How Institutions Can Navigate Operation Choke Point 2.0
May 7, 2023

In 2013, the Obama Administration put an unofficial initiative called “Operation Choke Point” into place that targeted financial access for legal but undesirable industries in the U.S.A. Now, it seems like the same thing is happening for crypto, in what industry insiders are calling “Operation Choke Point 2.0”.

Long thought to be a conspiracy theory, the confirmation of Operation Choke Point in recent years led to controversy across the States. With the recent collapse of Signature Bank, Silicon Valley Bank, and Silvergate Bank, as well as banks making an effort to stifle onramps into crypto, it’s starting to look like hostilities toward crypto are coming to a head.

The History of Operation Choke Point

Operation Choke Point was a program initiated by the United States Department of Justice in 2013 under the Obama administration. Its stated objective was to combat fraudulent activities by targeting banks and financial institutions that knowingly or unknowingly provided payment processing services to fraudulent merchants.

The program aimed to “choke off” fraudulent activities by restricting access to the banking system for companies deemed high-risk or illegal by the government, including firearms dealers, payday lenders, online gambling websites, and other businesses. The idea was that by cutting off their ability to process payments, these businesses would be unable to operate.

Critics of the program argued that it was an overreach of government power and that it unfairly targeted legal businesses that were politically viewed as high-risk. They also claimed that the program was causing financial harm to legitimate businesses by cutting off their access to payment processing services, even if they were not engaged in any fraudulent activities.

The program was eventually discontinued in 2017 under the Trump administration, citing concerns about government overreach and unfair targeting of legal businesses. Now, big influencers and investors in crypto think something similar is being done to crypto’s accessibility.

Is the U.S. Government Coming After Crypto?

It isn’t conspiratorial to say that the US Government is hostile towards cryptocurrency.

When Silvergate collapsed, board member Barney Frank said “I think part of what happened was that regulators wanted to send a very strong anti-crypto message.” This has since been denied by regulators, but in Frank’s view, Silvergate became the poster boy despite having strong fundamentals.

Banks around the world have stifled access to crypto for years, both officially and unofficially, with HSBC even blocking the purchase of shares in MicroStrategy.

HSBC bans customers from buying bitcoin-backer MicroStrategy Shares

By Tom Wilson

In recent years, there has been growing concern among policymakers about the potential use of cryptocurrency for illicit activities, such as money laundering and terrorism financing. As a result, there have been discussions about a new version of Operation Choke Point that would target cryptocurrency companies, specifically those providing onramps and offramps for fiat currency.

A substantial amount of attention was given to digital assets and crypto in the recent Economic Report of the President, supporting the belief that Biden’s anti-crypto stance is going to come to a head.

One way the government could target onramps and offramps is by requiring cryptocurrency exchanges and other companies providing these services to comply with increased regulatory requirements, such as know-your-customer (KYC) and anti-money laundering (AML) laws. This is already being done and is considered to be a reasonable barrier.

However, another option would be to limit access to the banking system for companies deemed high-risk or illegal by the government, similar to the original Operation Choke Point. This could include restricting access to payment processing services or requiring additional approvals for banking relationships.

What Can Institutions Do About It?

The campaign picked up steam in February 2023 when Binance’s arrangement with their SWIFT partner changed and users will no longer be able to perform transfers of less than $100,000 into or out of the system.

Institutions have an advantage over retail clients in that they actually have the funds necessary to make these big transfers. However, if conditions get more onerous, they will need a plan.

These issues with on-ramps can initially be circumnavigated by moving to a different exchange. Additionally, it is suggested that crypto bank accounts be segregated from other business bank accounts, so as to not affect day-to-day operations if a bank account gets banned for being associated with cryptocurrencies.

However, these are band-aid solutions. One step better is using a peer-to-peer solution, but this lacks the safety and service of traditional methods. And for institutional clients, the risk just can’t be tolerated.

OTC desks have a unique advantage in that they are singularly focused on crypto and don’t have to worry about other verticals being affected by government pressure. Assuming an OTC desk continues to operate compliantly, they will not have problems with the government.

They also remain “small fries” compared to many of the other operators, and represent a very minor risk to unsophisticated retail investors.

The Good and the Bad of It

No matter how much officials deny an outright attack on crypto, with attitudes like the below from Elizabeth Warren, it is only a matter of time until real issues come up.

Operation Choke Point 2.0 could lower demand in the USA, the world is a big place and inflows will still occur, albeit with less friction.

It apparently doesn’t matter that the percentage of coins being used for illicit activities continues to go down and that cash is more useful for illicit crimes. Crypto is at risk and institutional investors need to be proactive about getting around these issues.

Secure Digital Markets works closely with regulators to ensure we are always fully compliant and that our clients are protected. Moreover, we don’t hold client funds, so there is no counterparty risk to institutions.

Moreover, many of our clients use crypto in their operations and need consistent liquidity, making it a focus for SDM to streamline the management of inflow and outflow of fiat to cover operational/remittance needs.

For any questions about our platform and offerings, book a discovery call with our trading team.

About SDM

Secure Digital Markets (SDM) is a leading digital asset brokerage specializing in OTC, spot, lending, and derivatives trading services for institutional, corporate, and high-net-worth clients across 60+ international markets. SDM’s experienced team provides tailored solutions with 24/7 access for counterparties to effectively navigate the dynamic digital asset market in a secure and compliant fashion.

Our clientele consistently relies on our expertise to streamline access to liquidity and capitalize on market opportunities. To discover how SDM can optimize your digital asset management, visit our website and explore our comprehensive range of services.

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