0/ Today, we are forced to return to an incredibly unfortunate subject: Operation Chokepoint 2.0.
I will include the press release from the Federal reserve at the end of this thread, along with @nic__carter's original article on OCP 2.0.
I will include the press release from the Federal reserve at the end of this thread, along with @nic__carter's original article on OCP 2.0.
1/ So let's start with a quick summary. After the carnage of 2022 in crypto markets, and the belated realization by banking regulators that crypto was a risk, they came to a couple of determinations that have proven incredibly toxic (and maybe illegal):
2/ First, that crypto itself somehow poses a risk to the banking system. Ironically, the reverse of this has actually been demonstrated in practice (SVB posing a risk to @circle, though it is fair to criticize the latter for leaving a large uninsured deposit balance there).
3/ Second is that BSA/AML controls throughout the crypto space were deeply insufficient.
Third is that the solution to this was to remove crypto from the US banking system (as if pushing it to the Eurodollar market would make it go away, which is just repeating past mistakes).
Third is that the solution to this was to remove crypto from the US banking system (as if pushing it to the Eurodollar market would make it go away, which is just repeating past mistakes).
4/ The problem this creates is one of discretion. Under the current BSA/AML standards, all banks are essentially non-compliant. Certainly at least under the standards being applied to crypto. This means that in each case where a regulator chooses to lean on this as a concern, there will be superficial evidence that allows them to proclaim those actions are justified.
Here, I am close to 100% certain that Customers will have BSA/AML failures that rise to the level of supervisory action, without knowing anything about Customers or their platform specifically. Why? Because this is true of all banks! It is true of First National, it is true of Citi, it is true of PNC, it is true of SoFi. Why? Because they are banks and the rules are essentially that if bad things happen with even $1, we can act.
Here, I am close to 100% certain that Customers will have BSA/AML failures that rise to the level of supervisory action, without knowing anything about Customers or their platform specifically. Why? Because this is true of all banks! It is true of First National, it is true of Citi, it is true of PNC, it is true of SoFi. Why? Because they are banks and the rules are essentially that if bad things happen with even $1, we can act.
5/ So why is that bad? I would suggest it would not be bad if the rules were applied fairly, but given there have been giant settlements between ABN, Deutsche, Citi, HSBC, etc. for money laundering and BSA/AML issues, none of which were shut down, and that the design of the programs themselves remain largely the same and completely and totally ineffective at deterring bad actions from a systemic perspective, it's pretty clear the rules are not applied fairly.
Instead, they are used as a pretext to go to institutions doing something else that a banking regulator does not like, and under that pretext, shut it down.
Don't believe me? There is a very large foreign bank that wanted to bid on Signet during the bankruptcy of Signature Bank, something that would have added value to the estate and made whole depositors, creditors, and equity holders, and they were arbitrarily banned from doing this by the FDIC.
This is a direct assault on specific activities that regulators don't like because they don't like an industry, and in conflict with their duties as regulators to provide a fair, safe system.
Instead, they are used as a pretext to go to institutions doing something else that a banking regulator does not like, and under that pretext, shut it down.
Don't believe me? There is a very large foreign bank that wanted to bid on Signet during the bankruptcy of Signature Bank, something that would have added value to the estate and made whole depositors, creditors, and equity holders, and they were arbitrarily banned from doing this by the FDIC.
This is a direct assault on specific activities that regulators don't like because they don't like an industry, and in conflict with their duties as regulators to provide a fair, safe system.
6/ The second layer of the badness is that, hilariously, the exact action they are trying to interdict (fast payments to settle blockchain trades) are preventing a system from operating which is better and more transparent for the goal of preventing financial crime!
"No, no, no!" they scream, forcing banks to shut down these platforms that feed into public blockchains where profoundly evil groups like Hamas get <1% of their funding (and we know that because we can see it).
"Also you are fine," they say to the dark box they can't see into where the other 99% of funding goes to these entities.
It is a tech-illiterate stance that increases, not decreases, both the probability and magnitude of financial crime. It is security theater, where if you can see the problem, it's a problem, but if you can't, nobody cares so crime away as much as you want!
Maybe they will fine you occasionally, but can anyone please find me a list of all the US bank executives in jail for BSA/AML violations? Thanks!
"No, no, no!" they scream, forcing banks to shut down these platforms that feed into public blockchains where profoundly evil groups like Hamas get <1% of their funding (and we know that because we can see it).
"Also you are fine," they say to the dark box they can't see into where the other 99% of funding goes to these entities.
It is a tech-illiterate stance that increases, not decreases, both the probability and magnitude of financial crime. It is security theater, where if you can see the problem, it's a problem, but if you can't, nobody cares so crime away as much as you want!
Maybe they will fine you occasionally, but can anyone please find me a list of all the US bank executives in jail for BSA/AML violations? Thanks!
7/ So here today, we see the news that Customers has been singled out for specifically this kind of activity (while, hilariously, things like the Evolve bank situation being documented by @mikulaja are not being handled with nearly this degree of alacrity despite destroying lives), but many other banks with similar levels of controls problems (or, likely, much worse) not being subjected to this sort of pressure.
This is after Signature and Silvergate were hit for the same, and others (who I will not name for their safety but I personally know) have been banned from starting RTP networks for this purpose.
This is after Signature and Silvergate were hit for the same, and others (who I will not name for their safety but I personally know) have been banned from starting RTP networks for this purpose.
8/ It all leads back to the inference that Nic made in the OCP 2.0 article: this behavior can only be rationally explained by straight up animus towards crypto and regulators being unwilling or unable to grapple with the reality of new technology. It is a deeply technophobic stance, as the brilliant and outspoken @sultanmeghji has written about previously. And it is one that risks crippling the US banking system as we (attempt to) move into the future.
9/ Here, along with the conduct of the SEC, is where I personally find the actions of the current Federal agencies most reprehensible. I am a pro-regulation person. I am also deeply anti-financial crime.
This is why I support blockchains as a better tool to find and interdict those things.
However, our regulators have been completely unwilling to grapple with this and instead fall back on a legacy system we know is rife with fraud, simply because they know that system and inhibit change.
This is why I support blockchains as a better tool to find and interdict those things.
However, our regulators have been completely unwilling to grapple with this and instead fall back on a legacy system we know is rife with fraud, simply because they know that system and inhibit change.
10/ If you want to know why the current administration is so loathed by entrepreneurs, financial professionals, and all of the good actors in the fintech space, this is why. This hysterical throwing of 8 different babies out with the bathwater simply leaves consumers either in an extortionate, broken legacy system or going offshore with far less rule of law (see: FTX) to get damaged.
We should not, and cannot, tolerate that kind of conduct from our Federal agencies. We can do better. We can re-think the rules. We have a live example of that right now with the FTC under Lina Khan and their excellent work around non-competes and revising antitrust policy!
So today, I shake my head at this, and wonder how we got here, where it's fine to give Hamas as much money as you want so long as you do it through the traditional system (because nobody will look, given the system is designed so that they can't), but God have mercy on your soul if you look at a blockchain even once.
We should not, and cannot, tolerate that kind of conduct from our Federal agencies. We can do better. We can re-think the rules. We have a live example of that right now with the FTC under Lina Khan and their excellent work around non-competes and revising antitrust policy!
So today, I shake my head at this, and wonder how we got here, where it's fine to give Hamas as much money as you want so long as you do it through the traditional system (because nobody will look, given the system is designed so that they can't), but God have mercy on your soul if you look at a blockchain even once.
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