The Breakdown - The Suspicious Denial of Protego Trust: New York Magazine Finds Evidence of Operation Choke Point 2.0

Episode Date: May 2, 2023

Operation Choke Point 2.0 refers to the idea that there has been coordinated action by bank regulators to try to force crypto out of the system - something which the current administration strenuously denies. New York Magazine recently found more evidence than they might have believed for the effort. Enjoying this content? SUBSCRIBE to the Podcast: https://pod.link/1438693620 Watch on YouTube: https://www.youtube.com/nathanielwhittemorecrypto Subscribeto 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 “The Breakdown” is written, produced and hosted by Nathaniel Whittemore aka NLW. Research is by Scott Hill. Editing is by Rob Mitchell and Kyle Barbour-Hoffman. Our theme music is “Countdown” by Neon Beach.

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 Tuesday, May 2nd, and today we're talking about the latest in Operation Chokepoint 2.0. New evidence is here. A few quick notes before we dive in. First, if you were enjoying the breakdown, I would so appreciate it if you would leave a five-star rating or review. Second, if you're really enjoying the breakdown, I would love it if you would join our community. The Breakers Discord is a great place to talk about all things Bitcoin, crypto, macro, you name it.

Bit.ly slash breakdown pod. Third, now that the Breakdown Network is up and running, we will be out recruiting aligned sponsors again. If you're interested in sponsoring the show, shoot me an email at sponsors at breakdown.network. And for those of you dreading hateful ads, I promise there will be ad-free versions available. But with that, let's shift to our story today, and it is a bombshell. Last night, Jen Vietchner from New York Magazine, dropped a story all about Operation Chokepoint 2.0. And while some have commented that they were surprised that this particular piece appeared in New York Magazine, they clearly haven't been following Jen.

Jen has been covering crypto for more than six years now for numerous publications and has a very good read on the industry. She also went to Northwestern as an undergrad, so obviously, you know she has game. Anyway, we'll come back to Jen's story in a moment, but we have to move a bit farther back. I don't think that any of you listening to the show right now won't be familiar with the idea of Operation Chokepoint 2.0. Operation Choke Point was an Obama era program that basically used political pressure to block unwanted or unloved industries out of banking access. So it was things like payday loans or gambling or pornography, right? That program was eventually halted during the Trump administration, but the seeds of it clearly remained. In fact, one of the people

in charge of architecting Operation Chokepoint 1.0 would go on to become the head of the FDIC under Biden. There has been a strong suspicion among the crypto crowd that ever since the collapse of FTCS, there has been a largely coordinated push to block out legal crypto businesses from having access to the banking industry. It has at times seemed very transparent, and has at other times just been reflected in what feels like impossible to ignore coordinated actions. Well, trying to get a little bit more information about how real this thing is, on March 16th, Jake Chirvinsky, the chief policy officer at the Blockchain Association, wrote, Today, Blockchain Association sent Freedom of Information Act request to the Fed, FDIC, and OCC demanding information about the unlawful debanking of crypto

companies. We're also collecting evidence of debanking. Here's the situation. There are troubling reports of crypto companies having their bank accounts closed, often with no notice and no explanation. They've struggled to open new accounts, too. This disturbing trend suggests that regulators are trying to cut crypto entirely out of the banking system. These reports are especially concerning this month after the failures of Silvergate, Silicon Valley Bank, and signature bank. Those banks had many crypto companies as customers who are now rushing to open new accounts elsewhere to make payroll and stay in business. To be clear, there is no valid reason to debank crypto companies. They're just like all other law-abiding companies that need bank accounts to operate. They hold dollars to pay rent,

salaries, and taxes. If regulators are debanking crypto companies, they're breaking the law. Yet we still don't know for sure that regulators are forcing banks to close crypto companies' accounts. If they are, it's happening covertly behind the scenes. That's why blockchain association submitted FOIA requests directly to the regulators today and is asking for your help. Here's what we know so far. On January 3rd, the banking regulators issued a joint statement highlighting key risks associated with crypto assets and crypto asset sector participants. This may have been the start of their debanking effort. On January 27th, the Fed issued a statement saying banks can't conduct, quote, crypto-related activities like issuing or holding crypto as a

principle. On February 7th, the Fed published it as a final rule, despite not following a valid rulemaking process. At the same time, the Fed denied a membership application from Caitlin Long's custodia bank. The Fed cited, quote, concerns regarding the heightened risks associated with its proposed crypto activities, even though Custodia planned to hold 108% reserves. Finally, on February 23rd, the regulators published another joint statement saying crypto companies, quote, may pose heightened liquidity risks that banks must manage. The statement stops just short of saying debank crypto, but the implication is obvious. All told, we have two months of hostile actions from the Fed, FDIC, and OCC, suggesting an effort to choke crypto off from the banking system. In addition to the

regulators' own statements, we've heard many other reports about debanking from Congress and in the media. On March 9th, Senator Haggerty plus Senators Mike Crapo, Senator Tom Tillis, and Senator Steve Daines sent a letter to regulators saying, it appears that the desired outcome from the banking regulators is the debanking of the crypto industry in America. On March 12th, signature bank was seized by the New York Department of Financial Services and turned over to the FDIC, even though board member and former representative Barney Frank said the bank was still solvent. He said regulators, quote, just wanted to send a message to get people away from crypto. Frank wondered if signature was the first bank to be closed when nobody, including the regulators,

said it was insolvent. Quote, that's why I speculate that using us as a poster child to say stay away from crypto was the reason, he said. Yesterday on March 15th, we received three more disturbing reports. First, GOP Majority Whip Tom Emmer sent a letter to the FDIC, calling out the regulators, quote, demonstrated effort to choke off digital assets from the United States financial system. Second, Brian Brooks shared his view that, quote, there has been a decision across the bank regulatory

agencies that crypto is inherently risky and needs to be extricated from the banking system. He would know he used to run the OCC. Third, Reuters reported that, according to two sources, the FDIC is imposing an absurd condition on bidders in the auction they're holding for signature bank. Any buyer of signature must agree to give up all the crypto business at the bank. Make no mistake, debanking the crypto industry is illegal. The regulators have said in all of their statements that banks are, quote, neither prohibited nor discouraged from providing banking services to customers of any specific

class or type. We want to know if that's true. So we sent FOIA requests to the Fed, FDIC, and OCC demanding certain documents related to the debanking of crypto companies. For example, we ask about instructions to banks to close accounts, coordination among the regulators, the closure of signature bank. It can take a long time to get responses to FOIA requests, but we'll pursue them aggressively and we'll share what we can as soon as we're able. Now Jake then goes on to ask for people who have been affected by this directly, by the debanking, whether they've had a bank account closed or tried to open a new account and were refused, to email the blockchain association to give that evidence.

Now, it's one thing for the crypto industry to make these accusations, even though there's a plethora of evidence. It's another thing beyond that for allies and Congress and the Senate to make those accusations or at least be asking those questions. But in spite of all this, it's still been tempting for people to write it off as not real. Nick Carter, who came up with the term Operation Choke Point 2.0, has been ridiculed for spouting conspiracy theories. And I think many folks have tried to give regulators the benefit of the doubt, saying that maybe this isn't some big coordinated action,

but just a few bureaucrats who really hate crypto being able to have their way, given the general anti-crypto sentiment floating around. Well, that gets us back to Jen Vietchner's piece for New York Magazine. Last night, Jen tweeted, I spent a few weeks asking people in crypto and the government whether Operation Chokepoint 2.0 is real. I found several troubling cases and sources who believe this is more than a conspiracy theory. The never-before-told story of how Protigo Trust was denied a national charter after receiving conditional approval is among the most glaring. Protigo lined up 100 million in required funding and completed all Office of the Comptroller of the Currency requirements.

but the OCC denied it because the dollars weren't physically in the bank. Past practice at the OCC, as Protigo well knew, with former comptroller of the currency Brian Brooks on its board, was that the dollars just needed to be wired in four days before the bank opened, which happens after it's approved. Was there a new unwritten rule? The Pretigo CEO told me, in the end it feels like there was an unannounced and unexplained policy change that derailed our efforts. I asked a former regulator how the denial of crypto companies looked and they said, it sure seems like the OCC really doesn't want to approve these applicants. There's a lot of discretion inherent in that licensing process. If they're looking

for a certain outcome, there are ways to get there. I reached out to five regulatory agencies, the OCC, the Fed, FDIC, New York Department of Financial Services, and the SEC to ask them about Operation Chokepoint 2.0. A White House spokesperson said the allegations were, quote, categorically false. Another administration official called much of it coincidences and timing. But many regulators pointed back to the January joint statement by the Fed, FDIC, and OCC, which in and of itself is a coordinated anti-crypto initiative. It says crypto activities are, quote, highly likely to be inconsistent with safe and sound banking practices. That statement alone, which crypto fiercely contests, may give regulators enough cover to box out crypto from much of the banking system without

any other secret or condescentine choke point operations. All right, so giving a little bit more color, especially digging into this story of Protigo Trust. So Protigo had been operating a squeaky, clean crypto custody trading and lending business, exclusively servicing investing firms, and we're really, really trying to play by the U.S.'s rules. Founder Greg Gilman said, we courted regulation, we did everything that was required in order to build a pristine financial institution to serve the most discerning institutional clients. Now, after a lengthy compliance process where Protigo jumped through all the required hoops during its conditional approval, the firm approvals the OCC for its final approval in February, only to be denied on this technicality that the

regulator hadn't previously mentioned, which was this idea that they had to have the money in the bank, not just lined up, even though that hadn't been the case for previous applicants. Now, Protigo subsequently laid off most of its staff and appears to have no future to speak of. One anonymous former official noted how unusual the process that Protigo went through was. Generally speaking, they said, once you get your conditional approval to open, it's kind of a glide path. Another former regulator said, it's different from the original choke point in that they are being pretty public about it. Nobody's guessing their views. Another difference is that it's actually broader in scope. Now, one of the challenges, and one of the most insidious things about this,

is that by refusing to acknowledge any official or coordinated action, there's no room left for due process or constitutional legal challenge, or at least very little. That same White House official that called the accusations of coordinated action categorically false said, this administration supports responsible technology innovations that make financial services cheaper, faster, safer, and more accessible. We've also been outspoken about the need for congressional action to address the risks posed by cryptocurrencies to the financial system and the American people. Now, officials from the OCC refused to comment, and the FDIC simply pointed to that joint guidance from earlier that year. Now, one potential explanation is that this is simply what happens when regulators are caught between an industry that demonstrated an aptitude for rampant fraud last year, and a lawmaking body that appears unable to pass the required and requested legislation.

Speaking at Consensus last week, the founder and CEO of Cryptobanking firm BCB Group, Oliver von Lansberg Sadie said, I think chokepoint is the SEC's chemotherapy for a giant gap for a 14 billion Ponzi cancer and healthy legitimate organs like Custodia Bank are getting hit. It was a tragedy to see what happened, in this case a good actor, Custodia, getting the short end of the stick of a massive crime, that the SEC was right to attempt to address. Others are not so sure. that this is the correct explanation, charitable though it may be. Also speaking at consensus, blockchain association's CEO, Kristen Smith, said, we are absolutely at war. Smith singled out SEC Chairman Gary Gensler and Senator Elizabeth Warren, along with her anti-crypto army,

as the major antagonists. Now, giving a spark of hope, Smith also noted that there is a pro-crypto army building in the capital, which are fighting, quote, in Washington every day for the industry. Speaking on the recent news that Senator Warren couldn't find sufficient support for her latest anti-crypto bill to get off the ground, Smith said, quote, there's a reason that Elizabeth Warren has stalled her bill. That's because she lost co-sponsors, and that was because of the lobbying effort and education effort that went on from the pro-crypto groups. When asked how long we'll be in the trenches, Smith said, I don't think this is a war that lasts forever, but we're probably going to be at war for the next 18 to 20 months. By my calculations, that puts us right around next presidential

election season. Now, I've said this in various ways and forms at different times. My general feeling, is that it's not even opaque this time. There are a set of legislators and regulators in and out of this administration that are avaledly against crypto. They don't want it to exist, and they will use whatever means necessary to get there, including denying access to the banking system. In the wake of the collapse of FTX, that group has been emboldened. And what's more, the people in the middle, who don't really care one way or another about crypto or just don't want it to be their problem, haven't been willing to throw their bodies in front of those antagonists to slow them down. It doesn't take much for an inherently conservative institution like the banking industry to read the tea leaves that this is more trouble than it's worth.

Now add on top of that the fact that the banking industry is in its own sort of turmoil, and reliant on the Fed and other government institutions to survive and stay liquid, there is even more pressure to kow to whatever the party line is. And frankly, it doesn't have to be consensus that crypto is unfavored for banks to say, I just don't want to deal with it one way or another. To put it differently, when one hand is choking you, it doesn't matter if the other hand isn't choking you. All that matters is that the other hand isn't trying to drag off the hand that is choking you. You're still getting choked. Now, I do think there is room for optimism. As much as a lot of these congressional hearings are sort of farcical, there's certainly a reflection of the fact that there is a large contingent of elected officials who aren't willing to let crypto go down without a fight, who are striving for better, clearer, simpler rules. While the U.S. doesn't really care what other people in the world do, I do think that the fact that Europe has put together legislation that, while imperfect, now exists, puts pressure on the U.S. system to at least do something, something simple, something reasonable, something common sense.

The fact that you're seeing Republicans assert themselves and just push forward their version of a stable coin bill, the one that Democrats rejected last year, puts them on the offensive, making opponents look like the ones who are holding things up. Now, of course, the challenge that we have is that election season is coming. And I think it's pretty well clear that the lines have been drawn for this election season, and not a lot of additional work is likely to get done. Maybe I'm being a little pessimistic. It isn't, after all, election year yet. But my hope for now is that we have some small, simple legislative wins, like a stable coin bill, that can galvanize action coming into this election cycle,

that can lead to a return of bipartisanship common-common-sense approaches to regulation in the next administration, whoever it may be. Is that a fool's hope? Totally possible. But it's all we got right now. Anyways, guys, that is the story from where I'm sitting. Thanks for listening as always, and until tomorrow, be safe and take care of each other. Peace.