New FDIC docs show Choke Point 2.0 more fantasy than conspiracy

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American financial regulators never ordered banks to ‘debank’ crypto companies, taking more wind out of the sails of the ‘Choke Point 2.0’ conspiracy theorists.

On January 3, the Federal Deposit Insurance Corporation (FDIC) released another round of documents in response to Freedom of Information Act (FOIA) requests filed by a company hired by the Coinbase (NASDAQ: COIN) exchange.

The documents are basically the same letters released in December, but with fewer redactions. The re-release followed U.S. District Court Judge Ana Reyes’s ruling that the original redactions showed a “lack of good-faith effort” by the FDIC.

Coinbase executives, including Chief Legal Officer Paul Grewal, had criticized the FDIC’s original redactions, even as they celebrated what they claimed was proof that Choke Point 2.0 “wasn’t just some crypto conspiracy theory.” However, all the redacted documents really showed was the FDIC asking banks to “refrain from providing” crypto-related services/products that regulators had yet to fully vet.

The new less-redacted documents fail to offer any more definitive proof that the FDIC ordered or even warned banks not to maintain accounts or facilitate transactions for crypto operators. Some of these operators had strongly implied that they had lost all access to banking services due to direct intervention by federal regulators.

Once again, the reality is far different. The FDIC merely instructed unidentified banks to pause plans to offer blockchain-based products/services to crypto clients until the banks supplied the FDIC with more information regarding these products/services so the regulator could determine whether the risks were acceptable.

Additional details revealed by the less onerous redactions include a March 2022 letter in which the FDIC expresses concerns regarding an unspecified New York bank’s plans for a ‘Bank Digital Deposit’ product. The letter notes that the product would “only enable transactions between qualifying [REDACTED] Bank commercial clients.”

However, the FDIC notes that the product “will operate on the [REDACTED], a decentralized public Blockchain, rather than on the [REDACTED], a private, permissioned Blockchain.” The FDIC had questions the bank needed to “satisfactorily address” to ensure the bank was “engaging in this new activity in a safe and sound manner.”

Other newly revealed info includes a Texas bank that wanted to “offer bank customers access to [BTC] and Ethereum through the bank’s mobile app.” Other documents mention “the purchase and sale of [BTC]” through mobile apps and websites in conjunction with unidentified trading platforms and technology providers.

A letter from the FDIC’s San Francisco office sought due diligence on all vendors related to a bank’s Digital Banking Division as well as those assisting in “customer due diligence, custodial services, exchange services, funds movement, and any other services related to” the digital ops. The same bank faced questions regarding a “Digital Assets Lending Program.”

A bank in Missouri was asked about plans to offer “a debit card with cash rewards that [REDACTED] pays in the form of [BTC].” The same letter asks about credit having been extended by the bank in November 2021 that was “secured by [BTC] and contains a 50% margin requirement, updated daily.”

Circling the wagons

There are two letters in the latest release that weren’t included in the original bunch. Their content is largely similar to the others, although one New York bank alerted the FDIC on March 13, 2023, regarding its plans to provide a bank account to an unspecified party “for the purposes of holding deposit reserves corresponding to [REDACTED] issuance of a stablecoin.”

For what it’s worth, March 2023 saw the collapse of three banks with ‘crypto’ ties: Silvergate Bank, Signature Bank and Silicon Valley Bank (SVB). The latter was, at the time of its collapse, the custodian of $3.3 billion worth of cash reserves backing up USDC, the stablecoin issued by Circle (in a partnership with Coinbase).

SVB collapsed on March 10, three days before the unnamed bank contacted the FDIC regarding the stable reserves proposal. So, was Circle the stablecoin issuer in a New York state of mind? For the record, Circle’s butt was ultimately pulled from the fire by none other than the FDIC, which covered the company’s $3.3 billion marker.

All raged up and nowhere to blow

The FDIC also released a June 2022 internal memo to its regional directors titled Procedures for Reviewing Notifications of Engagement in Crypto-Related Activities.

The memo explains why greater scrutiny is asked of a bank looking to directly engage in ‘crypto’ activity versus those simply looking to offer mainstream banking services to crypto clients. Not that it matters, given the 180° turn that President-elect Donald Trump’s new federal regulators are about to pull on crypto oversight.

If Coinbase et al. has any real bone to pick with the FDIC, it’s with the FDIC’s original redactions of the letters, which evidently didn’t really hide anything of any real significance but clearly ginned up the crypto bros’ eager expectations of regulatory smoking guns. Now it’s just a mix of sad trombone and the world’s smallest violin playing just for the guys who believed their operations should be exempt from regulatory oversight.

Regardless, their thirst for martyrdom is unquenchable, so cue up histrionics about the FDIC engaging in “unconstitutional and illegal” activity and “covering up evidence that [the FDIC] tried to kill” crypto operators. Congressional hearings have been demanded so that the public can get a taste of this nothingburger.

Enter John Deaton, a crypto-friendly lawyer a last seen mounting an unsuccessful campaign to dethrone anti-crypto Sen. Elizabeth Warren (D-MA). Deaton, a former federal prosecutor, tweeted his willingness to “help lead a federal investigation into ChokePoint 2.0” and to do so on a pro bono basis. Deaton said helping to “uncover multiagency coordination, and possible corruption, related to ChokePoint 2.0 would be both an honor and a privilege.”

Barr-bye

Monday brought word that Michael Barr, the Federal Reserve Board’s vice-chair for supervision—basically, the Fed’s top cop overseeing financial firms—was stepping down from that role effective February 28. Barr, who will continue as a member of the Board, had been targeted for early termination by Trump on suspicions that he might object to Republicans’ plans for overhauling banking regulations.

In March 2023, Barr criticized crypto operators following the failure of Silvergate Bank, whose former clients included Sam Bankman-Fried’s market maker Alameda Research. Underscoring the concerns expressed in the FDIC letters, Alameda served as a pass-through front for U.S. customers looking to make deposits to SBF’s Bahamas-based FTX crypto exchange.

Barr gave a speech at the time discussing “the recent turmoil in the crypto sector,” in which he appeared to take a shot at Circle’s SVB debacle. Referring to stablecoins, Barr said the “operational risks are quite high” due to the inability to immediately monetize the reserve assets covering the value of their issued tokens. “This mismatch in value and liquidity is the recipe for a classic bank run.”

Barr’s replacements

Candidates to replace Barr on the supervision beat are limited to current Fed governors, including Michelle Bowman, a former state bank commissioner of Kansas. In October 2023, Bowman gave a speech expressing concerns about stablecoins, calling them “less secure, less stable, and less regulated than traditional forms of money.”

Bowman believed in “private sector innovations within established guardrails,” in which “the same activities that present the same risks are subject to the same regulations—regardless of what a product is called and by whom it is offered.”

Bowman has also expressed doubts about the benefit of the federal government issuing a central bank digital currency (CBDC) while celebrating the government’s FedNow 24/7 interbank payment system.

Another candidate is Fed Governor Christopher Waller, a former executive VP at the Federal Reserve Bank of St. Louis. Waller has spoken positively on the subjects of stablecoins and called decentralized finance (DeFi) tools “largely complementary to centralized finance.” In November, Waller said the government should let the private sector take point on payment processing developments.

However, in 2023, Waller expressed doubts regarding the safety of so-called ‘crypto assets,’ saying they were “risky and many of the firms dealing in them are in their infancy.” Waller said he had no problem if people wanted to take risks speculating on these ‘assets’ but warned speculators not to expect “taxpayers to socialize your losses.”

Waller also warned that “banks considering engaging in crypto-asset-related activities face a critical task to meet the ‘know your customer’ and ‘anti-money laundering’ requirements, which they in no way are allowed to ignore.”

New sheriffs in town

Sen. Tim Scott (R-SC), who will head the Senate Banking Committee in the new Congress, wasn’t shy about slamming the door on Barr’s backside as the latter headed for the exit. Scott issued a statement accusing Barr of having “failed to meet the responsibilities of his position” and listed a number of his shortcomings, including “supervisory failures” during the 2023 implosions of Silvergate, Signature and SVB.

Scott’s counterpart in the House of Representatives will be Rep. French Hill (R-AR), who is taking over from the retiring Rep. Patrick McHenry (R-NC) as chair of the Financial Services Committee. Hill issued his own statement saying he was “pleased to learn” of Barr’s plans to resign, adding that he hoped Trump would pick a replacement who was “committed to tailoring bank regulatory policies and implementing a balanced approach to prudential supervision.”

Politico recently ran a profile of Hill detailing his role as “a leading advocate for policies that help boost emerging technology sectors, including cryptocurrency and artificial intelligence.” However, as the article noted, Hill’s “biggest legislative focus over the past two years has been crypto.”

As such, it’s not surprising that Hill’s campaign contributor list reads like a who’s who of crypto bros, including Coinbase CEO Brian Armstrong, venture capitalist Marc Andreessen, Solana co-founders Anatoly Yakovenko and Raj Gokal, Multicoin Capital co-founder Kyle Samani and a lot of other notable notables.

The holidays might be over, but sing it with me: It’s beginning to look a lot like crypto…

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