Operation Choke Point 2.0
In 2014, the Wall Street Journal blew the lid off the Obama-Biden Administration’s “Operation Choke Point”, where the Department of Justice and bank regulators colluded and overreached their authority to close legal businesses that were deemed “undesirable”. They did it through pressuring banks and credit card payment processors to close the accounts of people and companies that had not violated any laws, without any proof of wrongdoing. It’s happening again today, on a much bigger scale, against legal U.S. companies that use crypto technology for their product offerings.
It was illegal then. It’s illegal now.
As I have previously written, we are still in the infant stages of cryptocurrencies and associated crypto tech. Cryptocurrencies and the underlying technology don’t neatly fit into the related – but ultimately, different – legal categories and classifications for the agencies that regulate securities, commodities, currencies and all other aspects of commerce.
Congress and the federal government should have moved a long time ago to set out a regulatory framework that addressed this, so that American innovators could know how to legally operate and consumers could be protected from harm. It didn’t happen, and that has provided an opening for a panicked Administration to launch another illegal war on American businesses they don’t like and distract the public from their own economic mismanagement.
The top generals in the war on crypto are Securities and Exchange Commission Chairman Gary Gensler and Senator Elizabeth Warren (D-MA). Only a few months ago, they were somewhat isolated in their own party, as sensible regulatory framework bills have been advanced by some of the leading lights of the Democratic left like Reps. Ritchie Torres (D-NY) and Ro Khanna (D-CA).
But the FTX fraud scandal and the failure of Silicon Valley Bank (SVB) gave Gensler and Warren the impetus to pounce. The FTX fraud was no different than a hundred other frauds, just with crypto assets in the middle rather than real estate or fake bonds. SVB made long bets on Treasury bonds that went south after the Fed raised interest rates. Neither was an indictment of crypto technology, but the headlines were just what Gensler and Warren needed to enlist a wide swath of allies to step up “Operation Choke Point 2.0”.
As detailed in a legal memo from Cooper & Kirk, the DC law firm that helped bring down the first “Choke Point”, federal banking regulators are using illegal tactics to “drive crypto businesses from the financial system” in a coordinated attack with state-based political allies. It points to the New York state forcing a solvent Signature Bank into receivership, allowing the Federal Insurance Deposit Corporation (FDIC) to require any buyers to cut off all crypto business as a condition of sale.
But banking is just the newest theater of Operation Choke Point 2.0. Gensler has been waging attacks on legal crypto companies since he took over as SEC chair in 2021. He inherited and stepped up the December 2020 lawsuit against Ripple, a software company that offers virtually cost-free cross-border settlement products to international banks using the XRP token as a bridge currency. It is a simple application of the technology to take a little friction and a lot of consumer cost out of global banking.
The SEC claims Ripple’s sales of the XRP token have been “one long unregistered securities transaction” since 2013, and that every sale of XRP on the secondary markets by people who never heard of Ripple are investment contracts in the company. No fraud was alleged, and no crime committed, but Ripple and its two top executives were sued for billions of dollars allegedly to “protect investors”. The fee-happy legacy banks where Gensler spent most of his career privately celebrated, no doubt.
The complete lack of clear rules around what makes which cryptocurrency a security or not is the hole through which Gensler has been driving his tanks. Anything can be a “Section 5 violation” in an expensive, business-destroying SEC lawsuit if the rules are whatever Gensler’s lawyers want to allege. The SEC’s goal in suing Ripple was clearly to destroy it quickly and frighten the rest of the industry with its corpse.
But the Ripple case has dragged on in the Southern District of New York for two years because the company refused to back down and had the resources to fight. In the process, the evident lack of due process and misdeeds by SEC officials have all been exposed in court. Tens of thousands of XRP token users, the people the SEC claims to be protecting, have entered the case against the agency. A summary judgment ruling is expected any day from the judge, and legal scholars think it will end up in the Supreme Court due to the SEC’s unconstitutional tactics.
It hasn’t stopped Gensler, who now has his sights on Coinbase, a crypto exchange whose stock registration his henchmen approved in 2021. The SEC approved the IPO knowing its business model was the legal trading of digital assets. It would take some incredible gall for Gensler to now claim that Coinbase’s business model is non-compliant. It would also be illegal.
The courts will take years to shut Operation Choke Point 2.0 down on their own. In the meantime, Congress needs to step in like it did last time and hold these agencies accountable for the illegal destruction of lawful businesses that an Administration and its political friends don’t like.
Andrew Langer is President of the Institute for Liberty.
