America's War on Crypto

The crypto industry recently held a Consensus 2023 industry event in Austin, Texas. It was a 3 day event featuring numerous panels/sessions with speakers/representatives from both crypto and non-crypto companies/industries as well as representatives from various government regulators.

The event covered many topics including:

• efforts by large, mainstream companies like PepsiCo that are looking for opportunities in the crypto space
• a merger of traditional finance with blockchain governance
• plans by large banks to innovate in tokenizing traditional-financial assets

Crypto isn't just the wild west purview of money launderers and dark web ne'er do wells. There is serious financial/corporate activity happening in the crypto world now.

Valid Criticisms or Propaganda?​

Anti-crypto voices have tried to vilify the crypto industry on environmental concerns - claiming that crypto consumes too much energy. However, like most nascent technologies, they evolve with innovation when there is sufficient interest.

Bitcoin (BTC) was the first crypto coin and it was built on a "proof of work" model. This model is energy intensive by design and it also didn't scale well for handling a large volume of transactions. So, "proof of stake" crypto were developed that were orders of magnitude more efficient and scalable. Ethereum (ETH) transitioned from a proof of work model to a proof of stake model for this reason - and it's still not done being developed. Stellar (XLM) was developed on another "proof of agreement" model that claims to be several more orders of magnitude more efficient than proof of stake models - and even more energy efficient than traditional finance like credit cards:

Electricity Consumption of a Distributed Consensus Algorithm | LUP Student Papers

The efficiency of proof of work and proof of stake based cryptos are still being improved in many cases by the development of new technologies like parallel blockchains (aka parachains, cross chains, etc.) that distribute transaction loads and zero knowledge proofs (which could be very significant for Bitcoin in particular).

In addition to the developers of various crypto projects being sensitive to the energy costs from a design standpoint, the decentralized network of node operators (and bitcoin miners) that implement the crypto protocols (than operate the computer servers on the network) are also increasingly using more green energy sources:

... There has also been a shift toward using more renewable energy sources to power cryptocurrency mining. One 2020 study found that around 39% of the energy consumed by PoW cryptocurrencies is from renewable energy sources, up from 28% reported in a previous study. This percentage is likely to rise as renewables become more affordable in the future.
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Biden's 30% Crypto Electricity Tax May Be Too Blunt A Solution

In his latest budget for Fiscal Year 2024, President Biden has proposed a new tax on electricity use from cryptocurrency mining.

www.forbes.com

Crypto Threatened by Government Hostility​

The Biden administration has been very open about their hostility to the crypto industry:

It’s a safe bet that 80-year-old President Biden—like his 76-year-old predecessor—has never bought Bitcoin, used a stablecoin, or tried out Web3. But that didn’t stop Biden’s underlings at the White House from issuing a blog post on Friday, decrying crypto as predatory and dangerous. The document reads like a diatribe and even has a whiff of moral panic—as if Biden had instructed the makers of Reefer Madness to turn their attention to digital currency.
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The Biden White House just rolled out some of its most anti-crypto language yet. They may regret it

The White House rolled out an aggressive anti-crypto stance that could come to bite Democrats in the long term.

fortune.com

The White House Council of Economic Advisers delivered a 35-page takedown of the idea that digital assets like Bitcoin are useful as an alternative to government-backed currency, the claim that crypto’s underlying distributed ledger technology could have some utopian application, and the notion that it could serve as a hedge against inflation.

“Although the underlying technologies are a clever solution for the problem of how to execute transactions without a trusted authority, crypto assets currently do not offer widespread economic benefits,” the council writes. “They are largely speculative investment vehicles and are not an effective alternative to fiat currency. Also, they are too risky at present to function as payment instruments or to expand financial inclusion.”

The extended crypto criticism, which fills one chapter in a book-length annual report the White House sends to Congress each year, represents a stark change in tone from President Joe Biden’s administration.

One year ago, Biden signed an executive order asking federal agencies to look at ways of curtailing the risks of crypto without stifling “financial innovation.” This week’s report makes clear the White House thinks crypto can’t innovate much besides the same kinds of financial disasters that prompted Congress to regulate the banking industry a century ago.
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White House Slams Crypto As Offering 'No Widespread Economic Benefits'

The Biden administration has soured on crypto after several high-profile industry failures.

www.huffpost.com

Crypto faces similar hostility within the legislative branch from a group of Senators led by Elizabeth Warren.

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Now, influential Democrat senator Elizabeth Warren has signaled she's "building an anti-crypto army" as part of her re-election campaign following a warning from crypto lobby group Coin Center that a crackdown on TikTok could pave the way for a bitcoin ban.

"I’m in this fight to put our government on the side of working families," the former U.S. presidential hopeful posted to Twitter, embracing a quote from a recent Politico profile that said she's "building an anti-crypto army."

Warren, who is on the Senate Banking Committee that oversees the U.S. Securities and Exchange Commission (SEC), has been at the vanguard of a slew of anti-bitcoin and crypto bills that have been introduced over the last year.
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Elizabeth Warren Is Building An ‘Anti-Crypto Army’—Feeding Serious U.S. Bitcoin Ban Warnings

Bitcoin and crypto companies are struggling with the growing possibility that the U.S. is trying to "quietly" ban bitcoin...

www.forbes.com

Three Pronged Attack​

The American government is currently employing a three pronged attack on the crypto industry in an attempt to suffocate it.

Prong number one makes headlines in most news media and involves the SEC purposefully maintaining vague guidance and attacking companies with lawsuits. Their behavior has been so egregious that it has drawn dissent from their own ranks and from Congress. The SEC has apparently been tasked to be the Biden administration's Shawshank warden Samuel Norton in obtusely responding to the crypto industry. There really isn't any other way to explain SEC chair Gensler's blatant hypocrisy.

Prong number two has flown under the radar of most news media and involves the revival of Operation Choke Point - an Obama era program that aimed to de-bank lawful industries that the administration disfavored. The operation was shut down circa 2017, but is now making a comeback targeting the crypto industry. Cooper & Kirk, a law firm that sued FDIC, OCC & Fed over the original Operation Choke Point, published a detailed summary of Operation Choke Point 2.0.

Former Congressman Barney Frank, a board member of Signature Bank, alleged that the bank was solvent and seized by regulators to debank it's crypto clients. The move sparked contagion in the regional banking industry and prompted some members of Congress to question the FDIC's actions. When the FDIC solicited bids for Signature bank, they split off Signature's crypto clients effectively de-banking them.

The third prong involves legislation and executive orders designed to handcuff the crypto industry including increasing taxes on bitcoin miners and regulations.

Stablecoins - Kind of a Big Deal​

Stablecoins, such as US Dollar Coin (USDC) and Tether (USDT), are cryptocurrencies that are backed by national currencies. They are essentially tokenized forms of the underlying legal tender they represent. Unfortunately for the Federal reserve, US Treasury Dept., etc., they enable transactions that do not process through the US banking system. As such, they have drawn particular interest from the Biden administration.

Stablecoins provide an open door for global entities to conduct dollar denominated transactions that could bypass US sanctions. They provide an opportunity for people in nations with high inflation to save money in dollar denominated currency that bypasses official dollar exchanges (or prohibitions). The adoption and growth of stablecoins would appear to be a direct threat to any possible plans for a Central Bank Digital Currency (CBDC).

Futile and Stupid Gesture​

The Biden administration's effort are provoking a chilling effect of the domestic crypto industry and forcing much of America's leadership in innovation and development to expatriate to friendlier shores. What the Biden administration does not appear to realize is that crypto is global. They are not going to be able to choke the global industry with an iron fist. Pandora's box has been opened. The crypto industries will continue to innovate and grow with new financial and commercial applications. It will be a true shame if America abdicates their position in leading the charge.

 

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SCOOP: @FoxBusiness has learned that some Republican members of the @FinancialCmte led by @RepJohnRose sent a letter today to @SECGov Chair @GaryGensler and @FINRA President/CEO Robert Cook expressing concern over their continued silence regarding @PrometheumInc’s May launch of custody services for Ethereum as a so-called “crypto asset security.”

The letter states that the agencies’ silence on the matter signals they are “complicit” in creating market confusion and uncertainty given that the SEC has already acknowledged that $ETH is not a security and the term “crypto asset security” does not apply to the token itself, but rather the manner in which it is sold.

“Players in the digital assets space deserve certainty from their regulators,” Rose writes. “Yet under Chair Gensler they’ve only received chaos and confusion. I hope while Chair Gensler is cleaning out his office, he can heed our concerns seriously and maybe deliver some real guidance on his way out the door.”

Co-signers of are @RepFrenchHill, @USRepMikeFlood, @RepDustyJohnson and @RepTimmons.

Last year, @CGasparino wrote in the @nypost that the SEC’s regulations on #crypto are an “uneven mess,” citing Prometheum as a company that “appeared to have slipped through some very large SEC cracks to become a thing.”

 

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The War on Crypto/Operation Choke Point 2.0 is going to continue right up until Trump takes office and starts cleaning house with bad actors in the 3 letter agencies.

 

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SEC Chair Gensler to Depart Agency on January 20​

Washington D.C., Nov. 21, 2024 — The Securities and Exchange Commission today announced that its 33rd Chair, Gary Gensler, will step down from the Commission effective at 12:00 pm on January 20, 2025. ...

SEC.gov | SEC Chair Gensler to Depart Agency on January 20

www.sec.gov

Good riddance.

 

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A Texas federal court has rejected the U.S. Securities and Exchange Commission's recent rule expanding the definition of a securities dealer to include a wider swath of firms — including some in the cryptocurrency sector. This adds a significant legal loss to the crypto legacy of SEC Chair Gary Gensler on the same day he announced his January departure.

In response to a lawsuit from the industry lobbying group Blockchain Association and the Crypto Freedom Alliance of Texas, a judge in the U.S. District Court for the Northern District of Texas granted an early decision Thursday that slammed the SEC for overextending its legal reach. The court ordered that the rule be thrown out.

"The court concludes that the SEC exceeded its statutory authority by enacting such a broad definition of dealer untethered from the text, history, and structure of the Exchange Act," according to the ruling from Judge Reed O’Connor.

The judge, who previously handled a Consensys suit against the SEC, issued an order that no part of the final rule approved in February can stand.
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More:

U.S. SEC Loses Crypto Lawsuit Over 'Dealer' Definition That Pushed Into Crypto

A Texas federal court ruled that the regulator's new dealer definition that roped in crypto entities was "untethered" to U.S. securities law.

www.coindesk.com

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Let's all be clear on one thing. @GaryGensler is evil. He should never again have a position of influence, power, or consequence. Any company, university, or organization that hires or works with him post-SEC is betraying the crypto industry and should be boycotted aggressively. This the only way to prevent this kind of misuse of government power from happening again in the future.

Gensler’s behavior can't be explained away as a good faith mistakes. It was entirely thought out, intentional, and purposeful to fulfill his personal, political agenda at any cost. Even if this meant nuking an industry, tens of thousands of jobs, people’s livelihoods, billions of invested capital, and more. Ironically, his sociopathic ambition ended up torching his own political party.

No amount of apology can undo the damage he has done to our industry and our country. This type of person has no place at any institution, big or small. Americans have had enough of their tax dollars going towards a government that is supposed to protect them, but instead is wielded against them by politicians looking to advance their careers. It's time for this pathology to be stopped once and for all. Onward!

 

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U.S. sanctions against Tornado Cash, a service that anonymizes crypto transactions, must be abandoned, a federal appeals court ruled Tuesday.

The decision answers a controversial privacy debate on whether the government — via a sanctions list maintained by the U.S. Treasury Department — has a right to target the technology because it's associated with criminals. The ruling reversed a district court's August ruling that had sided with the government's pursuit of what it had characterized as a "notorious" crypto-mixing service.
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More:

Tornado Cash Sanctions Overturned by U.S. Appeals Court

The decision answers the controversial debate over whether the crypto-mixing service, which anonymizes transactions, can be banned for its use by criminals.

www.coindesk.com

 

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Two significant legal victories for the #crypto industry in the past few days:

1. Today’s ruling by the Fifth Circuit Court of Appeals in regards to Tornado Cash which says the @USTreasury acted unlawfully when it added an open source protocol to its list of sanctioned entities. This ruling will set a precedent that open source technology cannot be banned solely because it gets used by bad actors — also a blow to @SenWarren’s AML bill.

2. A district judge striking down the @SECGov’s proposed expanded broker-dealer rule which would have included decentralized protocols and automated market makers in the agency’s definition of a “dealer,” subjecting them to regulatory scrutiny. The judge ruled the SEC exceeded its Congressional authority by trying to cast its net so broadly.

 

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Marc Andreessen appeared on Joe Rogan's show and talked about Operation Choke Point 2.0. Now it's starting to go viral and people that had no clue are learning about it.



This is the post Elon Musk referenced (not shown in the embedded tweet, but visible on X if you click on the tweet):

 

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Both Elon and Vivek sounding the bell on OCP2.0. I never thought I'd see the day where this shit was brought into the light.

 

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The following tweets are one reply chain:

Some quotes:

• “election outcome stunted OCP2.0, but needs to be rooted out.”
• “ETF’s would’ve been the only approved crypto vehicles; US exchanges would’ve been extinct in 24 months.”
• “forget political tribalism, Trump equaled survival.”
• “debanking, bias against tech/crypto friendly banks (Custodia) was hard to comprehend; anti-American type stuff.”

 

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Can confirm this is true. It was one of the most unethical and un-American things that happened in the Biden administration, and my guess is we'll find Elizabeth Warren's fingerprints all over it (Biden himself was probably unaware).

We're still collecting documents via FOIA requests, so hopefully the full story emerges of who was involved and whether they broke any laws.

Warren and Gensler tried to unlawfully kill our entire industry, and it was a major factor in the Dems losing the election. The Democratic party should realize Warren is a liability and further distance themselves if they want to have any hope of rebuilding.

More to come?

 

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Context for Brian Armstong's comments (from November 1):

Slowly but surely, the picture is becoming clear. After we sued, @FDICgov finally started giving us information related to our FOIA request about the pause letters it sent to financial institutions as part of Operation Chokepoint 2.0. In short, the contents are a shameful example of a government agency trying to cut off financial access to law-abiding American companies. 1/3

So far we've uncovered more than 20 examples of the FDIC telling banks to “pause” or “refrain from providing” or “not proceed” with offering crypto-banking services. The public deserves transparency, not an agency that’s working behind a bureaucratic curtain. 2/3

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We don’t have the full letters yet, but what we’ve seen so far speaks volumes. Take a look for yourself. In the meantime, we’ll keep pushing to get clarity from our regulators through FOIA requests and any other means necessary. 3/3

https://assets.ctfassets.net/c5bd0wqjc7v0/7nBWws5LwK6pwHTPcRO76u/7f7f0f78ae404e951c389d28f578a19f/-25-2-_Exhibit_B_-_Vaughn_Index.pdf

 

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Kept quiet about this for almost a year out of fear but since I'm in good company with @tyler @cameron @brian_armstrong @elonmusk now..Last December, I got a call from JPM saying "we have to close anyone's account that we know their primary source of income/wealth is crypto. This is directly from the top from Jamie. I'm really sorry."

I had a close relationship with my banker so I assume 99% of people wouldn't even get that kind of transparency/explanation. Wanted to add my own name to the debanked OCP list @nic__carter. It's real. It happened. Hopefully now it will soon be over.

 

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I never shared this publicly before, but since @pmarca opened the floodgates on @joerogan’s pod, it feels appropriate to shed more light on this.

As a reminder, Libra (then Diem) was an advanced, high-performance, payments-centric blockchain paired with a stablecoin that we built with my team at @Meta. It would’ve solved global payments at scale. Prior to announcing the project, we spent months briefing key regulators in DC and abroad. We then announced the project in June 2019 alongside 28 companies. Two weeks later, I was called to testify in front of both the Senate Banking Committee and the House Financial Services Committee, which was the starting point of two years of nonstop work and changes to appease lawmakers and regulators.

By spring of 2021 (yes they slow played us at every step), we had addressed every last possible regulatory concern across financial crime, money laundering, consumer protection, reserve management, buffers, and so much more, and we were ready to launch.

We had worked on a slow rollout of a limited pilot that some members of the Fed’s Board of Governors were supportive of. At last, Chair Jay Powell was ready to let us move forward in a limited way. The story, as I heard it, is that Jay Powell was told by Treasury Secretary Janet Yellen at one of their biweekly meetings that allowing this project to move forward was “political suicide,” and she would not have his back if he let it happen. I wasn’t in the room when this conversation happened, so take these words with a grain of salt, but effectively this was the moment Libra was killed.

Shortly thereafter, the Fed organized calls with all the participating banks, and the Fed’s general counsel read a prepared statement to each of them, saying: “We can’t stop you from moving forward and launching, but we are not comfortable with you doing so.” And just like that, it was over.

One essential point is worth making here. There was no legal or regulatory angle left for the government or regulators to kill the project. It was 100% a political kill—one that was executed through intimidation of captive banking institutions. That was the hardest part of this story for me personally. Not that we had failed, but that America, this country I immigrated to and became a proud citizen of because of its rule of law and value system, behaved in such a way for political reasons. It was a very tough pill to swallow.

The bright side of the story, though, was the many learnings from this wild ride. By the end of the project, we had made so many concessions to get a thumbs-up that the whole design of the network became a Frankenstein of our initial ambitions.

We also learned the biggest lesson of all, which is that if you’re trying to build an open money grid for the world—eventually moving trillions of dollars a day, designed to be here 100 years from now—you have to build it on the most neutral, decentralized, unassailable network and asset, which, hands down, is Bitcoin.

And now this is what many of us who went through this scarring journey are building together at @Lightspark. And this time, we won’t stop until we get it done!

 

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Here's a special Black Friday FATF Thread to complement @pmarca 's explainer on the Joe Rogan show about how the USG's "control mechanism" was applied to Big Tech by emulating the way it already controlled the banking system.

2/ FATF stands for the Financial Action Task Force (FATF). It originated in 1989 as a one-year fact-finding mission, championed by the United States during the “war on drugs,” but has since evolved into one of the most influential, yet opaque, financial regulators in the world.
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More (long):

Thread by @izakaminska on Thread Reader App

@izakaminska: 🧵Here's a special Black Friday FATF Thread to complement @pmarca 's explainer on the Joe Rogan show about how the USG's "control mechanism" was applied to Big Tech by emulating the way it already contr...…

threadreaderapp.com

 

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Long xitter thread from Caitlin Long:

Thread by @CaitlinLong_ on Thread Reader App

@CaitlinLong_: 1/ HOW TO FIX THE U.S. DEBANKING PROBLEM, a 🧵by someone who set out to solve it but ended up repeatedly targeted by it (+ whose bank has a lawsuit against the Fed pertaining to...

threadreaderapp.com

 

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Longer thread on the FDIC’s 2022-23 “pause letters” to banks regarding crypto-asset activities in 2022 and 2023. Strap in
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More (long):

Thread by @nic__carter on Thread Reader App

@nic__carter: Longer thread on the FDIC’s 2022-23 “pause letters” to banks regarding crypto-asset activities in 2022 and 2023. Strap in So we all know that banks have been stymied from doing crypto stuff for years: ...…

threadreaderapp.com

 

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Crypto banking activity was paused or prevented by the Federal Deposit Insurance Corp. at a large number of U.S. banks in 2022, according to communications pried loose by a research firm hired by Coinbase Inc. (COIN).

Coinbase's hired help, History Associates Inc., had taken the FDIC and the Securities and Exchange Commission to court in June and finally won access to certain internal FDIC communications. The heavily-redacted documents emerged on Friday, showing the banking regulator slamming the brakes on lenders offering or considering products and services in the digital assets sector.

"We respectfully ask that you pause all crypto asset-related activity," the regulator wrote in one of the 23 letters shared by the crypto exchange. "The FDIC will notify all FDIC-supervised banks at a later date when a determination has been made on the supervisory expectations for engaging in crypto asset-related activity."

The industry has long complained that it's been under a banking crisis in which companies and leading crypto figures are blocked from U.S. bank services. Coinbase Chief Legal Officer Paul Grewal argued that these letters represent hard evidence that crypto businesses were systematically walled off from banking by the regulator.

"The letters show that this was no conspiracy theory at all, that this was not just rank speculation or the musings of a paranoid industry," Grewal said in an interview with CoinDesk. "There was a concerted plan on the part of the FDIC that they carried out — without any reluctance — to deny banking services to a legal American industry. That should give everyone great pause."
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U.S. FDIC Told U.S. Banks to Lay Off Crypto, Letters Obtained by Coinbase Reveal

Coinbase's Paul Grewal says this is hard evidence proving the industry hasn't been spouting conspiracy theories about being shoved out of U.S. banking.

www.coindesk.com

 

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Consumer Action for a Strong Economy (CASE) called on outgoing Chairman Gary Gensler to act in good faith and finally release the Security and Exchange Commission (SEC) Office of the Inspector General's report on potential conflicts of interest by former Director of Corporation Finance William Hinman, in an ad that is slated to run during 60 Minutes this week.

"The American public's faith in our institutions like the SEC have collapsed, in large part due to questions about conflicts of interest among the SEC's highest officials. The Inspector General's investigation into the former Director of Corporation Finance is well known. It's past time to release the IG's report," said Matthew Kandrach, President of CASE. "We are asking Chairman Gensler to do the right thing and release the IG report so the American people can know what happened leading up to the government's most consequential actions on crypto regulation."

Crypto policy will take center stage during this week's episode of 60 Minutes as Martha Brennan interviews Ripple CEO Brad Garlinghouse. Knowing the longstanding legal dispute between the SEC and Ripple, CASE believes that Chairman Gensler will be tuning into the interview, so the organization is buying time during the show to call on the Chairman to release the Inspector General's report.

The government watchdog organization Empower Oversight obtained thousands of pages of documents through the Freedom of Information Act and lawsuits against the SEC which probed Mr. Hinman's actions in office that may have violated federal ethics rules on conflicts of interest. The group's investigation resulted in a referral of evidence to the SEC OIG in May 2022. In February 2024, the SEC OIG asserted they were in the "final stages" of an investigation into these facts.

CASE's ad calls on Gensler to release that report.

CASE Calls on SEC Chairman Gensler to Release Hinman IG Report in New Ad to Air during 60 Minutes

/PRNewswire/ -- Consumer Action for a Strong Economy (CASE) called on outgoing Chairman Gary Gensler to act in good faith and finally release the Security and...

www.prnewswire.com

 

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Spoiler: image in post #2

 

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So Marty Gruenberg was out today trying to claim the pause letters from the FDIC only pertain to crypto assets on the balance sheet.

Despite this transparently not being the only thing the FDIC was communicating (so either he is lying or doesn't know what his people were up to), here is an interesting part:

The @NYDIG arrangement, as I recall, would have banks using NYDIG as a sub custodian for non-FDIC insured assets that don't go on the balance sheet.

Which really complicates that narrative until SAB121 magically put them on balance sheets...

Maybe something to look into @RepFrenchHill?

 

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...
John & the AIMA took the time to do an exhaustive survey of crypto asset managers in the United States (so we're not talking 3 dudes in a broom closet who are anon in the Seychelles, but rather actual asset managers) about their access to banking services.

To quote the WSJ:

"Out of 160 crypto hedge funds, three-quarters reported issues with basic banking services over the past three years. The funds invest in digital currencies and blockchain-technology companies."

This comports with my personal experience advising companies in the space, and with the stories I hear in the industry. When regulators are in public telling the story that they are not interdicting the industry, in private those same banks are debanking regulated asset management companies from basic services like operational accounts and cash management, and either openly saying regulatory pressure is the reason or refusing to say anything at all (because they have been threatened, in many cases, I would suspect).

This is some excellent survey work and reporting by the WSJ & Angel here. I suggest you just read the whole thing for yourself if you want to understand the depth of the issue, but let me reiterate:

Well-organized, transparent asset managers cannot get regular way banking services if they touch this space, yet similarly situated alternative asset managers in real estate, private credit, etc. do not report any issues.

And for those who would say "well this is a risk judgment by banks", I will retort with the fact that providing basic accounts and cash management services are not high risk for US asset management funds (or certainly not so high risk you can't charge for it), or if you believe that, @Fidelity needs to be debanked (remember they have a BTC ETF?).

Something else is going on here, and here are some receipts.

Majority of Crypto Hedge Funds Report Facing Banking Issues in Recent Years

Cryptocurrency hedge funds have run into widespread banking problems in recent years, according to a new survey.

• Out of 160 crypto hedge funds, three-quarters reported issues with basic banking services over the past three years. The funds invest in digital currencies and blockchain-technology companies.
• None of the 20 other alternative investors surveyed, in areas including real estate and private credit, reported similar issues.
• Of the crypto funds that faced issues, a little more than half were told that banks planned to end the relationship. The rest either weren't informed or didn’t answer the survey question.
• When banks communicated, most didn't give crypto funds a clear reason for denying access. Banks told two funds they were limiting crypto clients and industry exposure.

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Guess we won't be sad when the banks all die a quick death.