thing that could go to the Supreme Court, and we could finally litigate these questions of executive authority that we didn't really have the chance to the first time around. And I expect the Supreme Court will unsurprisingly find in favor of the rule of law and fine on the side of the crypto industry. But of course, that takes a very long time. Well, we appreciate you sounding the alarm here in the crypto space and bringing these narrative threads together and certainly coming in and explaining it. And hopefully the next time we check Again, there will be interesting progress to the upside rather than the downside.

Yeah, it would be nice to catch a W every now and again. Yeah, well, here we are, 2023. All right, Nick, always great to have you on the show, man. Thanks so much. Appreciate it. All right, guys, back to NLW here. So as Nick and I were recording, a Senate banking committee hearing on the recent bank failures was going on.

And for those hoping for something relating to Operation Chokepoint 2.0, there was almost nothing. Indeed, there was virtually no discussion of Silvergate or signature at all. The focus was almost entirely on Silicon Valley Bank and what we've all learned about the structure of the banking system and how it might need to change. Michael Barr, Vice Chairman for Supervision at the Fed, said, We must evolve our understanding of banking in light of changing technologies and emerging risks. To that end, we are analyzing what recent events have taught us about banking, customer behavior, social media, concentrated in novel business models, rapid growth, deposit runs, interest rate risk, and other factors,

and for how we think about financial stability. Martin Groomberg, Chairman of the FDIC, said, One clear takeaway from recent events is that heavy reliance on uninsured deposits creates liquidity risks that are extremely difficult to manage, particularly in today's environment where money could flow out of institutions with incredible speed in response to news amplified through social media channels. Indeed, there was a huge amount of emphasis on just how fast money moved in the case of Silicon Valley Bank. 42 billion of deposits flowed out of SVB on Thursday,

and had it not been closed, the bank estimated that another 100, billion would flow out on Friday. Now, to the extent that there was discussion of signature, it was to argue that they simply didn't have the collateral to back up what was anticipated to be a similarly devastating bank run on Monday. And so it was closed and placed into receivership on Sunday to avoid that outcome. This, of course, doesn't answer questions about why it wasn't able to open up on Monday and take advantage of the new lending facility the Fed was spinning up in the bank term funding program, or why it was sold without its crypto portfolio, even though the FDIC denied rumors that it was forcing potential buyers not to take on those crypto deposits.

And so here we are. Crypto companies with deposits on signature were notified yesterday that they had until April 5th to remove the rest of their money, and thus their story ends. It's hard not to sit here and ask, have we been fully choked? And right now, friends, it is not looking good. Hopefully the next few months see some changes, more inquiries on the part of Congress, and more banks stepping up to service this industry. But I'd be lying if I said it wasn't a rough time.

time. Thanks again to Nick for coming on the show today and for his work sounding the alarm. Until tomorrow, be safe and take care of each other. Peace.