The lessons learned at Operation Chokepoint 2.0 Congressional hearings

The deep political divisions in the United States were apparent once again during the recent Congressional hearings on Operation Chokepoint 2.0, the alleged top-down initiative by former US President Joe Biden’s administration to “de-bank” crypto firms.

For much of Thursday afternoon (Feb. 6), it seemed that members of the Republican and Democratic parties were inhabiting different universes. Had Biden administration regulators really pressured US financial institutions to deny bank accounts to cryptocurrency firms in 2023, as Republicans asserted? Or was this whole construct of Chokepoint 2.0 “a fake program,” one never initiated by the Biden administration, as Democratic Representative Al Green stated?

Interestingly, at the end of the two-hour hearing, titled “Operation Choke Point 2.0: The Biden administration’s Efforts to Put Crypto in the Crosshairs,” the two political parties actually seemed to be in agreement on steps to be taken to prevent future regulatory ‘overreach’ — even while arguing about past practices.

For the most part, though, the Republicans cast the former Biden administration’s bank regulators as bullies operating in the shadows. 

Bitter back-and-forth at Operation Chokepoint hearing

Paul Grewal, chief legal officer at Coinbase, testified that the US Federal Deposit Insurance Corporation (FDIC) “bludgeoned the banks” with an onslaught of examinations and questions “until the banks relented under the pressure.” Regulators forced banks to deny stablecoin issuers bank accounts for their reserves, for instance.

There was some drama, too, when Republican Rep. Ann Wagner questioned Fred Thiel, CEO of MARA Holdings, a leading Bitcoin mining firm, about events in 2023 when several large US banks failed: 

“Mr. Thiel, has your bank ever stated whether their prudential regulators told them that they should refrain from providing services to digital asset firms?”

“We banked with Signature Bank and when the FDIC shut them down [in March 2023] and Flagstar took over the accounts, none of the crypto accounts were allowed to be part of those assets acquired,” answered Thiel, continuing: 

“We were forced to immediately seek accounts with other banks. We were able to open an account with another bank, deposited $70 million after going through the approval processes, and six days later, we were told we have to shut down the accounts because our bank no longer will bank crypto companies.”

Wagner: “So the answer is yes.”

Elsewhere, Meuser asserted that the former administration’s regulators “resorted to vague interpretive regulatory letters, threatening banks with negative examination scores and fines if they continue their partnership with digital asset companies.”

Not surprisingly, the minority party resisted these characterizations. Ranking minority party member Green asked if anyone “had read a document from someone in the Biden administration or some regulator saying that there was a Chokepoint 2.0 operation.”

No one raised their hand.

“So this is a made-up statement. Somebody concluded that this was something that sells.”

Democratic Representative Nikema Williams said the matter under discussion, Choke Point 2.0, isn’t a serious issue — unlike, say, the continuing racial wealth gap or “Elon Musk dismantling our federal government.” Williams questioned why the subcommittee was even meeting to discuss the crypto policy of former president Biden when “he isn’t in power anymore.” 

Meuser asked another witness, Austin Campbell, adjunct professor at NYU’s Stern School of Business, for some details on just how “Operation Chokepoint operated in the past” (e.g., Chokepoint 1.0, invented by the Obama administration, supposedly), given he was a former bank risk manager. How exactly did regulators pressure banks into severing ties with legally operating businesses?

Related: Bitcoin reserves and sovereign wealth funds in the US, explained

Campbell answered that when communicating with regulators, “you are getting fundamentally several layers of guidance,” both written and verbal. 

On the verbal level, regulators might say: “Well, we have reputational concerns about you banking crypto clients…. We’re still not sure. Maybe we’ll answer you on that. Maybe we won’t, but we still find it risky.” 

“You understand that to mean no,” explained Campbell.

“Rhetorical red meat” or genuine overreach?

Cointelegraph queried several outside sources in the wake of the hearings, including Dru Stevenson, professor of law at South Texas College of Law Houston. Was debanking the crypto industry a serious problem in the US, or is it just something dreamed up by the crypto industry? 

“The invocation of ‘Chokepoint’ is pure political theater, rhetorical red meat for the GOP base,” Stevenson answered. 

The reality is that all rules and regulations, even the most wholesome and helpful, involve some tradeoffs, such as compliance checks and a little bit of overdeterrence at the margins, which may have happened in the last administration, he said.

Stephen Gannon, a partner at law firm Davis Wright Tremaine, disagreed. The “evidence is now overwhelming” that regulators overreached in the previous administration.