Operation Choke Point may be the most infamous example of the U.S. government using its weight to pressure the financial system in recent history. The operation was thought to have ended with the Obama administration, but now many fear that cryptocurrencies have been caught in the crosshairs of a similar effort.

For those that are unfamiliar, Operation Choke Point was a coordinated effort between the Department of Justice (DOJ), Federal Deposit Insurance Corporation (FDIC), and Office of the Comptroller of the Currency (OCC) to shut down politically controversial businesses by restricting their access to banks. As one official described it, the operation was designed to “[choke] them off from the very air they need to survive.” Certain businesses, including payday lenders, coin dealers, and gun shops, were suddenly pushed out of the banking system not for breaking the law, but for being politically disfavored.

In a recent report that broke the story of today’s saga, what some are referring to as Operation Choke Point 2.0, Nic Carter wrote,

What began as a trickle is now a flood: the U.S. government is using the banking sector to organize a sophisticated, widespread crackdown against the crypto industry. And the administration’s efforts are no secret: they’re expressed plainly in memos, regulatory guidance, and blog posts.

To be fair, and as Carter explains, the cryptocurrency industry has always had difficulty tapping into the existing banking system. However, recent events have caused some to suggest that there could be a coordinated strategy from the federal government to choke off the industry. Consider the following timeline,

  • December 6, 2022: Senators Elizabeth Warren, John Kennedy, and Roger Marshall call out Silvergate bank for providing services to FTX and Alameda.
  • December 7, 2022: Signature Bank announces shut down of cryptocurrency deposit acceptance.
  • January 3, 2023: The Federal Reserve, FDIC, and OCC release a joint statement to discourage banks from engaging with cryptocurrency due to risks to safety and soundness.
  • January 9, 2023: Metropolitan Commercial Bank announces shut down of cryptocurrency services.
  • January 27, 2023: The Federal Reserve Board denies Custodia Bank’s application to become a member of the Federal Reserve System.
  • January 27, 2023: The Federal Reserve Bank of Kansas City denies Custodia Bank’s application for a master account.
  • January 27, 2023: The Federal Reserve issues a policy statement to discourage banks from holding or issuing cryptocurrencies.
  • January 27, 2023: The White House National Economic Council issues a policy statement to discourage banks from interacting with cryptocurrency.
  • February 2, 2023: The Department of Justice announces an investigation into Silvergate bank for business with FTX and Alameda.
  • February 7, 2023: The Federal Reserve finalizes its policy statement to discourage banks from interacting with cryptocurrencies.
  • February 13, 2023: The New York Department of Financial Services orders Paxos to halt the issuance of its stablecoin, BUSD.
  • February 14, 2023: Senator Elizabeth Warren (D‑MA) labels ShapeShift, a decentralized exchange, a money-laundering haven.
  • February 16, 2023: The FDIC releases a report that notes that the FDIC has identified 136 federally insured banks that “had ongoing or planned crypto asset-related activities.”
  • February 23, 2023: The Federal Reserve, FDIC, and OCC release a joint statement to discourage banks from engaging with cryptocurrency due to risks to safety and soundness. Notably, however, the joint statement explicitly said: “Banking organizations are neither prohibited nor discouraged from providing banking services to customers of any specific class or type, as permitted by law or regulation.”
  • February 23, 2023: The Federal Reserve Board denies Custodia’s request for reconsideration. 

Reflecting on these developments at a Senate Banking Committee hearing, Senator Bill Hagerty (R‑TN) said, “In the past few weeks, there’s been a coordinated chorus of regulators talking about severing crypto from our financial system. To me, this really feels reminiscent of Operation Choke Point.”

Reminiscent is the right word. While these developments are indeed concerning, more evidence will need to be secured through Freedom of Information Act (FOIA) requests and accompanying investigations. For it could very well be that officials have merely ramped up their scrutiny due to recent events in the cryptocurrency markets. For instance, this scrutiny could be in response to complaints after FTX appeared to have defrauded its users. Or rather than going after cryptocurrency broadly, perhaps this scrutiny is an effort to save face after government officials widely accepted donations from FTX. Disentangling exactly what’s causing this escalation will be no easy matter.

Either way, there’s another issue that deserves more scrutiny here: namely, the discretionary powers of regulators. All these government actions have been justified under authorities to maintain “safety and soundness,” “financial stability,” or other vague mandates. For example, “reputational risk” has long been a focus of financial regulators. According to a 2017 bulletin from the OCC, reputational risk is the “risk to current or projected financial condition and resilience arising from negative public opinion.” Both the Federal Reserve and FDIC have made similar statements on reputational risk.

The risks of this discretion are clear. In 2022, Brian Knight explained that the discretion to regulate based on reputational risks can often result in customers losing access to the banking system without any recourse. In 2021, Norbert Michel, David Burton, and Nicolas Loris explained how the Biden administration may use this discretion to address climate change through financial regulators. And in 2020, Julie Hill explained how the benefits of regulating reputational risks are far from clear.

So whether today’s experience is in fact a coordinated operation is yet to be seen, but what’s clear is that there should be firm limits on the discretion afforded to financial regulators. Operation Choke Point may have formally ended with the Obama administration, but there were never any limits enacted to prevent it from coming back. As Brian Knight noted, “If we are serious about protecting freedom, we need to eliminate, or at least significantly reduce, the ability of financial regulation to serve as a conduit of coercion.” That starts with limiting the discretion of regulators.