Cryptocurrency firms are struggling to find new banking partners following the closure of three of the largest crypto-friendly banks in the U.S. Stakeholders and market watchers tell Forkast that this may be the result of a coordinated regulatory effort to unbank the industry.
The theory, or “Operation Choke Point 2.0,” a term coined by Nic Carter, a general partner at Castle Island Ventures, suggests that regulatory actions against Silvergate Bank, Silicon Valley Bank (SVB) and Signature Bank are part of a wider strategy to unbank the crypto industry. Washington-based law firm Cooper & Kirk supported Carter’s claims in a recent white paper. The law firm litigated the U.S. Justice Department’s original Operation Choke Point initiative that started in 2013 as a coordinated effort to weaponize the banking industry against unfavorable industries such as gun stores, payday lenders and tobacco stores.
Adrienne Harris, superintendent of the New York Department of Financial Services, has dismissed the theory as “ludicrous,” but some industry participants are concerned about the impact of the regulatory crackdown on crypto.
Harris’ remarks came nearly a month after Signature Bank, the largest surviving crypto-focused bank in the U.S., was shut by regulators over what they called a “systemic bank failure,” a few days after the collapse of SVB and Silvergate.
“The shutdown of Signature Bank, despite its solvency and relatively low levels of unrealized losses, raises questions about the motivations behind the regulatory action. The decision to shut down the bank could be interpreted as a message to discourage people from participating in the crypto industry,” wrote Luke Lombe, a core developer at Spool, a decentralized finance application for yield generation.
The U.S. wing of Binance, the world’s largest crypto exchange, has struggled to find banking partners to serve as fiat on-ramps since the shutdown of Signature Bank. Some USD deposit services have been temporarily halted since April 2, due to Binance.US “transitioning to new banking and payment service providers.”
“Regulators don’t like crypto and even the word decentralization makes them nervous, however, they’re not stupid — they’ll know that no amount of opaque legalese and strongarming will make crypto go away,” Vadim Yarmak, the chief executive officer of blockchain marketing firm PRMR said to Forkast. “The short-term goal is to keep crypto out of traditional banks so that that the idea of crypto doesn’t become normalized.”
Signature Bank: Why did regulators shut a solvent financial institution?
Among the shutdowns of the three banks, Signature Bank’s was the most controversial, according to Carter, as it was still honoring withdrawal requests and had less unrealized losses than many other banks.
“It appears that these banks, especially Signature, were the victims of an opportunistic campaign to decapitate banks serving the crypto industry. Not only was the bank run opportunistically exploited by regulators to shut down Signature, but it may even trace its origins to Choke Point 2.0,” wrote Carter in a March 23 blog post
According to former congressman and Signature Bank board member, Barney Frank, the bank’s closure meant that “regulators wanted to send a very strong anti-crypto message.”
“The statement by Frank marries with the data,” Jamie Douglas Coutts, a senior market structure analyst at Bloomberg Intelligence, wrote in a research note shared with Forkast. “Based on the last reported numbers, unrealized losses from held-to-maturity assets for Signature Bank were 27.4% of book value, below the average for the S&P 500 banks industry group at 36.6%.”
US Authorities to Slow Crypto Expansion?
Macro investor Luke Gromen says it US authorities are likely attempting to control the price of Bitcoin (BTC) ahead of the possibility of hyperinflation.
In an interview with Peter McCormack on the What Bitcoin Did podcast, the founder of investment research firm Forest for the Trees says that the US authorities don’t want assets like Bitcoin or gold to go up as it could hurt confidence in their economic policies.
“[US authorities] don’t want things going up that make [them] look bad. If the stock market goes up a ton, there’s not going to be any Americans going, ‘You guys are terrible’. The stock market’s up 100% a year for three years, people will love that. They won’t ask a lot of questions. If Bitcoin goes up 500% a year for three years or if gold goes up 200% a year for three years there start to be more questions.”
Ahead of a possible rise in inflation, Groman says the US may be attempting to curtail the use of crypto in a coordinated attack on digital currencies that many refer to as “Choke Point 2.0,” or a series of unreasonable regulatory enforcement actions on the space.
“They need to inflate away and by delaying the inflating away as much as they already have, they’re increasing the odds they need to do a really compressed period [of inflation]. And then I look at Operation Choke Point 2.0… Gosh, it sure looks like they’re trying to chain the theater doors before they light the joint on fire.
…They are starting to see the inevitability of where policy is going to have to go which is a compressed period of high rates of inflation and I don’t know if that’s 100 (% inflation) or if that’s 20. For me a 100 a year is still a tail risk, but that tail has gotten meaningfully fatter over the last two, three years.
For me, Choke Point 2.0, within this, starts to look like a capital control of an asset class that certain elements of the government would not want going up as a result of what they’re doing or what they’re going to do.”
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