Cryptocurrency firms are struggling to find new banking partners following the closure of three of the largest crypto-friendly banks in the U.S. Stakeholders and market watchers tell Forkast that this may be the result of a coordinated regulatory effort to unbank the industry.

The theory, or “Operation Choke Point 2.0,” a term coined by Nic Carter, a general partner at Castle Island Ventures, suggests that regulatory actions against Silvergate Bank, Silicon Valley Bank (SVB) and Signature Bank are part of a wider strategy to unbank the crypto industry. Washington-based law firm Cooper & Kirk supported Carter’s claims in a recent white paper. The law firm litigated the U.S. Justice Department’s original Operation Choke Point initiative that started in 2013 as a coordinated effort to weaponize the banking industry against unfavorable industries such as gun stores, payday lenders and tobacco stores. 

Adrienne Harris, superintendent of the New York Department of Financial Services, has dismissed the theory as “ludicrous,” but some industry participants are concerned about the impact of the regulatory crackdown on crypto.

Harris’ remarks came nearly a month after Signature Bank, the largest surviving crypto-focused bank in the U.S., was shut by regulators over what they called a “systemic bank failure,” a few days after the collapse of SVB and Silvergate.

“The shutdown of Signature Bank, despite its solvency and relatively low levels of unrealized losses, raises questions about the motivations behind the regulatory action. The decision to shut down the bank could be interpreted as a message to discourage people from participating in the crypto industry,” wrote Luke Lombe, a core developer at Spool, a decentralized finance application for yield generation.

The U.S. wing of Binance, the world’s largest crypto exchange, has struggled to find banking partners to serve as fiat on-ramps since the shutdown of Signature Bank. Some USD deposit services have been temporarily halted since April 2, due to Binance.US “transitioning to new banking and payment service providers.”

“Regulators don’t like crypto and even the word decentralization makes them nervous, however, they’re not stupid — they’ll know that no amount of opaque legalese and strongarming will make crypto go away,” Vadim Yarmak, the chief executive officer of blockchain marketing firm PRMR said to Forkast. “The short-term goal is to keep crypto out of traditional banks so that that the idea of crypto doesn’t become normalized.”

Signature Bank: Why did regulators shut a solvent financial institution?

Among the shutdowns of the three banks, Signature Bank’s was the most controversial, according to Carter, as it was still honoring withdrawal requests and had less unrealized losses than many other banks. 

“It appears that these banks, especially Signature, were the victims of an opportunistic campaign to decapitate banks serving the crypto industry. Not only was the bank run opportunistically exploited by regulators to shut down Signature, but it may even trace its origins to Choke Point 2.0,” wrote Carter in a March 23 blog post

According to former congressman and Signature Bank board member, Barney Frank, the bank’s closure meant that “regulators wanted to send a very strong anti-crypto message.”

“The statement by Frank marries with the data,” Jamie Douglas Coutts, a senior market structure analyst at Bloomberg Intelligence, wrote in a research note shared with Forkast. “Based on the last reported numbers, unrealized losses from held-to-maturity assets for Signature Bank were 27.4% of book value, below the average for the S&P 500 banks industry group at 36.6%.”

The NYDFS denied Frank’s allegations and said that Signature’s closure had nothing to do with crypto. The regulator added that the decision was “based on the current status of the bank and its ability to do business in a safe and sound manner.”

Will crypto innovation leave the U.S.?

Crypto industry leaders are concerned that the U.S. government’s strict regulatory actions could drive innovation out of the country. Ripple Labs’ president Monica Long said that the Asia-Pacific is leading the development of global cryptocurrency regulations that favor innovation, which U.S. regulators should also consider.

According to Kadan Stadelmann, chief technical officer of blockchain infrastructure firm Komodo, Europe is also ahead of the U.S. in crypto regulations with its Markets In Crypto Assets framework. 

“The U.S. has not generally taken an affable approach to crypto. We see Europe at least moving forward with a regulatory framework — Markets In Crypto Assets (MiCA). In the U.S., executive branch law enforcement agencies remain tasked with crypto regulation through enforcement,” wrote Stadelmann. 

The MiCA bill is scheduled for a final discussion in the European Parliament on April 18, with the final vote to take place on April 19, according to the Parliament’s agenda.

In the U.S., Senator Elizabeth Warren and Representative Alexandria Ocasio-Cortez sent letters to BlockFi, Circle and 12 other non-crypto firms on Sunday, asking about their relationship with SVB. Circle CEO Jeremy Allaire and BlockFi CEO Zac Prince will be required to provide details about their deposits at SVB, relationships between company executives and any potential “mutual backscratching arrangements” between the two firms. The companies have to respond by April 24.

The letters suggest that more regulatory scrutiny may be on the way for crypto firms that partnered the three crypto-focused banks. The ongoing U.S. crypto banking crisis will likely result in many other crypto firms struggling to find banking partners in the world’s largest economy. 

See related article: Circle’s Disparte speaks on de-risking crypto from banking risks