#247—Taking down solvent banks

The extent of Operation Choke Point 2.0

Apr 03, 2023

Welcome to Yaka Stuff, our weekly newsletter that covers news, industry perspectives, and updates from the Hard Yaka ecosystem. Check out our last report here.

This week:

Taking down solvent banks
Banks step up to fill the void
Ecosystem updates
Stuff happens

1. Taking down solvent banks

Barney Frank, Photo: U.S. Department of Agriculture

Nic Carter, who had previously coined the term Operation Choke Point 2.0, has published a bombshell follow up (via Greg), arguing that regulators took down a solvent bank in Signature primarily due to their distaste in crypto.

That narrative was more or less confirmed by former congressman Barney Frank, who sits on Signature’s board., in interviews with New York Magazine and CNBC.

From his interview with NYMag:

I’m very disappointed to learn, apparently, the Department of Financial Services in New York, which did the closing, hasn’t said we were insolvent! They said, well, they had a problem, because they couldn’t get sufficient data. I mean, I was disappointed when they closed it, and sort of vindicated — they have not argued that we were insolvent. And I think it’s very clear if we had the benefit of those two announcements, we’d still be an ongoing bank.
Now, the question is, why did they react so harshly to what they said was our inability to give them the sufficient data? I believe it was probably to send the message that even though we were doing crypto stuff responsibly, they don’t want banks doing crypto. They denied that in their statement, but I don’t fully believe that. I think that they overreacted to what they saw was our problem with data, which may well have existed, but the data was improving. I think sloppy data is not a reason to close a bank that you have not decided was insolvent, and they’ve never said we were insolvent.

DC law firm Cooper & Kirk further validated that thesis, arguing that these coordinated actions are unconstitutional in a white paper (via Greg):

“In the wake of the collapse of Silicon Valley Bank, Signature had experienced $10 billion of withdrawals on Friday, March 10. But by Sunday, management had shored up the bank’s capital situation, the deposit exodus had slowed, and the situation had stabilized. Nonetheless, the regulators moved in, summarily removed management, shuttered the bank, and began conducting a sale of the bank’s assets. The move was suspicious. At that same time they closed Signature, the bank’s regulators were moving to shore up the finances of other banks, including First Republic, that were in far more dire straits than Signature. Signature, after all, had $110.36 billion of assets to cover $88.59 billion of deposits at the end of 2022, and the regulators had conceded that the bank was not insolvent at the time it was closed.”
“Former Representative Barney Frank, a principal author of the Dodd-Frank legislation enacted in the wake of the 2008 financial crisis and a member of Signature’s Board of Directors, agreed that there was ‘no real objective reason’ for the bank’s seizure and drew the conclusion that the bank was likely closed because of Operation Choke Point 2.0.”

Here’s Axios with a bit of context:

A law firm that likes to take on controversial fights has made the case that anti-crypto sentiment is real and that it's hurting businesses in the U.S., Crystal and Brady write.
Driving the news: That's according to a legal argument published this week detailing Operation Choke Point 2.0 from the same law firm that argued the first one in a courtroom.
The big picture: To starve a business of financial services because of its bad reputation would be illegal, but that’s what happened to payday lenders, gun sellers and pawn shops during the Obama administration.

And it is happening again, to crypto this time, under the Biden administration, according to Cooper & Kirk.

Fun fact: That’s the firm that trade association and payday lender Advance America hired in 2014 to sue the Federal Deposit Insurance Corporation, the Federal Reserve and the Office of the Comptroller of the Currency (OCC).

Of note: It's also the firm that argued against gay marriage in 2013.

Flashback: The original Choke Point started in 2012 with vague policy guidance. Then, whisper campaigns and backroom threats, according to the paper. Eventually, entire swaths of business were choked off from financial services. Sound familiar?
Zoom in: The paper lays out the case that the current crackdown is unconstitutional.

It cites case law where the courts have found the due process clause of the Constitution had been violated when the state engenders a stigma against a person or kind of business.

In Wisconsin v. Constantineau (1971), a police officer posted a notice at retail liquor stores in Hartford to refuse sale to a local man for one year because of his "excessive drinking."

The paper also argues that bank regulators violated the Administrative Procedure Act by taking 27 months to respond to Custodia Bank’s application for a master account with the Federal Reserve when the act requires a response within one year.

Regulators lacked the authority to deny the charter to a bank if it's state-chartered, the paper said.

One grain of salt—Axios:

Be smart: The firm seems to have written this whitepaper as a giant ad, seeking clients who will pay it to do its thing again.

2. Banks step up to fill the void

There’s over 4000 banks in the U.S., and many are stepping up to fill the void left by the likes of Silvergate, SVB, and Signature, according to reports from The Information and the WSJ.

Here’s the WSJ:

Some banks are rolling out the welcome mat for cryptocurrency firms that found themselves in need of banking services after the downfall of two big crypto-friendly lenders, Signature Bank and Silvergate Capital Corp. SI -1.85%decrease; red down pointing triangle
As crypto companies have scrambled to establish new bank relationships, industry executives say they have received a positive reception from regional banks such as Customers Bancorp CUBI 1.58%increase; green up pointing triangle., based in West Reading, Pa., and Fifth Third Bancorp FITB 0.34%increase; green up pointing triangle, based in Cincinnati.
Other crypto firms are moving deposits to smaller upstart banks that tout themselves as digital pioneers, such as New Jersey-based Cross River Bank. Still others are considering taking their banking business offshore.
Meanwhile the biggest banks—such as JPMorgan Chase & Co. and Bank of New York Mellon Corp.—still do business with crypto clients, though they are selective about their client list and what banking services they provide.
A few weeks ago, crypto circles were abuzz with talk that Washington was plotting to kill crypto by cutting off its access to the banking system in what some commentators dubbed “Operation Choke Point 2.0.”
Those fears have now somewhat abated, as banks have stepped up to fill the vacuum created after Silvergate shut down and Signature was placed in receivership with the Federal Deposit Insurance Corp. earlier this month.
“There are dozens of other banks, both onshore and offshore, that are taking advantage of this opportunity,” said Rich Rosenblum, co-founder and president of crypto trading firm GSR.

And here’s The Information:

After a two-week auction process, Silicon Valley Bank has finally been sold to regional lender First Citizens Bank. But already, other banks have moved to replace SVB as the tech industry’s go-to bank.
Among the firms moving quickly are SVB rival Western Alliance-owned Bridge Bank and JPMorgan Chase, as well as newer institutions Mercury and Brex.
“You can see the void is being filled immediately,” said Scott Orn, the chief operating officer at Kruze Consulting, which works with CFOs at roughly 800 startup clients. He was speaking with The Information on Friday at the moment he was informed that Bridge Bank had just signed a $16 million debt term sheet with one of his clients. Prior to the collapse of SVB, the debt process was running between SVB and Bridge Bank.

3. Ecosystem updates

True Global Ventures invests $24 Million in Ledger:

True Global Ventures (TGV) invests over US$24 million (over €22 million) into Ledger, the leading global platform for digital assets and Web3. This funding will enable Ledger to further its global ambitions and accelerate its drive to becoming a truly desirable consumer technology brand.

USBC

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