Multiple news stories have simultaneously emerged about the world’s largest crypto exchange – Binance. In what light should investors view them given the ‘Operation Chokepoint 2.0’ revelations and the alleged “war” on crypto?
Crypto Busts Eroded Confidence in Sector
Crypto space is no stranger to steep price collapses. In the early days, Mt. Gox was the equivalent of Binance as the world’s largest Bitcoin exchange. When Mt. Gox collapsed, the price of Bitcoin fell by -36%. The crypto space maturity was at a very low level, as Bitcoin’s market cap held at just ~$7 billion, an altcoin’s market cap today.
However, even at elevated maturity levels, we saw similar impacts last year. When Terra (LUNA) collapsed in May, followed by Celsius, Bitcoin plummeted by -31% despite not having direct ties to this DeFi niche. Likewise, when the FTX exchange crashed in November, Bitcoin fell by -29%.
In broader terms, these piled-up crises in a single year eroded confidence in the crypto space. Moreover, they became commonly cited by legislators and regulators alike. However, in the middle of the US banking crisis, Bitcoin’s differentiation from ‘crypto’ is again manifesting, poised to return to pre-Terra price levels.
Crypto-Friendly Banks Shut Down
At this time of shaken banking confidence, a new crisis cluster is emerging. Simultaneously, the digital asset space lost three key banks: Silicon Valley Bank as VC/crypto facing, and Silvergate and Signature banks directly providing fiat rails to crypto companies.
The latter two collapsed under suspicious circumstances, as Silvergate suffered a $1 billion net loss in Q4 ‘22. The bank was forced to sell securities at a loss to pay back the prematurely recalled $4.3 billion loan to the Home Loan Bank of San Francisco, the second-to-last lender of last resort (the Fed is the first).
Further, Silvergate’s bank run that necessitated the loan was sparked by the FTX crash itself. Under Gary Gensler, former Goldman Sachs banker, the SEC missed multiple red flags as Sam Bankman-Fried positioned himself to influence crypto legislation. This included the SEC’s approval of FTX.US’ stake in IEX, an SEC-regulated exchange.
The FDIC’s seizure of Signature Bank, in the shadow of SVB, is particularly controversial. One of the bank’s board members, Barney Frank of the Dodd-Frank Act, openly said that Signature was solvent, implying that this message was sent by regulators.
“This was just a way to tell people, ‘We don’t want you dealing with crypto,’”
This points to a rerun of Operation Chokepoint, which aimed to debunk online casinos during the Obama admin. At the urging of Republican lawmakers, the Justice Department ended the shadowy operation.
“We share your view that law abiding businesses should not be targeted simply for operating in an industry that a particular administration might disfavor,”
From a letter to House Judiciary Chairman Bob Goodlatte, by Assistant Attorney General Stephen Boyd
Before we delve into the idea of an “Operation Chokepoint 2.0” aimed at crypto, one question arises. What would be the next big crisis in crypto that would topple the prices and erode confidence further?
The answer is clear even to crypto outsiders. By a large margin, Binance stands out from the crypto exchange crowd.
In that light, why is Binance in the news?
CFTC Charges Binance
In a civil complaint published on Monday, the Commodity Futures Trading Commission (CFTC) alleges that Binance emerged “through an opaque web of corporate entities, all of which are ultimately controlled by Zhao.”
Specifically, Binance solicited customers from the US but failed to register appropriately under US law. This included Binance’s guidance for users to use VPNs to circumvent compliance protocols by obfuscating their geo-location.
CFTC cited a comm between Lim (former Binance chief compliance officer) and Zhao (Binance CEO) that a large portion of Binance customers “could be US citizens in reality.”
CFTC’s gambit would then be to de-platform those US citizens from Binance, at the same time as Coinbase, the most regulated US exchange, is under scrutiny by the SEC following the aforementioned de-banking of US crypto companies.
In the initial response, Binance’s CEO claims that the exchange is the most regulated globally, supported by 16 licenses worldwide. The exchange employs several filters to exclude US citizens from nationality via KYC to IP addresses, VPN endpoints, money withdrawals, and device fingerprints. Further, Binance continues to cooperate with US authorities by assisting in freezing/seizing over $125 million in funds in 2022 and $160 million in 2023.
Interestingly, in the complaint, CFTC describes Bitcoin (BTC), Ethereum (ETH), and Litecoin LTC), among others, as commodities. This clashes with repeated claims by Gary Gensler’s SEC that ETH is a security. Such regulatory uncertainty has been used as a wellspring for ‘regulation by enforcement.’
In this legislative void that can feed an “Operation Chokepoint 2.0”, it is up to the companies to take the agencies to court, as it happened with Ripple Labs, Grayscale, and is now happening to Coinbase and Binance.
Binance Outflows Post CFTC Action FUD
Tagging the CFTC-Binance storyline, Wall Street Journal published an article titled “Binance Sees $2 Billion in Outflows as Troubles Compound” on Tuesday. Under the same title, the article was replicated by Fox Business.
Realistically, a civil complaint by the CFTC will likely result in a large fine, which Binance can easily pay.
Amid the CFTC FUD (fear, uncertainty, doubt), Binance saw $2.1 billion in outflows, according to Nansen analytics. However, this is still lower than during the FTX turmoil, as Binance holds $63.2 billion in publicly disclosed wallets.
When looking at charts, one would be hard-pressed to justify the WSJ title as anything worthy of note.
Binance’s Links with China FUD
On Wednesday, the Financial Times dropped another Binance story titled “Binance hid extensive links to China for several years.”
The CEO of Binance, Changpeng Zhao (CZ), was born in China but left the country following the Tiananmen Square incident, having gained Canadian citizenship in 1992. In the late 2000s, CZ regained connection to China, reportedly owning an apartment in Shanghai.
FT’s article relates to China to the extent that Binance used an office “at least the end of 2019”, with some employees using Chinese banks to pay for their salaries. Moreover, FT dragged messages from November 2017, with CZ saying that “We no longer publish our office addresses?.?.?.?people in China can directly say that our office is not in China.”
These were all periods before September 2021, when the People’s Bank of China (PBOC) banned all cryptocurrency transactions.
In this light, FT’s article can be viewed as the backdrop of the “Chinese spy balloons” narrative alongside the Chinese TikTok narrative. The latter is especially indicative as it is likely poised to sneak in the crypto version of the Patriot Act.
This brings in the pressing issue of the wide-scoping “Operation Chokepoint 2.0“.
Established Legal Firm Explains Operation Chokepoint 2.0
As mentioned, the federal government is no stranger to borderline illegal activities and the weaponization of federal agencies. A prestigious firm Cooper & Kirk, known for arguing numerous cases before the Supreme Court, published a 37-page whitepaper titled “Operation Choke Point 2.0: The Federal Bank Regulators Come For Crypto”.
In the paper, the company’s lawyers, David Thompson, John Ohlendorf, Harold Reeves, and Joseph Masterman, first explain the background of Operation Chokepoint under the Obama admin.
The authors frame recent activities relating to crypto crackdowns as backroom deals, extracting many similarities to the crypto world. They cite one banker retelling of their communication with a federal bank examiner:
“I don’t like this product and I don’t believe it has any place in our financial system . . .
Your decision to move forward will result in an immediate, unplanned, audit of your entire bank.”
In technical terms, the first move under the Biden admin was the rescinded rule within the Office of the Comptroller of the Currency (OCC). It was there to “ensure fair access to banking services for several industries—including debt collection—previously cut off during the controversial Obama-era program Operation Chokepoint.”
Finally, the paper argues that the Biden admin is acting unconstitutionally, as “Operation Choke Point 2.0 deprives businesses of their constitutional rights to due process in violation of the Fifth Amendment.”
While this may be true, it is the stifling effect that counts. As we have seen with Ripple Labs vs. SEC, legal processes are typically protracted. By the time “Operation Choke Point 2.0” is resolved, in all its forms, the Federal Reserve is on a path to deploy FedNow service with a CBDC experiment in play.
This mindset is telling. The Fed Chair Powell doesn’t grasp the valuation of an asset with a fixed supply. As opposed to a manipulated supply that tends to birth boom and bust cycles, leading to currency debasement and evaporation of people’s savings.
Following the latest US banking crisis, the financial media complex is on an accelerated timetable to dismantle fiat-to-crypto rails while simultaneously sparking various FUDs to depress prices.
This article originally appeared on The Tokenist
Sponsored: Find a Qualified Financial Advisor
Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to 3 fiduciary financial advisors in your area in 5 minutes. Each advisor has been vetted by SmartAsset and is held to a fiduciary standard to act in your best interests. If you’re ready to be matched with local advisors that can help you achieve your financial goals, get started now.