This is an article I published in the technology edition of The Paper in April.
Continue to track US encryption regulatory policies for everyone and contribute better content.
My Twitter: @curiousjoe5
The 2023 Presidential Economic Report states, “To date, crypto assets do not appear to offer investments of any fundamental value, nor have they served as effective alternatives to fiat currencies, increased financial inclusion, or improved payment efficiency. Instead, their innovation has been primarily aimed at creating artificial scarcity to support crypto asset prices.”
·FTX's collapse has dealt a heavy blow to Washington's confidence in cryptocurrencies. Faced with a new industry, most regulators who have a say have only a vague understanding of its innovations, and everyone can feel the impact of hundreds of millions of dollars evaporating in an instant. Coupled with the political speculation of a group of politicians, the current situation is that US regulators are suppressing the crypto industry in a relatively radical way. As a result, legitimate entrepreneurs and illegal scammers are in a panic and are planning to flee the United States.
On April 1, someone posted a message on social media: "Breaking news: The U.S. Congress passed a new law by 250 votes to 0, banning all cryptocurrencies." This was an April Fool's Day prank, but it received 32,000 views, 88 likes and 32 retweets within an hour, and many people in the comments believed it to be true.
The United States is using the full force of the government to crack down on the crypto industry. This may just be an April Fool's joke. Because in a system like the United States, it is difficult for the whole government to do anything, not to mention that it is difficult for the executive branch to coordinate and take unified enforcement actions on non-core issues such as crypto. People who pay attention to crypto know that the US regulatory authorities are not monolithic, and there are fundamental differences between the main responsible departments on the most basic issues. The U.S. Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC), one says that Ethereum and most cryptocurrencies are securities, and the other says that Ethereum is a commodity and the second largest asset in the crypto world. It is hard to imagine that they are coordinating to crack down on the crypto industry.
But the narrative that "the Biden administration is going all out to crack down on cryptocurrencies" is fermenting in the crypto community. A series of events that occurred in March did demonstrate the Biden administration's determination to crack down on the crypto industry. The aftermath of the FTX crash broke out in the U.S. crypto community. The U.S. Securities and Exchange Commission launched severe enforcement actions against compliant crypto entities such as Kraken and Coinbase. The Commodity Futures Trading Commission sued Binance, the world's largest crypto exchange. Taking advantage of the bank crash, almost all crypto-friendly banks went bankrupt and liquidated. It seems that the regulators are systematically "debanking" the crypto industry.
Is the US government systematically cracking down on encryption?
As the United States is intensively cracking down on the encryption industry and many innovative entities are seriously considering moving out of the United States, where are China's opportunities in the context of Sino-US competition?
An organized attack?
The recent regulatory actions in the United States should be analyzed from two aspects. First, after the FTX incident, crypto has received increasing attention in Washington. For example, in order to prepare for crypto legislation, the House Financial Services Committee created a digital assets subcommittee. This is the first time in the history of Congress that a special agency has been established for digital assets. Second, there is a strong hostility towards crypto among the current Washington regulators. A group of politicians are turning the crackdown on crypto into a political correctness. This atmosphere allows regulatory pioneers such as Gary Gensler, chairman of the U.S. Securities and Exchange Commission, to appear at ease when implementing policies.
Regardless of whether this repression is organized, the hostility can be seen at all levels:
First, the White House’s 2023 Economic Report of the President denies the value of cryptocurrencies.
On March 22, the Biden administration released the 513-page "2023 Presidential Economic Report", of which Chapter 8, titled "Digital Assets: Reassessing Economic Principles", focuses specifically on the issue of cryptocurrencies. The Presidential Economic Report is a report submitted by the US President to Congress every year, outlining the performance of the US economy in the past year and providing economic forecasts for the coming year. The report is drafted by the White House Council of Economic Advisers. The report usually covers key economic indicators such as employment, inflation, GDP growth, budget deficit, etc., and puts forward corresponding policy recommendations.
From this point of view, this report is quite important in the field of US economic policy. A special chapter on digital assets fully demonstrates the importance of this government to related issues. The report has a clear conclusion on digital assets, which can well represent the attitude of this government towards digital assets. For example, the report directly denies the value of cryptocurrencies - "many crypto assets have no fundamental value." Specifically, the attitude of the report is, "To date, crypto assets do not seem to provide investments with any fundamental value, nor have they become an effective alternative to legal tender, improving financial inclusion or improving payment efficiency. Instead, their innovation is mainly to create artificial scarcity to support the price of crypto assets."
This evaluation is quite extreme. There is a large blockchain startup community in the United States. This evaluation completely negates these dynamic innovative forces. As a field lacking supervision, the encryption field is indeed full of chaos, but the technology itself is not sinful. One of the important reasons for the chaos is the lack of effective supervision. In the end, the White House made such a one-sided conclusion, which can well explain the attitude of the regulators.
Second, the “anti-encryption army” at the top of Congress
US Senator Elizabeth Warren is an important force in the Democratic Party in Congress. She was a strong contender for the Democratic presidential candidate in the last election. She is also a senior member of the Senate Banking Committee.
Warren kicked off her reelection campaign in late March, explicitly stating that the campaign would focus on the crypto industry. In a tweet announcing her reelection, Warren mentioned the need to "build an anti-crypto army" in the United States. Warren's anti-crypto stance has a long history. In December 2022, she introduced the Digital Asset Anti-Money Laundering Act of 2022, which requires all decentralized entities to comply with strict anti-money laundering (AML) requirements. In February 2023, Warren vowed to reintroduce the bill this year. The term "anti-crypto army" in this re-election campaign is consistent with the previous position, and it seems to have risen to a higher level. Warren seems to be intent on making herself a leading figure in Washington's fight against crypto. American politicians like Warren are masters of political speculation. When they launch their campaign platforms, they must have fully considered the inclinations of voters in their constituencies and the political direction of Washington. Warren's high-profile anti-crypto image must be closely related to the relatively strong anti-crypto sentiment in the United States. And high-profile organizations like Warren’s “anti-crypto army” will in turn intensify the spread of related sentiments.
Operation Chokepoint 2.0 and the De-Banking of Crypto
Operation Chokepoint 2.0 is not an official name. It is based on a program previously implemented by the US government called Operation Chokepoint. Operation Chokepoint 1.0 was a program launched by the US Department of Justice (DOJ) in 2013 to combat fraud and illegal activities such as money laundering and drug trafficking. The US government prevented certain businesses from obtaining financial services by putting pressure on banks that did business with high-risk merchants. This measure caused some controversy at the time because it caused many legal but high-risk businesses to suffer serious liquidity crises, such as legal adult content providers, short-term loan companies, etc. This action was also seen as an Obama-era campaign to deprive legal but politically unpopular businesses (including gun manufacturers, etc.) of banking services.
The recent "de-banking" action against the crypto industry is called "Operation Choke Point 2.0". Due to the chain reaction caused by the continuous interest rate hikes by the Federal Reserve, several banks in the United States were forced to go bankrupt and liquidate in March. Afterwards, people found that the banks that were liquidated (Signature Bank, Silicon Valley Bank and Silvergate Bank) were all crypto-friendly banks. A large part of Signature Bank's daily business is related to the crypto industry. According to Barron's, about 20% of Signature Bank's deposits come from cryptocurrency companies. After the bankruptcy of these banks, if crypto companies cannot find alternative liquidity providers, the entire industry will face huge difficulties in deposits and withdrawals.
After the bankruptcy of the above crypto-friendly banks, US crypto companies have become "homeless" in terms of banking services. According to a report by CoinDesk on March 20, they asked the 20 largest banks in the United States about their attitudes towards crypto customers. Most banks, including JPMorgan Chase, Citigroup, Bank of New York Mellon and Morgan Stanley, remained silent on the issue. Some banks have also made it clear that they are unwilling to accept crypto customers.
There is evidence that these are not coincidences. Regulators seem to be using this banking crisis to cut off crypto companies from banks. Former Congressman Barney Frank, who was a member of the board of directors of Signature Bank, publicly stated that his bank was liquidated by the New York Department of Financial Services (NYDFS) because "regulators wanted to send a very strong anti-crypto message." The New York Department of Financial Services denied the accusation. On March 16, Reuters reported that the Federal Deposit Insurance Corporation (FDIC) asked potential buyers of Signature Bank to abandon the bank's crypto customers, thereby cutting off their continued access to banking services. Although the FDIC denied it, crypto customers did not have the opportunity to be acquired at the time of the transaction.
An interesting fact is that the current FDIC Chairman Martin Greunberg was the architect of Operation Choke Point 1.0.
In response to this situation, the Blockchain Alliance, one of the largest cryptocurrency lobbying groups in Washington, submitted a Freedom of Information Act request to the Federal Reserve, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation on March 16. CEO Kristin Smith said the requests are intended to "reveal the truth behind the potential debanking of U.S. crypto companies."
However, some people in the industry believe that these actions cannot be called "Operation Choke Point". Ron Hammond, director of public relations at the Blockchain Alliance, called on in a tweet on March 29 that these activities "have not yet reached the level of Operation Choke Point 2.0, please stop calling it that."
Fourth, regulators focus on cracking down on leading crypto companies
At the corporate level, the highlight of March was the regulatory authorities’ administrative crackdown on three leading centralized exchanges. The situations of these three exchanges were different.
The SEC's allegations against Kraken are "outrageous profit promotion and extremely high depositor risks." Kraken does have problems promoting Ethereum staking returns, so these allegations are less controversial and Kraken has taken the initiative to pay the fine.
Binance is the world's largest centralized crypto exchange, and the CFTC's lawsuit against Binance has caused a big stir in the industry. However, considering that Binance is mainly a foreign exchange, it has indeed been caught in some compliance issues, and Binance has little interaction with Washington, leaving a bad impression in Congress, so it is expected that it will be targeted by US regulators.
The most controversial is the SEC's investigation into Coinbase, the largest centralized exchange in the United States. Coinbase is a compliant company that went public in accordance with official procedures. Compared with the above two companies, Coinbase has closer ties with regulators and acts more cautiously. As a result, under the "big stick" of supervision, its situation is almost the same as that of other companies, and all previous compliance efforts have been wasted. This situation has caused great disappointment in the U.S. crypto community and has led more companies to publicly discuss moving out of the United States.
On March 22, Coinbase's chief legal officer published an article titled "We asked the SEC to provide Americans with reasonable crypto rules, but what we got was legal threats." The tone of the article is very sad, and it mainly talks about one thing, that is, pushing the SEC to clarify regulatory policies has been fruitless. According to the article, Coinbase actively requested compliance, held more than 30 meetings with the SEC, and spent millions of dollars to study the registration method, but did not receive a response during the 9 months. This article can well represent the confusion of practitioners in the US crypto circle, that is, the vacuum of regulatory policies makes them at a loss. Gary Gensler, chairman of the SEC, has repeatedly said in public speeches that the US regulatory policy is very clear, but in fact it is not the case. In terms of top-level design, the crypto bill has been brewing but has not been launched; in terms of administrative policies, there is no consensus among various regulatory agencies, such as the contradiction between the SEC and the Commodity Futures Trading Commission; these have caused the specific law enforcement to be more arbitrary, making practitioners feel insecure.
The politicization of crypto issues
Encryption was originally a new issue without any partisan overtones, but as attention has increased today, like many other important issues, encryption has gradually taken on the color of partisan struggle, becoming a bargaining chip for candidates in their campaigns and a weapon for the two parties to attack each other.
Coindesk published an article on March 31 titled “The Biden Administration is Politicizing Cryptocurrency,” which stated, “Cryptocurrency has always been a divisive issue in the United States, but it has never been a partisan issue. Until now… With a series of high-profile enforcement announcements by the U.S. Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) against crypto entities, we are at risk of losing that balance. Whether intentional or not, cryptocurrency is being politicized and has become one of the many issues that are difficult to resolve in a divided and deadlocked U.S. Congress. This situation is unlikely to bring good results.”
The well-known crypto podcast Bankless recently interviewed Congressman Tom Emmer. Emmer is the "whip" of the U.S. House of Representatives, that is, the third person behind the speaker and the majority leader. It is the first time that such a political heavyweight has been interviewed by a crypto media. Interestingly, although Emmer talked about crypto in the interview, the basic routine of the conversation was still political commentary and political attacks. As a Republican leader, Emmer seized every opportunity in the interview to accuse "centralized bankers" and the general backers of these bankers-Democratic Senator Elizabeth Warren. In Emmer's words, it seems that "Operation Choke Point 2.0" is an irrefutable fact, and the top leaders of the Democratic Party are using the banking system to strangle the crypto industry at all costs. The Democratic Party is destroying emerging industries and suppressing innovation, all to protect their own political interests-the interests of the Democratic Party's financial backers, big bankers, because crypto is a threat to traditional banking. Undoubtedly, this is not only a crypto interview, but also another political show, and crypto has thus become another stage for the Democratic and Republican parties to wrestle.
Hong Kong is taking over crypto resources moving from the United States
FTX's collapse has dealt a heavy blow to Washington's confidence in cryptocurrencies. Faced with a new industry, most regulators with a say have only a vague understanding of its innovations, and everyone can feel the impact of hundreds of millions of dollars evaporating in an instant. Coupled with the political speculation of a group of politicians, the current situation is that US regulators are suppressing the crypto industry in a relatively radical way. As a result, legitimate entrepreneurs and illegal scammers are in a panic and are planning to flee the United States. A social media account named "MariaShen" "analyzed more than 200 million code submissions and more than 11,000 developer profiles" and concluded that "the United States has lost its leading position in blockchain developers, and its open source developer market share has dropped from 40% to 29%."
One of the important destinations for these outward-moving crypto resources is Hong Kong.
The Wall Street Journal published an article on April 1: "U.S. suppression fuels Hong Kong's cryptocurrency ambitions", which mentioned that "today, the U.S. regulates cryptocurrencies more strictly than ever before, while Hong Kong regulates in a more relaxed manner... This will undoubtedly shift the focus of crypto asset trading and investment more to Hong Kong." Ambre Soubiran, CEO of Kaiko, a digital asset data provider based in Paris, said in an interview, "We want to be where our customers are." And customers are gathering in Hong Kong. "Official data shows that more than 20 cryptocurrency and blockchain companies from mainland China, Europe, Canada and Singapore have informed the government that they plan to establish operations in Hong Kong, and more than 80 companies have expressed their intention to do so."
At the same time, the author of the article "The Biden Administration is Politicizing Cryptocurrency" lamented at the end of the article: "Just last year, when President Biden issued a balanced, forward-looking executive order on digital assets, I still believed that the United States could still lead the industry despite Congress's delays in important legislation and the SEC's hostility to the industry. I saw the opportunity for the United States to deal with cryptocurrency issues like the Telecommunications Act of 1996, which established a viable open standard for the Internet, and when the world followed this standard, it became the framework for our leadership of the world. However, this opportunity has now been lost." If this trend continues, the United States will indeed lose the opportunity to lead the industry. What then?
(Author Curiousjoe is a cross-border researcher of international politics and cryptocurrency.)
