Could the collapse of regional US banks be a foretaste of things to come as the SEC intensifies its efforts to de-bank crypto?
Both Silvergate and Signature Bank were the primary banks in the US that bridged the traditional banking system with crypto, providing on and off ramp services for crypto businesses.
While one might argue that the collapse of Silvergate is the bank’s own doing as it heavily invested in long-term bonds that was hit hard by the Fed interest rate hikes, Signature Bank was forced to close by regulators.
The New York Community Bancorp bought over Signature Bank’s assets for USD 38.3B and took over all of their clients, except for its crypto customers.
To say that the SEC went on a rampage will be an understatement, especially after the US regulatory commission announced a barrage of lawsuits against crypto exchanges Binance and Coinbase.
In an interesting twist to the plot, Binance lawyers alleged that SEC Chairman Gary Gensler offered to serve as an advisor to the crypto exchange but was turned down by CZ.
This begs the question as to whether there is a wider conspiracy behind this crypto crackdown in the US better known as Chokepoint 2.0. Could this be Gensler waging a personal vendetta on Binance and crypto?
However, one thing is for sure, this is a concerted effort by the US regulators to ringfence and cripple the crypto industry.
Tracing The Roots Of Operation Chokepoint 2.0
Perhaps lesser known, as early as 2013, then President Obama’s Administration introduced a scheme known as Operation Chokepoint that targeted certain legal but high risk industries such as firearms sales and pornography.
Banks and payment processors were pressured to avoid business dealings with companies that engaged in high risk activities and there were far-reaching effects even after this program ended in 2017.
As highly regulated entities, banks today continue to avoid such companies to err on the side of caution, even in the absence of specific guidance that prohibits them from doing so.
How Operation Chokepoint 2.0 Differs And Why Now?
The crypto onslaught in the US can be largely attributed to the failure of FTX and the close ties between Gary Gensler and previous FTX CEO Sam Bankman-Fried (SBF) that was widely publicized prior to the collapse of the exchange.
In a desperate attempt to prevent the next such collapse, the SEC and regulators seek to replicate the success of Operation Chokepoint to isolate the crypto industry from the wider banking system and bring it to its knees.
This is especially so as many crypto exchanges and businesses often do not have a headquarters and some may not even have a physical presence in any jurisdiction, making them particularly challenging to regulate.
Chokepoint 1.0 was focused on threatening banks with investigation by the Department of Justice (DoJ) and Federal Deposit Insurance Corporation (FDIC) should they continue to provide banking services to high risk industries and this was deemed unconstitutional.
In contrast, the aim of Chokepoint 2.0 is for federal regulators to publish guidance that discourages banks from engaging with crypto businesses.
This results in smaller banks with a greater risk appetite taking on crypto customers. However, even these smaller banks may also be discouraged from doing so based on the experiences of both Silvergate and Signature Bank.
Can Crypto Survive This SEC Crackdown?
Ultimately, crypto will most definitely survive this SEC crackdown. Gary Gensler and the SEC can unbank crypto businesses, to shut them off completely from the traditional banking system.
However, if they are bent on banning crypto altogether, the only way is to cut off access to the internet which is not a viable option.
Therefore, the SEC and regulators globally will need to come to the realization that the best way going forward is to embrace and build a clear and robust regulatory framework that requires all industry participants to comply with.
The US securities laws are archaic and need to be updated so as not to stifle the progress of financial technology innovation.
Instead of waging a war on crypto, many believe that the SEC should channel its resources in simplifying the rules such that bad actors can be weeded out and good actors can operate effectively within the confines of the regulatory framework, ensuring consumer protection in the process.
The actions by Gary Gensler and the SEC thus far have only cast doubt on the credibility and integrity of regulators in the US.
In my opinion, Asia will likely benefit from this SEC crackdown. If operating in the US becomes untenable, crypto exchanges and business will just relocate offshore, away from the prying eyes of the SEC.
The SEC’s actions are in stark contrast to that of Hong Kong in particular. Besides legalizing crypto trading for retail investors, the Hong Kong Monetary Authority (HKMA) also urged banks to provide services to licensed crypto firms. The Hong Kong Securities and Futures Commission is also a strong advocate of traditional financial institutions embracing real-world assets tokenization.
“[Editor’s Note: This article does not represent financial advice. Please do your research before investing.]
Featured Image Credit: ChainDebrief
This article was written by Clarence Lee and edited by Yusoff Kim