The Breakdown - The History of Operation Chokepoint 2.0

Episode Date: February 7, 2025

With a set of recent actions, the FDIC has completely reversed its aggressive anti-crypto campaign, nearly two years to the day after Nic Carter first termed it "Operation Chokepoint 2.0." In this episode, a recently voice losing NLW turns to OpenAI's Deep Research and Google's NotebookLM to do a history of the campaign against crypto. Read the original research paper: https://docs.google.com/document/d/1F_zV0uyI5MRa5TNN3fh8X7EQPKDoD_zOT6JUZi1ryQY/edit?usp=sharing Sponsored by: Ledger Ledger, the world leader in digital asset security, proudly sponsors The Breakdown podcast. Celebrating 10 years of protecting over 20% of the world’s crypto, Ledger ensures the security of your assets. For the best self-custody solution in the space, buy a LEDGER™ device and secure your crypto today.Buy now on Ledger.com. 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 Thursday, February 6th, and today we are talking about the complete history of Operation Chokepoint 2.0. 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.ly slash breakdown pod. All right, friends, well, you can probably hear from my voice that we are a little bit decimated over here. After a good run of many months of no kid sickness, the flu has hit the house like a tornado. More specifically, it's hit my vocal cords, which is just great as a daily podcaster.

Now, even as I was doing them yesterday, I could feel myself just absolutely shredding my throat. And so today, I had two options. One, just skip it, try to get better and be back on Friday. Or two, try to do something interesting and different. Luckily, there are some cool tools out there that change the nature of what we can do for Option 2. So today I'm using two AI tools to produce a different type of a show. The first is OpenAI's recently released Deep Research. This is a tool that exactly as it sounds goes deep on research based on a particular prompt.

It can take anywhere between 5 and 15 minutes. It cites its sources, and it produces a comprehensive report. I had noticed yesterday that Nick Carter tweeted, February 6, 2023, I published my first article on OCP 2.0 in Pirate Wires. February 5th, 2025, we can definitively say that OCP2.0 is over. He retweeted a set of headlines that include FDIC plans to revise crypto guidelines, FDIC aims to allow banks to engage in some crypto activities, banks met with officials to discuss crypto custody and tokenized deposits. But lest we forget what happened over the last two years, I asked deep research to put together a complete history of Operation Chokepoint 2.0. I then handed that over to

Google's Notebook L.M, whose audio overview of feature creates a podcast conversation between two synthetic hosts. So what you're about to hear is the history of Operation Chokepoint 2.0, as described by the two fake hosts of Google's Notebook LM, and as researched by OpenAI. Hope you enjoy it and hope I will be back tomorrow with a normal episode. Today we're dining into a really controversial period for crypto in the U.S. Operation Chokepoint 2.0. Oh, yeah, definitely a turbulent time. I mean, just looking at all these articles and analyses you sent me, it looks like this so-called debanking of the crypto industry was a wild ride. Definitely a wild ride, yeah. We're going to unpack all of it, what happened, who was involved, and the impact on, you know, the future of crypto and financial regulations in the U.S.

I think before we get into all the specifics of chokepoint 2.0, it's important to understand, well, the original operation choke point. Oh, absolutely, yeah. Can't talk about 2.0 without understanding 1.0. That was back in 2013 to 2017. Obama administration, agencies like the DOJ, the FDIC, the OCC, they all kind of targeted industries that they considered high risk. Okay, that sounds reasonable, but these weren't criminal enterprises, right?

Well, not at all. Payday lenders, gun sellers, a lot of, you know, legal businesses, but ones that, you know, weren't viewed favorably by, well, some. Some more like political targeting. You could say that. Basically, regulators pressured banks

to just deny these businesses services. It just cut them off. Yeah, essentially. Which, you know, caused, major disruption for a lot of them, financial strain. Well, what happened? Did it just go on? Well, the DOJ eventually admitted it was a misguided initiative, and the OCC, the Office of the controller of the currency, they publicly repudiated their own tactics. So it shows you how controversial it was, even back then. Okay, so that's the original. A lot of people in crypto see what

happened recently as basically a repeat, hence Operation Choke Point 2.0. Right. And that term, it was coined by a crypto venture investor, Nick Carter. He saw a lot of parallels to what happened, you know, in the Obama era in what started unfolding with crypto. And just to be clear, there was no official government program called Operation choke point 2.0. No, nothing official, no. But there's definitely a pattern of actions that raised concerns about a coordinated effort to restrict crypto's access to banking. Okay, so let's get it to those actions. When did things start to get really bad for crypto companies? Well, like I said, it wasn't sudden. More like a series of events. that built up creating a perfect storm, really.

One of the first signals came on December 6, 2022. Three senators, Warren, Kennedy, and Marshall, sent a letter to Silvergate Bank. Silvergate. They're big in crypto at the time, right? Huge. Basically, the senators criticized their crypto dealings, which, you know, is never a good sign when lawmakers get involved. Right.

Sending a message. And then, boom, the very next day, Signature Bank, another big player in crypto, they announced they were going to reduce their crypto-related deposits. Big time. Seemed like a direct response, honestly. It really does. So even before any formal regulations changed, the atmosphere was, you know, getting colder. Killy, yeah.

What happened next? Then in January 2023, things got more official. January 3rd, federal bank regulators, the Fed, FDIC, OCC, all three of them. They issue a joint statement, warning banks about crypto risks. So not an outright ban, but... It's a strong warning, basically saying, hey, be really, really careful with crypto. And banks listen to those warnings, right? They do.

It definitely had a chilling effect. In fact, just a few days later, Metropolitan Commercial Bank, they just announced, okay, we're out. We're done with crypto. Wow, completely pulled out. Yep. And then things escalated even more, January 27, 2023. That was a crazy day.

Oh, yeah, I remember that. It's all over the news. Three big things happened. The Federal Reserve, they denied Custodia Bank's application for a Fedmaster account. Custodia, they were that Wyoming Bay. crypto bank, right? Exactly. They were trying to bridge that gap

between traditional finance and crypto. But the Fed basically said, nope, you're not getting direct access to our system. So that was a major blow. Yeah. And then on the same day, the Fed releases a new policy statement,

specifically discouraging banks from holding crypto assets or issuing stable coins. And then to top it off, the White House issues a warning to banks about the risks associated with crypto clients.

So now it's not just banking regulators. It's the White House, too. Right. And just a couple weeks later, February 2nd, the Department of Justice announces an investigation into Silvergate Bank, specifically about their dealings with FTX. Silvergate was already in trouble, right, from those letters and the market downturn. Yeah, they were. And then this investigation, it was like, okay, we're really going to make an example out of you. And that policy statement the Fed released, did that just fade away?

Nope. February 7th, it was entered into the Federal Register, which, you know, basically makes it a rule. Ah, so now it's official. And what's interesting is this happened without the usual public comment, period. So not very transparent. Not really. And then just to add to it all, February 13th, the New York Department of Financial Services, they ordered Paxos to stop issuing the BUSD stable coin.

BUSD. That was a big one. Huge. So by mid-February, things were looking pretty bleak for crypto companies in the U.S. Yeah, it sounds like it. We've got a lot more to unpack here, though. Like, who are the key players driving all this? and how did the crypto industry fight back?

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what they have available to you. So thanks once again to Ledger for sponsoring the show. All right. So we left off with the crypto industry facing basically a coordinated attack on their access to banking. Yeah, pretty much. And like we were saying, some companies were already feeling the heat, especially institutions like Silvergate and signature. Silvergate especially seems like they were hit from all sides. Yeah, definitely. You know, they were already dealing with the fallout from FTX and those critical letters from the senators. And then, boom, a DOJ investigation. Exactly.

And remember, they were already struggling because of their investments in bonds that lost value when interest rates rose. Oh, right, right. So it wasn't just the regulatory pressure. It was a perfect storm. They had those bad investments. Then the FTX collapsed, spooked everyone. And then regulators piled on with the investigation. So people started pulling their money out.

Exactly. Classic bank run. And in March, 23, they announced they were liquidating. So a big casualty of this whole choke point 2.0 situation. What about Signature? Their collapse seemed even more sudden. Oh, yeah, signature. They were seized by regulators just days after Silicon Valley Bank went under. That was a crazy week I remember. It was. And Signatures collapsed. That was the third largest bank failure in U.S. history. Huge.

And there was a lot of speculation about why they were targeted. Right. A lot of people thought it was because of their crypto dealings. In fact, Barney Frank, who was on Signature's board, he said publicly that he thought regulators were sending a message by shutting them down. So basically punishing them for being involved with crypto. That was the perception. And remember, this is all happening really fast. The whole industry is freaking out. No one knows who's next. Right.

So much uncertainty. And what about those companies that were specifically trying to bridge the gap between crypto and traditional finance? Like custodia. Yeah. Custodia is a really interesting case. They spent two years trying to get a Fedmaster account. Which would have given them direct access to the Fed's payment systems. Right.

And in January, 2023, they were denied. It was a huge blow. Basically, the Fed said, nope, we don't want crypto banks in our system. They fought back, though, right, with a lawsuit. Oh, yeah, they sued the Fed, challenged the denial, said it was unfair, and that the Fed didn't have the authority to do that. That case is still ongoing, isn't it? Yeah, and it's a big one to watch. It could have major implications for the future of crypto banking in the U.S. But Custodia wasn't the only one fighting back. The whole crypto industry pushed back against this crackdown. So it wasn't just companies

quietly accepting these restrictions. No way. They fought back on multiple fronts, congressional hearings, lawsuits, FOIA requests. It was a full-on battle for transparency and accountability. Okay, let's break that down.

Let's start with the congressional hearings. What happened there? Well, the Republicans took control of the House in January 2023, and they immediately started holding hearings on Operation Chokepoint 2.0. Specifically on that? Yeah.

They brought in people from the industry, lawyers, even former regulators to testify. It was a way to put pressure on the regulators and get them to explain their actions. Were these hearings effective? Oh, yeah. They were really important. First, they gave the crypto industry a platform to voice their concerns. And second, it gave lawmakers the opportunity to question regulators directly, to hold their feet to the fire. And these were televised, right? So it became a much bigger public issue. Exactly. And then there were the letters that lawmakers sent to regulators demanding and answers and explanations.

I remember Congressman Emmer was really vocal about this. Oh, yeah. He and Senator Loomis, they were relentless. Emmer sent a really strong letter to the FDIC, asking if they were telling banks to cut off crypto clients, gave them a deadline to respond. It was a power move. So Congress was really starting to flex its muscles. Yeah.

And then there were the FOIA requests. Remind me, what are those again? FOIA, the Freedom of Information Act. It allows anyone to request government documents. So Coinbase, the big crypto exchange, they find. filed a bunch of FOIA requests to get information on what regulators were telling banks about crypto. Trying to get that paper trail. Yep. And at first, the regulators dragged their feet and a lot of the documents they released

were blacked out. But Coinbase kept pushing back. And eventually, a judge ordered the FDIC to release more documents. And what did those documents reveal? Well, they showed a pattern of the regulators basically making it as difficult as possible for banks to work with crypto companies, slowing down approvals, raising the bar for everything, and just generally creating a hostile environment. Wow. So a lot more transparency thanks to those FOIA requests. So we've got Congress holding hearings, sending letters, and FOIA requests forcing regulators to be more open. It sounds like a multi-pronged attack. It was. And on top of all that, the crypto industry itself was adapting and finding ways to work around these restrictions. So they weren't just fighting back. They were finding ways to survive. Exactly. They had to get creative.

Some companies started moving their funds to smaller banks or even international banks that were more open to working with crypto. Diversifying their risk, basically. Yeah, exactly. And some even explored buying banks or starting their own, taking matters into their own hands. Wow, that's bold. What else? They also started looking at alternative financial systems, things that didn't rely on traditional banks. Like stable coins, crypto to fiat conversions, peer-to-peer networks.

It was like they were building a parallel system. So they were adapting and innovating out of necessity. But all this fighting back, adapting, it seems like it ultimately led to a push for more formal legislation. Right. Absolutely. A lot of lawmakers realized that the best way to protect the crypto industry and foster innovation was to actually have clear rules.

Get rid of all this vague guidance and behind the scenes pressure. So codify it into law. What were some of the key legislative efforts? There were a bunch of bills introduced. One of the biggest ones was the Staplecoin bill led by Congressman. McHenry. This bill was trying to create a federal framework for stable coins, clear rules for everyone. That seems like a good step. Was it bipartisan? Yeah, it was. And that was a big deal. It showed that there was growing support for crypto in both parties. There was also the Loomis

Gillibrand bill, which was a much broader attempt to create a regulatory framework for the whole crypto industry. Right. That one was huge, even though it didn't pass in the end. Yeah, but it laid the groundwork for future efforts. It was a sign that the conversation was evolving. And then there was Biden's executive order in March 22. Oh, yeah, that was a big one. It seemed like a much more balanced approach compared to what was happening before. Definitely. It basically directed all the different federal agencies to coordinate their efforts on

crypto, to explore central bank digital currency, and to focus on consumer protection and financial stability. It signaled a shift in the White House's stance. So it sounds like while the crypto industry was fighting back and adapting, they were also working with lawmakers to try to create a more stable and predictable regulatory environment. Exactly. It was a multi-pronged effort. And while there were definitely setbacks, there were also some important victories. It was a perpulent time, but it ultimately led to some positive changes. Okay, so we've seen how the crypto industry fought back against this so-called Operation Chokepoint 2.0.

They adapted, they pushed for legislation. Things seemed to be moving in a, well, maybe a better direction. But what about the long-term impact? Did this whole Sonduct? hurt crypto in the U.S. for good. Well, it's hard to say for sure, but there's no doubt that those events, you know, back in 2022, early 2023, definitely had a chilling effect. Like we talked about, companies had to move operations overseas, find different banks to work with, some even started building their own financial systems. It really seemed like the U.S. was pushing innovation away.

Yeah, there was definitely a sense that the U.S. was losing its edge, you know, not just companies leaving, but also talent, investment, all flowing to places that were friendlier to crypto. So geographically, innovation shifted. But you said it's hard to say for sure about the long-term impact. Did anything good come out of all this? Yeah, actually, there were some positive outcomes. One of the biggest was that it forced everyone to get serious about regulation. Because before, it was all kind of haphazard. Informal pressure, vague guidance. Exactly. It was a mess. And the whole choke point 2.0 thing, it was like a wake-up call. Lawmakers realized, okay, we need clear rules for crypto. So the industry pushes back. Some lawmakers

get on board, and suddenly the conversation changes. It's not about whether to regulate. It's about how to regulate. Did that actually lead to any breakers, though? Yeah, definitely. There was a wave of new bills trying to address different parts of the crypto ecosystem, like stable coins, exchanges, you name it. The Limousgillabrand Responsible Financial Innovation Act, that was a big one. I remember that, a bipartisan bill. Pretty ambitious, tried to create a whole framework for digital assets. It was. And even though it didn't pass, it should. showed that both parties could agree on some things when it came to crypto. And it laid the groundwork for future bills.

So it wasn't a total failure. No, not at all. And then you had Biden's executive order in March 2022. That was a big moment. Huge. It signaled a more, you know, thoughtful, strategic approach from the White House. Right. It told all the agencies to work together on crypto, to look into a central bank digital

currency, to really focus on protecting consumers. Exactly. It was a much more balanced approach. And did that change things? I mean, did regulators start acting differently? Yeah, they did. They were more willing to actually talk to the crypto industry to get their input. So that whole adversarial thing, the whole choke point 2.0 vibe, it started to fade away. Yeah, it did. There was more focus on finding common ground, having a real dialogue.

Okay, so maybe choke point 2.0, even though it was messy and disruptive, maybe it pushed things in the right direction in the end. I think so. It forced both sides, the crypto industry and the government, to really confront this new technology and figure out how to deal with it. But of course, there are still challenges, right? It's not like everything's perfect now. Oh, definitely not. I mean, the regulatory landscape is still changing all the time. There are new bills, legal challenges, and the technology itself is always evolving. It's a really dynamic space.

What are some of the big issues that are still being debated? Well, one of the toughest things is finding that balance. How do we encourage innovation but also protect people? Because crypto is still new, right? And there are risks, scams, fraud, all that. Exactly. And then there's the question of how to. to integrate crypto into the existing financial system without, you know, causing a whole new set of

problems. Right, like systemic risk. And then there are all the broader societal questions, privacy, financial inclusion, even national security. Yeah, there's a lot to consider. And that's why it's so important to have that ongoing conversation between the industry, policymakers, and the public. So where do we go from here? What's next for crypto in the U.S.? Honestly, it's impossible to say for sure. But I do think there's reason to be optimistic that crypto industry has shown that It can adapt. It can innovate. And policymakers seem to be, you know, more open to working with them now. It's not just about shutting it down anymore. Exactly. Now it's about figuring out how to make it work, how to harness its potential.

Well, that's a much better place to be. It sounds like we're entering a new chapter. One that's less about fighting and more about finding solutions together. I think so, yeah. There will be challenges for sure. But I think we can create a future where crypto is a positive force in our economy and in society as a whole. That's a great note to end on. Thanks for taking us on this deep dive into Operation chokepoint 2.0. I know I learned a lot. My pleasure. And remember, everyone, the crypto world is constantly changing.

So stay curious, stay informed, and keep diving deep.