So, what’s this chokepoint thing everyone’s talking about? In recent months, the cryptocurrency industry has been rocked by revelations of regulatory overreach that have stifled innovation, suppressed lawful businesses, and driven entire financial institutions to the brink. At the center of the controversy is Operation Chokepoint 2.0, a covert effort by federal banking regulators to isolate the crypto industry by pressuring banks to cut ties with crypto-related businesses. Armed with vague concepts like “reputational risk,” regulators have wielded their supervisory power to devastating effect—ushering in a chilling new era of financial exclusion.

Newly uncovered documents, secured through Freedom of Information Act (FOIA) requests by Coinbase and its Chief Legal Officer Paul Grewal, provide damning evidence of the Federal Deposit Insurance Corporation’s (FDIC) role in discouraging banks from engaging in crypto-related activities. The unredacted letters and supporting documents reveal a deliberate and coordinated campaign to suffocate crypto innovation under the guise of consumer protection and financial stability.

The crypto community is now rallying against what many see as an unprecedented assault on economic freedom and technological progress. With legal challenges mounting and Congress considering hearings, the stakes for the future of digital assets—and the broader principles of fairness and transparency—have never been higher.

A Brief History of Regulatory Overreach: From Chokepoint 1.0 to 2.0

The origins of Operation Chokepoint trace back to the Obama Administration (2013–2017), when federal regulators pressured banks to sever ties with politically disfavored but lawful industries like firearms, payday lending, and tobacco. Using the nebulous concept of “reputational risk,” regulators targeted these industries through informal guidance and behind-the-scenes pressure during confidential bank examinations. This practice, later dubbed “Operation Chokepoint 1.0,” was widely criticized for its lack of transparency and accountability, culminating in legal challenges and Congressional scrutiny.

Despite public backlash and assurances that such practices had been discontinued, Operation Chokepoint 2.0 emerged during the Biden Administration, this time targeting cryptocurrency. Under the guise of protecting the financial system from the risks associated with digital assets, regulators have once again used reputational risk as a weapon—this time against an industry that has matured significantly and actively sought regulatory clarity.

The FDIC’s “Pause Letters”: Smoking Gun Evidence

The recent FOIA-obtained letters, dubbed “pause letters,” reveal the FDIC’s systematic efforts to discourage banks from engaging in crypto-related activities. These letters, often framed as informal guidance, pressured banks to halt services ranging from Bitcoin transactions and stablecoin issuance to crypto-backed lending and blockchain settlements.

One particularly striking example involved a bank already providing Bitcoin services to 2,800 clients. The FDIC’s letter effectively forced the bank to discontinue the service, despite its proven demand and profitability. Critics argue that this type of intervention, conducted under the radar, amounts to regulatory overreach and deprives banks and their customers of the opportunity to make lawful financial decisions.

Paul Grewal, Coinbase’s Chief Legal Officer, has called for Congressional hearings to investigate whether the FDIC’s actions constituted bad faith. “The unredacted letters show a coordinated effort to stop a wide variety of crypto activity—from basic BTC transactions to more complex offerings,” he said. “These actions are not only harmful to the crypto industry but also undermine trust in our regulatory institutions.”

The Weaponization of Reputational Risk

The concept of reputational risk—originally introduced into the CAMELS rating system in the mid-1990s—has become a powerful yet troubling tool for regulators. Unlike traditional risk categories like credit or market risk, reputational risk is inherently subjective, making it vulnerable to misuse. Regulators can claim reputational risk for anything from unflattering press coverage to hypothetical public backlash, regardless of whether the underlying activity poses any tangible risk to a bank’s safety or soundness.

This amorphous standard was the cornerstone of Operation Chokepoint 1.0 and remains central to Chokepoint 2.0. By labeling crypto-related activities as reputational risks, regulators have been able to quietly pressure banks into severing ties with crypto clients—without issuing formal directives that could be challenged in court or through public comment.

In essence, reputational risk has become a “catch-all” justification for regulatory intervention, enabling federal agencies to shape industry behavior without accountability. This has created a chilling effect, where banks avoid crypto altogether to steer clear of regulatory scrutiny, regardless of the actual risks involved.

The Fallout: Bank Failures and Economic Consequences

The fallout from Operation Chokepoint 2.0 has been catastrophic, not just for the crypto industry but for the broader financial system. Silvergate Bank and Signature Bank, two of the most crypto-friendly institutions, were forced to shutter their operations under the weight of regulatory pressure. Both banks had been pivotal in providing 24/7 settlement layers for the crypto industry, enabling efficient transfers and liquidity. Their collapse represents a significant setback for U.S.-based crypto innovation.

The FDIC’s refusal to sell Signature’s crypto-focused assets, despite its policy of maximizing taxpayer value, further underscores the regulators’ hostility toward digital assets. As Barney Frank, a Signature board member and former House Financial Services Committee Chair, remarked, “Signature’s closure was just a way to tell people, ‘We don’t want you dealing with crypto.’”

Legal Challenges and Path Forward

The regulatory overreach exposed in Operation Chokepoint 2.0 has sparked significant legal and political backlash. Among the key issues:

1. Procedural Violations: The FDIC’s informal guidance and reputational risk determinations circumvent the Administrative Procedure Act (APA), which requires formal rulemaking for policies with the force of law.

2. Due Process Concerns: By stigmatizing lawful businesses without formal charges or hearings, regulators have denied crypto firms their constitutional right to engage in lawful commerce under the Fifth Amendment.

3. Congressional Scrutiny: Lawmakers are now calling for investigations into the FDIC’s actions, with proposals to reinstate the Fair Access Rule, which would prohibit banks from denying services based on reputational risk without objective criteria.

To restore trust and accountability, the following measures are urgently needed:

• Transparency: Require federal agencies to disclose all supervisory communications and guidance related to reputational risk and crypto.

• Objective Standards: Replace subjective reputational risk assessments with clear, quantifiable criteria tied to actual safety and soundness concerns.

• Legislative Action: Establish a Digital Asset Commission to develop consistent and transparent rules for crypto regulation.

Conclusion: The Future of Crypto and Financial Freedom

Operation Chokepoint 2.0 has revealed the fragility of financial access in the U.S. regulatory system. By leveraging vague concepts like reputational risk, federal agencies have created a de facto system of exclusion that undermines innovation, economic growth, and public trust. The crypto industry, while uniquely vulnerable to these tactics, is not the only casualty. The broader implications for banking, commerce, and financial freedom cannot be ignored.

As Congress and the courts grapple with the revelations from Coinbase’s FOIA campaign, the stakes are clear: regulatory accountability and a balanced approach to crypto oversight are not just necessary—they are imperative. The fight for crypto’s future is a fight for the principles of fairness, transparency, and economic liberty that underpin the U.S. financial system.

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