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The US government launches a 'whole-of-government' crackdown on the cryptocurrency industry, causing crypto resources to flee?

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Is the US government systematically cracking down on cryptocurrencies?

Original Title: "Is the US launching a "whole-of-government" crackdown on the cryptocurrency industry, and are crypto resources fleeing?"

Source: Curiousjoe, The Paper

· The "2023 Presidential Economic Report" states that "so far, it seems that cryptocurrencies have not provided any investment with fundamental value, nor have they become effective substitutes for legal tender, improved financial inclusion, or increased payment efficiency. Instead, their innovation is mainly to create artificial scarcity to support the price of cryptocurrencies."

FTX's serious thunderbolt has severely hit Washington's confidence in encryption. Facing a new industry, most of the influential regulators have only a vague understanding of its innovative points, while everyone can feel the impact of billions of dollars evaporating in an instant, plus the political opportunism of a group of politicians, resulting in the current situation where US regulation is relatively extreme in suppressing the encryption industry. The result is that legal entrepreneurs and illegal scammers are equally panicked and planning to flee the United States.

On April 1st, someone posted a message on social media: "Breaking news: The US Congress has passed a new law with 250 votes to 0 votes to ban all cryptocurrencies." This was an April Fool's joke, but it received 32,000 views, 88 likes, and 32 retweets within an hour, and many people believed it in the comments.

The United States is using all its government power to crack down on the encryption industry, which may just be an April Fool's joke. Because in a system like the United States, it is difficult for the entire government to act together, let alone on non-core issues like encryption. Those who follow encryption know that there are fundamental differences between the regulatory agencies in the United States. The Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) have different opinions on whether Ethereum and most cryptocurrencies are securities or commodities. It is difficult to imagine them coordinating to crack down on the encryption industry.

However, the narrative of "the Biden administration is vigorously cracking down on encryption" is constantly fermenting in the encryption circle. A series of events in March did demonstrate the determination of the Biden administration to crack down on the encryption industry. The aftermath of the FTX explosion erupted in the US encryption circle, and the US Securities and Exchange Commission launched severe law enforcement actions against compliant encryption entities such as Kraken and Coinbase. The Commodity Futures Trading Commission sued Binance, the world's largest encryption exchange. Taking advantage of the bank's explosion, almost all banks friendly to the encryption industry went bankrupt and liquidated. The regulatory authorities seem to be "debanking" the encryption industry in a planned manner.

Is the US government systematically cracking down on encryption?

Amidst the intense crackdown on the cryptocurrency industry in the United States, many innovative entities are seriously considering moving out of the country. In the context of the competition between China and the United States, where are the opportunities for China?

Organized crackdown?

There are two aspects to analyze the recent regulatory actions in the United States. Firstly, after the FTX incident, cryptocurrencies have gained increasing attention in Washington. For example, in preparation for cryptocurrency legislation, the House Financial Services Committee has created a subcommittee on digital assets, which is the first specialized institution for digital assets in the history of Congress. Secondly, there is strong hostility towards cryptocurrencies among the current regulatory authorities in Washington. A group of politicians are turning the crackdown on cryptocurrencies into a political correctness. This atmosphere has made regulatory pioneers like Gary Gensler, the chairman of the Securities and Exchange Commission, more adept at implementing policies.

Regardless of whether this kind of suppression is organized or not, this hostility can indeed be seen at various levels:

Firstly, the "2023 Economic Report of the President" from the White House denies the value of cryptocurrency.

On March 22nd, the Biden administration released a 513-page "2023 Presidential Economic Report", with the eighth chapter titled "Digital Assets: Reassessing Economic Principles", specifically focusing on the issue of cryptocurrency. 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 next year. The report is drafted by the Council of Economic Advisers at the White House. The report typically covers key economic indicators such as employment, inflation, GDP growth, and budget deficits, and proposes corresponding policy recommendations.

It seems that this report carries weight in the field of US economic policy, and dedicating a whole chapter to discussing digital assets fully demonstrates the current government's attention to this issue. The report has a clear conclusion on digital assets, which represents the government's attitude towards them. For example, the report directly denies the value of cryptocurrencies, stating that "many crypto assets have no fundamental value." Specifically, the report's attitude is that "so far, crypto assets do not seem to offer investment with any fundamental value, nor have they become an effective substitute for legal currency, improved financial inclusion, or increased payment efficiency. Instead, their innovation is mainly to create artificial scarcity to support the price of crypto assets."

This kind of evaluation is still quite extreme. There is a sizable blockchain startup community in the United States, and such evaluations completely ignore these vibrant innovative forces. As a field lacking regulation, the cryptocurrency industry is indeed plagued with chaos, but the technology itself is not inherently guilty. One of the important reasons for the chaos is the lack of effective regulation, and the fact that the White House made such a one-sided conclusion clearly illustrates the attitude of the regulatory authorities.

Secondly, the "anti-encryption army" of the top echelons of Congress

Elizabeth Warren, a US Senator, is an important figure in the Democratic Party of Congress. In the last election, she was a strong contender for the Democratic presidential candidate. At the same time, she is a senior member of the Senate Banking Committee.

Elizabeth Warren wants to "build an anti-encryption army" in the United States.

Warren kicked off her re-election campaign at the end of March, with a clear focus on the cryptocurrency industry. In her announcement tweet, Warren mentioned her intention to "build an anti-crypto army" in the United States. Warren's anti-crypto stance has been long-standing. In December 2022, she introduced the "2022 Digital Asset Anti-Money Laundering Act," which requires all decentralized entities to comply with strict anti-money laundering (AML) requirements. In February 2023, Warren pledged to reintroduce the bill this year. The "anti-crypto army" mentioned in her re-election campaign is consistent with her previous stance, but seems to have taken it up a notch. Warren seems to be intentionally positioning herself as a leading figure in Washington's crackdown on cryptocurrency. American politicians like Warren are masters of political opportunism, and when they release their campaign platforms, they must fully consider the tendencies of their constituents and the political climate in Washington. Warren's high-profile efforts to create an anti-crypto image are undoubtedly closely related to the strong anti-crypto sentiment in the United States. And the high-profile organization of an "anti-crypto army" by figures like Warren will in turn strengthen the spread of related sentiments.

Third, Operation Chokepoint 2.0 and the "debanking" of the cryptocurrency industry

The Operation Chokepoint 2.0 is not an official name, it is based on a previous plan implemented by the US government called "Operation Chokepoint". "Operation Chokepoint 1.0" was a plan launched by the US Department of Justice (DOJ) in 2013, aimed at combating fraud and illegal activities such as money laundering and drug trafficking. The US government put pressure on banks that had business dealings with high-risk merchants to prevent certain businesses from obtaining financial services. This measure sparked controversy at the time because it caused many legitimate but deemed high-risk businesses to suffer severe liquidity crises, such as legal adult content providers and short-term loan companies. This action was also seen as a movement during the Obama era to cancel bank transactions of legal but politically unpopular businesses, including gun manufacturers.

People have recently launched a "de-banking" action against the encryption industry, called the "choke point action 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, it was discovered that several of the banks (Signature Bank, Silicon Valley Bank, and Silvergate Bank) that were liquidated were friendly to the encryption industry. Signature Bank, in particular, has a large portion of its daily business related to the encryption industry. According to Barron's, about 20% of Signature Bank's deposits come from cryptocurrency companies. After these banks go bankrupt, if encryption companies cannot find alternative liquidity providers, the entire industry will face huge difficulties in deposits and withdrawals.

After the bankruptcy of several crypto-friendly banks, American crypto companies have become "homeless" in terms of banking services. According to a report by CoinDesk on March 20th, they have inquired about the attitude of their crypto clients to the 20 largest banks in the United States. Most banks, including JPMorgan Chase, Citigroup, Bank of New York Mellon, and Morgan Stanley, remain silent on this issue. Some banks have also made it clear that they are unwilling to accept crypto clients.

There is evidence to suggest that these are not coincidences. Regulatory agencies seem to be intentionally cutting off the connection between encryption companies and banks during this banking crisis. Former Congressman Barney Frank, who was a board member 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-encryption message." The NYDFS denied this accusation. On March 16th, Reuters reported that the Federal Deposit Insurance Corporation (FDIC) required potential buyers of Signature Bank to abandon the bank's encryption customers, thereby cutting off their opportunity to continue to receive banking services. Although the FDIC denied this, encryption customers did not have the opportunity to be acquired during the transaction.

One interesting fact is that Martin Greunberg, the current Chairman of the Federal Deposit Insurance Corporation, was a planner of "Operation Choke Point 1.0".

Regarding this situation, as one of the largest cryptocurrency lobbying groups in Washington, the "Blockchain Alliance" submitted a Freedom of Information Act request to the Federal Reserve, the Currency Supervision Bureau, and the Federal Deposit Insurance Corporation on March 16. CEO Kristin Smith stated that these requests aim to "reveal the truth behind the de-banking of US cryptocurrency companies."

However, some insiders believe that these actions do not qualify as "choke point actions". Ron Hammond, Director of Public Relations at the "Blockchain Alliance", called for an end to referring to these activities as such in a tweet on March 29, stating that they "have not yet reached the level of Choke Point Action 2.0".

Fourth, regulatory agencies are cracking down on leading cryptocurrency companies.

At the enterprise level, the highlight of March was the regulatory crackdown on three top centralized exchanges. The situations of these three exchanges are all different.

The US Securities and Exchange Commission's accusation against Kraken is "outrageous profit promotion and extremely high depositor risk". Kraken did have some issues with promoting Ethereum staking profits, so these accusations are somewhat controversial, and Kraken has voluntarily paid the fine.

Binance is the world's largest centralized cryptocurrency exchange. The Commodity Futures Trading Commission's lawsuit against Binance has caused a 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 had little interaction with Washington, leaving a bad impression in Congress. Therefore, being targeted by US regulators is not unexpected.

The biggest controversy is the investigation by the US Securities and Exchange Commission into Coinbase, the largest centralized exchange in the United States. Coinbase is a compliant company listed through official procedures. Compared to the aforementioned two companies, Coinbase has closer ties with regulators and acts more cautiously. However, under the regulatory "stick," its situation is almost the same as other companies. The previous compliance efforts have been in vain, which has caused strong disappointment in the US crypto community and led to more companies openly discussing moving away from the United States.

The Chief Legal Officer of Coinbase published an article on March 22nd titled "We asked the SEC for reasonable crypto regulations. What we got was a lawsuit." The tone of the article is bitter, mainly discussing the failure to push for clear regulatory policies from the US Securities and Exchange Commission. According to the article, Coinbase actively sought compliance and had over 30 meetings with the SEC, spending millions of dollars researching registration methods, but received no response for 9 months. This article represents the confusion of US crypto industry practitioners, who are at a loss due to the regulatory policy vacuum. SEC Chairman Gary Gensler has repeatedly stated in public speeches that US regulatory policies are already very clear, but this is not the case. In terms of top-level design, crypto bills have been brewing without being released; in terms of administrative policies, there is no consensus among regulatory agencies, such as the conflict between the SEC and the Commodity Futures Trading Commission. All of this has led to a relatively strong sense of arbitrariness in specific law enforcement, causing practitioners to be on edge.

Political Trend of Cryptography Issues

Encryption was originally a non-partisan issue, but in today's increasingly attention-grabbing environment, like many other important issues, encryption has gradually taken on a partisan color and become a bargaining chip for candidate campaigns, turning into a weapon for both parties to attack each other.

Coindesk published an article on March 31 titled "The Biden Administration is Politicizing Cryptocurrency," which mentioned that "in the United States, cryptocurrency has always been a divisive issue, but it has never become a partisan issue. Until now... With a series of high-profile enforcement announcements by the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) against cryptocurrency entities, we are at risk of losing this balance. Whether intentional or not, cryptocurrency is being politicized and becoming one of the many issues that divide and deadlock the US Congress. This situation is unlikely to bring good results."

The well-known encryption podcast Bankless recently interviewed Congressman Tom Emmer. Emmer is the "whip" of the US House of Representatives, the third person behind the Speaker and the Majority Leader. It is the first time that such a heavyweight in the political world has accepted an interview with an encryption media. Interestingly, although Emmer talked about encryption 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 ultimate backers of these bankers - Democratic Senator Elizabeth Warren. In Emmer's mouth, it seems that "Operation Choke Point 2.0" is an indisputable fact, and the Democratic Party's top leaders are using the banking system at all costs to strangle the encryption industry. The Democratic Party is destroying emerging industries and suppressing innovation, all to protect their own political interests - the interests of Democratic Party donors and big bankers - because encryption is a threat to traditional banking. Undoubtedly, this is not only an encryption interview, but also another political show, and encryption has become another stage for the struggle between the Democratic and Republican parties.

香港在承接搬离美国的加密资源

Hong Kong is taking over the relocation of cryptographic resources from the United States.

FTX's serious thunderbolt has severely hit Washington's confidence in encryption. Faced with a new industry, most of the influential regulators have only a partial understanding of the innovative points, and everyone can feel the impact of billions of dollars evaporating in an instant, plus the political opportunism of a group of politicians, resulting in the current situation where US regulation is relatively extreme in suppressing the encryption industry. The result is that legal entrepreneurs and illegal scammers are equally panicked and are planning to flee the United States. A social media account named "MariaShen" concluded after analyzing "more than 200 million code submissions and more than 11,000 developer profiles" that "the United States has lost its leading position in blockchain developers, and its market share of open source developers has dropped from 40% to 29%".

One of the important landing points for these migrated encryption resources is Hong Kong.

The Wall Street Journal published an article on April 1st titled "US Crackdown Fuels Hong Kong's Cryptocurrency Ambitions". The article mentioned that "nowadays, the US regulation of cryptocurrencies is stricter than ever before, while Hong Kong regulates in a more relaxed manner...this undoubtedly will shift the focus of cryptocurrency trading and investment to Hong Kong." Ambre Soubiran, CEO of Paris-based digital asset data provider Kaiko, said in an interview, "We want to be where our clients are." And clients 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 of their plans to establish businesses in Hong Kong, while more than 80 companies have expressed interest in doing so."

Meanwhile, the author of the article "The Biden Administration is Politicizing Cryptocurrencies" laments at the end of the article: "Just last year, when President Biden issued a balanced and forward-looking executive order on digital assets, I believed that despite Congress dragging its feet on important legislation and the U.S. Securities and Exchange Commission being hostile to the industry, the U.S. could still lead the way. I saw an opportunity for the U.S. to handle the cryptocurrency issue like the Telecommunications Act of 1996, which established feasible open standards for the internet and became the framework for us to lead the world when everyone followed that standard. However, that opportunity has now been lost." If this trend continues, the U.S. will indeed lose the opportunity to lead this industry. What happens next?