Cooper & Kirk Break Down ‘Operation Choke-Point 2.0’

There are concerns that the Biden administration and federal regulators are using various means to cut off the cryptocurrency industry from banking services, a move that some have dubbed “Choke Point 2.0.” And while US officials deny that there is a coordinated agenda to cut off crypto businesses from banks, there is growing evidence that they are in the crosshairs.

Former regulators, including Brian Brooks, former head of the Office of the Comptroller of the Currency (OCC), have claimed that banks have been singled out for closure for serving cryptocurrency customers, even though there is no legislation authorizing such action.

Moreover, a new report by the White House Council of Economic Advisers confirms the negative sentiment toward crypto in the executive branch, which has led to a wave of bank shutdowns that some believe were triggered not just by financial stability concerns but also by the broader push to strangle crypto businesses.

However, critics have claimed that the Federal Deposit Insurance Corporation (FDIC) is not just actively pursuing an anti-crypto agenda but also lying to the public about it, which could lead to another wave of official and legal backlash.

While the crackdown on crypto may be politically expedient, it is economically fraught. The recent wave of crypto frauds and collapses, including the alleged crimes of Sam Bankman-Fried (SBF) and his FTX associates, has made crypto an easy target. But at the same time, rapid interest rate rises in response to inflation have fueled broad anxiety about the banking sector, which may have been compounded by the moves to target crypto.

In particular, Silvergate Bank's collapse under regulatory pressure and attacks from Sen. Elizabeth Warren (D-Mass.) may have primed fears that then led to a run on Silicon Valley Bank (SVB), which in turn fueled even broader fears.

However, attempting to de-bank legal and regulated crypto companies in the US would not have addressed offshore frauds that have contributed to the political support for the crackdown.

The same offshoring effect seems poised to continue as users are pushed away from the U.S.-regulated and broadly trusted stablecoins towards unregulated offshore services whose stability is an eternally open question. The crackdown already has unintended consequences that don't particularly make Americans safer.

Understanding Operation Choke Point 2.0

To help the crypto industry and others understand regulators' nefarious plans for crypto, the Washington DC law firm Cooper & Kirk has released a white paper called “Operation Choke Point 2.0: The Federal Bank Regulators Come For Crypto.”

The document details evidence that the FDIC, the Federal Reserve Board, and the OCC are, in fact, engaging in a clandestine financial war against the cryptocurrency industry.

According to the report, federal regulators are employing the same regulatory tools and pressure tactics utilized during Operation Choke Point. For those that haven't heard of this term, this previous Obama-era initiative sought to disconnect payday lenders, pawn shops, tobacco stores, and other politically controversial businesses from the modern financial system.

The banking agencies have put out informal guidance documents that characterize cryptocurrency customers as posing a heightened risk to banks. Businesses in the crypto industry are losing their bank accounts or access to the ACH network, often without explanation from their bankers. Owners and employees of cryptocurrency firms also have their personal accounts closed without any justification.

Recently, federal regulators effectively shut down a bank known to be serving the crypto industry. The FDIC, which is required to resolve banks through the “least cost resolution” to the Deposit Insurance Fund, chose to shutter rather than sell the part of the bank that serves crypto customers, costing the Fund billions of dollars. This series of events is not random and has been seen before.

The paper noted that federal bank regulators, in collaboration with their State-level counterparts, have previously used their supervisory authority to label certain businesses as unworthy of having a bank account and have worked in secret to purge disfavored lines of commerce from the financial system.

This practice was first observed in 2012 when the FDIC, the OCC, and the Board of Governors of the Fed carried out a coordinated campaign known as “Operation Choke Point.” The aim was to use banks against industries that had fallen out of favor with the administration.

At the time, Cooper & Kirk successfully sued these agencies over the original Operation Choke Point. They believe that the same tactics are being deployed again, this time against crypto.

However, the recent targeting of cryptocurrency businesses, as such, is not a new phenomenon but a continuation of a broader trend. The regulatory landscape for the cryptocurrency industry is evolving rapidly, and businesses operating in this space need to be aware of the potential risks and take steps to mitigate them, it said in the paper.

David H. Thompson, an attorney at Cooper & Kirk and lead author of the white paper, has also called on Congress to hold the federal banking regulators accountable and ensure that this new Operation Choke Point is exposed and brought to an immediate halt.

Backroom War Against Crypto Unlawful & Unconstitutional

The recent crackdown by bank regulators on the cryptocurrency industry faces legal challenges similar to those that ended Operation Choke Point in 2012. The coordinated campaign, dubbed Operation Choke Point 2.0, has deprived businesses of their constitutional rights to due process and violated the non-delegation and anti-commandeering doctrines.

Not only that, but the bank regulators have also exceeded their statutory authority by appointing themselves as gatekeepers of the financial system and the ultimate arbiters of American innovation and economic life.

Cooper & Kirk argued in the paper that the agencies' backroom war against crypto is unlawful, unconstitutional, arbitrary, and capricious. It highlights several reasons to support this argument.

The law firm stated that Operation Choke Point 2.0 is unconstitutional because it violates the Due Process Clause of the Fifth Amendment. Pressuring banks to drop or refuse to accept crypto customers violates the fundamental protections of the Due Process Clause.

The government's defamation of a person or entity may not violate due process on its own, but due process is implicated when such defamation causes an adverse impact on one's liberty or property rights.

They also suggest that Operation Choke Point 2.0 may violate structural constitutional protections, particularly the non-delegation doctrine. And if regulators have adopted and enforced a policy that deems the crypto industry too risky to be banked, they have exercised legislative power that violates the non-delegation doctrine.

Moreover, the regulators are acting arbitrarily and capriciously by failing to explain their decisions, engage in reasoned decision-making, and treat cases alike. They are also evading the notice and comment rulemaking requirements of the administrative procedure act by imposing binding requirements on the banking industry through informal guidance documents.

This undemocratic action deprives the public of the right to comment on proposed rules and goes against the principle of judicial review, as courts lack the power to review “informal” agency actions.

Furthermore, the firm asserts that federal bank regulators are failing to perform their statutory duties. The federal prudential bank regulators have the responsibility of ensuring that law-abiding Americans can access banks that are secure and reliable by enforcing adequate standards, practices, and procedures for managing risk within the banks themselves. However, regulators are making day-to-day business decisions for the banks by coercing them to stop doing business with specific lawful industries.

The bank regulators are actually refusing to perform their non-discretionary duties when it benefits the cryptocurrency industry. State banks entitled to access the federal reserve system are being denied their rights solely because they serve the crypto industry. This action is not permissible, and federal bank regulators cannot pick and choose which statutory obligations they wish to perform.

But this is not all. The federal bank regulators are also exceeding their statutory authority. By seeking to coerce banks to stop doing business with specific lawful industries, the regulators have gone beyond their statutory authority to ensure that banks manage risk.

This abuse is all the more striking because the regulators are effectively leveraging their statutory authority over the banks to set economic and technology policies for the United States economy as a whole. It said that the regulators of the nation's banks have no warrant to unilaterally wall off the American economy from these emerging changes.

This all shows that the recent regulatory overreach against the cryptocurrency industry is illegal for various reasons, similar to the previous regulatory abuse against gun stores, pawn shops, tobacco stores, payday lenders, and other brick-and-mortar businesses under Operation Choke Point.

Now, the legal challenges aimed at Operation Choke Point 2.0 underscore the significance of safeguarding constitutional protections against the arbitrary use of governmental authority.

Congress Needs to Step up & Perform its Duty

Cooper & Kirk argued in their white paper that it is imperative for Congress to take action and hold federal bank regulators accountable for their actions in the crypto industry.

In section IV of this paper, the firm proposes several steps that Congress should take to obtain answers and ensure the regulators act within their authority and comply with the Constitution.

Firstly, Congress should demand that the bank regulators produce their communications with supervised financial institutions and state regulatory agencies regarding the denial or regulation of access to the financial system by crypto businesses and banks that serve the crypto industry, it said.

This would shed light on the regulators' actions and their decision-making process. Also, it would give those businesses that federal regulators label as risky or unsound an opportunity to respond to charges and defend themselves.

Secondly, Congress is recommended to require the federal bank regulatory agencies to explain why they believe that the safety and soundness of the financial system require the insulation of banks from blockchain technology, customers who operate in the crypto space, and state-chartered depository institutions that currently serve those customers.

Understanding the regulators' rationale and basis for their conclusions is crucial. Also, the agencies must explain if their obsessive focus on campaigning against crypto diverted their resources away from the systemic risks growing in the financial system and contributed to the current loss of confidence in the banking system, the document added.

The law firm stated that Congress should clarify to the federal bank regulators and all federal agencies that the notice and comment rulemaking requirements of the Administrative Procedure Act are not optional. These requirements are not obstacles to be evaded by the use of informal guidance documents. The regulators must follow the law and engage in a transparent rulemaking process.

Congress should also investigate the role of federal regulators in the New York Department of Financial Supervision's decision to shutter Signature Bank and to determine the FDIC's role in excluding those who were interested in acquiring Signature's digital asset businesses from the bidding process, it said.

This would ensure that the regulators are acting within their authority and not overstepping their bounds. The law firm also suggested Congress have the bank regulatory agencies explain why First Republic Bank and PacWest, which had no exposure to crypto- but were in a worse financial position than Signature, were given an opportunity to save themselves, while Signature was given neither time nor opportunity to seek needed liquidity.

At last, Cooper & Kirk wants Congress to investigate whether the bank regulators are acting to stifle private sector innovation in order to clear the field of competition for the benefit of existing federally regulated banks or for a federal cryptocurrency alternative. It is crucial to ensure that the regulators are not abusing their power to eliminate competition in the market, said the firm.

Operation Choke Point 2.0 is clearly defaming participants in the crypto industry and causing an adverse impact on property rights. This attempt to strangle the entire crypto industry may also violate the non-delegation doctrine, as regulators have acted as the judge, jury, and executioner of American businesses without showing that Congress delegated them the authority to adopt this anti-crypto policy.

The federal bank regulators' attempts to destroy the crypto industry through Operation Choke Point 2.0 are not only concerning but unlawful and unconstitutional, and their abuse of their statutory authority and failure to perform their duties only serve to exacerbate the problem.

Regulators play a crucial role in shaping the American economy, but they must be held accountable for their actions and avoid stifling growth and innovation. According to Cooper & Kirk's white paper, Congress must step in to ensure regulators act within their authority and comply with the Constitution.

By keeping regulators in check, we can mend emerging fissures in the US financial system and foster a fair, competitive market for everyone.