Chokepoint 2.0: A Strategic Regulatory Initiative

In the aftermath of the 2022 crypto market crash, banking regulators, late to recognize the dangers posed by the sector, made several conclusions that have proven to be both highly detrimental as it creates chokepoint 2.0 and that sometimes seem unlawful:

1. Crypto as a Threat to the Banking Sector: Regulators concluded that cryptocurrency inherently threatens the stability of the banking system. Ironically, real-world events have shown the opposite—Silicon Valley Bank (SVB) presented a risk to Circle, though it’s worth noting that Circle left a large, uninsured deposit at SVB, which invites criticism.

2. Inadequate BSA/AML Controls in Crypto: Regulators also decided that compliance with the Bank Secrecy Act (BSA) and Anti-Money Laundering (AML) laws across the crypto industry was severely lacking.

3. Removing Crypto from the U.S. Banking System: Their proposed solution was to cut off cryptocurrency from the U.S. banking system entirely as if pushing it into the Eurodollar market would solve the issue. This approach, however, only repeats historical mistakes without addressing the core problems.

Effects of The Chokepoint 2.0

The issue at hand is one of regulatory discretion. Under the current BSA/AML standards, no bank is fully compliant—especially not when measured against the stringent criteria being applied to the crypto industry. This means that whenever regulators choose to scrutinize a bank on these grounds, there is often enough surface-level evidence to justify their actions.

It’s a given that any bank, including customers, will have BSA/AML lapses that warrant supervisory action, even without knowing the specifics of their operations. Why? Because this is a universal truth for all banks—whether it’s First National, Citi, PNC, or SoFi. The nature of banking is such that if even a single dollar is involved in something questionable, regulators have the authority to intervene.

The Evil Effect of the Chokepoint 2.0

So why are chokepoint 2.0 problematic? It wouldn’t necessarily be an issue if the rules were enforced uniformly. However, when you consider that major banks like ABN, Deutsche, Citi, and HSBC have faced massive settlements for money laundering and BSA/AML violations, yet none were shut down, it becomes evident that fairness is lacking. Despite these settlements, the underlying programs remain largely unchanged and ineffective in preventing systemic misconduct, proving that the rules aren’t being applied evenly.

Instead, these regulations are often wielded as a pretext by banking regulators to target institutions engaged in activities they disapprove of, ultimately shutting them down under the guise of compliance concerns. For example, during the bankruptcy proceedings of Signature Bank, a large foreign bank expressed interest in bidding on Signet. This action would have benefitted the estate by helping to reimburse depositors, creditors, and equity holders.

However, the FDIC arbitrarily blocked this bid, demonstrating the selective enforcement of these rules.
This represents a targeted attack on certain activities that regulators disapprove of simply because they dislike the industry, which contradicts their responsibility to ensure a fair and secure financial system. The irony, however, is that the very actions they are attempting to suppress—such as fast payments to settle blockchain trades—are hindering the development of a system that is more efficient and transparent in combating financial crime.

What Has the Chokepoint 2.0 Resulted Into

These days, we’ve seen reports that customers have been targeted for regulatory scrutiny, while, ironically, situations like the one involving Evolve Bank, as documented by @mikulaja, receive far less urgent attention, despite having devastating consequences for individuals. Meanwhile, many other banks with similar or even worse compliance issues are not facing the same level of regulatory pressure (Chokepoint 2.0).

These comes in the wake of similar actions against Signature and Silvergate, as well as other institutions (whom I won’t name for their protection but know personally) that have been barred from establishing RTP networks for these reasons. The only plausible explanation for this behavior is outright hostility toward crypto, coupled with regulators’ reluctance or inability to come to terms with emerging technology. As the insightful @sultanmeghji has previously pointed out, this represents a deeply technophobic stance, one that could severely undermine the U.S. banking system as we attempt to advance into the future.

Alongside the behavior of the SEC, the actions of current federal agencies stand out as particularly reprehensible. Rather than confronting these issues head-on, regulators have chosen to cling to an outdated system plagued with fraud, simply because it is familiar and easier to control.

This resistance to change is precisely why the current administration is so deeply disliked by entrepreneurs, financial professionals, and the ethical players in the fintech industry. The tendency to recklessly discard progress, akin to throwing out multiple babies with the bathwater, only serves to trap consumers in a predatory, dysfunctional legacy system or force them offshore, where the rule of law is weaker (as seen with FTX), exposing them to even greater harm.

This type of behavior from our federal agencies is simply unacceptable. We can do better—we can re-evaluate and improve the rules. The FTC under Lina Khan is a prime example, with their commendable efforts to tackle non-compete clauses and update antitrust policies. This shows that meaningful reform is possible.