US Government Instructed Banks to Limit Crypto Activity, Coinbase Documents Reveal

Internal communications from the Federal Deposit Insurance Corporation (FDIC) have revealed that the U.S. government took deliberate steps to limit banks’ involvement with cryptocurrency businesses in 2022, according to documents released by Coinbase. These communications, made public after a legal challenge by Coinbase, suggest that regulators played a significant role in restricting access to banking services for the crypto industry, creating a challenging environment for firms in the sector.

The FDIC’s Directives to Banks

The released FDIC documents include letters that explicitly instruct banks to pause all crypto-related activities. The letters, which were issued to banks, requested that they halt any services related to cryptocurrency assets, including offerings to crypto companies and customers. The official communication reads: “We respectfully ask that you pause all crypto asset-related activity.”

This directive appears to have delayed or halted banks’ efforts to provide crypto-related services, such as offering accounts or facilitating crypto transactions. The halt in services reportedly came as a response to unclear compliance requirements in the crypto sector, which some critics argue was used as a justification to restrict banking access for crypto businesses.

“Operation Chokepoint 2.0” Allegations

Coinbase claims that these FDIC communications shed light on a coordinated effort by the U.S. government to restrict banking access for legitimate crypto businesses. This is being referred to as “Operation Chokepoint 2.0”, which some in the crypto industry see as a government initiative to stifle the sector by effectively cutting it off from the traditional financial system.

The term “Operation Chokepoint” originally referred to a past initiative by U.S. regulators aimed at pressuring banks to stop providing services to industries deemed high-risk, such as payday lenders and gun dealers. Critics now argue that Operation Chokepoint 2.0 is an extension of this concept, specifically targeting the crypto industry.

Coinbase’s Chief Legal Officer, Paul Grewal, expressed strong disapproval of the government’s actions on X (formerly Twitter). He wrote, “These letters show Operation Chokepoint 2.0 wasn’t just some crypto conspiracy theory. [The FDIC] is still hiding behind way overbroad redactions.” Grewal further emphasized that the lack of clear guidelines for crypto businesses allowed regulators to impose informal restrictions on the industry, effectively isolating crypto from the banking sector.

The Strained Relationship Between Crypto and Traditional Banking

For years, cryptocurrency companies in the U.S. have faced challenges in establishing and maintaining banking relationships due to the uncertainty surrounding regulatory compliance. Many banks are reluctant to engage with crypto firms due to concerns over fraud risks, compliance issues, and potential reputational harm. This lack of clarity has led some banks to entirely avoid working with crypto businesses, which creates significant barriers for companies that rely on traditional banking infrastructure to operate.

Coinbase executives argue that the regulatory ambiguity surrounding cryptocurrency has contributed to this issue. The FDIC’s letters, according to Coinbase, highlight how the lack of formal guidance has enabled regulators to impose informal restrictions on banks, which, in turn, limits the ability of legal crypto businesses to access basic banking services.

A Call for Regulatory Reform

Paul Grewal of Coinbase is advocating for a change in approach, arguing that law-abiding American businesses should have the right to access banking services without undue interference from the government. He emphasized that the incoming administration has the opportunity to reverse what he views as harmful crypto policies, particularly regulatory measures like Operation Chokepoint 2.0 that he believes have been politically motivated.

The release of these FDIC documents has sparked renewed debate about the relationship between the crypto industry and U.S. regulators. While the crypto sector continues to grow and attract institutional investors, it faces ongoing challenges related to banking access and regulatory uncertainty. Coinbase’s legal challenge and the exposure of these communications are likely to intensify calls for clearer, more transparent regulations in the U.S. to allow the crypto industry to thrive alongside traditional financial services without unnecessary government interference.