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Operation Choke Point 2.0: How US Regulators Fight Bitcoin With Financial Censorship

Operation Choke Point 2.0: How US Regulators Fight Bitcoin With Financial Censorship

Authored by Peter Chawaga via BitcoinMagazine.com,

“The…

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Operation Choke Point 2.0: How US Regulators Fight Bitcoin With Financial Censorship

Authored by Peter Chawaga via BitcoinMagazine.com,

“The reason that we are focused on financial institutions and payment processors is because they are the so-called bottlenecks, or choke-points, in the fraud committed by so many merchants that victimize consumers and launder their illegal proceeds,” Bresnickat explained to the club.

“We hope to close the access to the banking system that mass marketing fraudsters enjoy - effectively putting a choke hold on it…”

This concerted effort, later labeled “Operation Choke Point”, targeted a wide range of business categories, including ammunition sales, drug paraphernalia, payday loans, dating services, pornography, telemarketing, tobacco sales, and government grants. This broad application of financial exclusion ultimately prompted multiple lawsuits and federal investigations into the conduct of both the DOJ and the Federal Deposit Insurance Corporation (FDIC), as well as harsh criticism from all corners.

“The clandestine Operation Choke Point had more in common with a purge of ideological foes than a regulatory enforcement action”, wrote Frank Keating, a former governor of Oklahoma who served in the DOJ during the Reagan administration, in a 2018 editorial for The Hill. “It targeted wide swaths of businesses with little regard for whether legal businesses were swept up and harmed. In fact, that seemed to be the goal.”

In 2017, the Trump administration’s DOJ wrote a letter to Congress indicating that Operation Choke Point was officially over. In 2018, the FDIC promised to limit its personnel’s ability to “terminate account relationships” and to put “additional training” into place for its examiners.

But in the years since the federal government so blatantly demonstrated its interest in dictating access to banking services and its power to do so deliberately with little or no consequences, many feel that little has changed.

BANK RUNS, WITH BIAS

On March 8, 2023, it was announced that the cryptocurrency-focused institution Silvergate Bank would be voluntarily liquidated by its holding company. The bank had been focused on serving cryptocurrency clients since 2013 when its CEO Alan Lane first invested in bitcoin. In 2022, it had acquired the technology behind Meta’s failed stablecoin project, Diem, with hopes of launching its own dollar-backed token. As the cryptocurrency market declined in late 2022, marked by the collapse of one of its biggest clients in cryptocurrency exchange FTX, the bank’s stock price plummeted. It likely did not help that at the same time, U.S. Senators Elizabeth Warren, Roger Marshall, and John Kennedy asked Silvergate to disclose details of its financial relationship with collapsed cryptocurrency exchange FTX.

Soon after, on March 10, 2023, almost ten years to the day from Bresnickat’s public detailing of Operation Choke Point, Silicon Valley Bank (SVB) was seized by the California Department of Financial Protection and Innovation and placed under FDIC receivership, marking what was then the second-largest bank failure in U.S. history.

Since 2021, the bank had been increasing its long-term securities holdings but, as the market value of these assets deteriorated amid U.S. dollar inflation and Federal Reserve interest rate hikes, it was left with unrealized losses. Simultaneously, its customers, many of whom were prominent businesses within the cryptocurrency industry and were similarly strained by economic conditions, were withdrawing their money. On March 8, 2023, SVB announced that it had sold more than $21 billion worth of securities, borrowed another $15 billion, and was planning an emergency sale to raise yet another $2.25 billion. Perhaps unsurprisingly, this sparked a run on its remaining funds, totaling some $42 billion in withdrawals by March 9, 2023. On Sunday, March 12, state and federal authorities stepped in; customers of Signature Bank had withdrawn more than $10 billion.

Since 2018, Signature Bank had maintained a focus on cryptocurrency businesses, with some 30% of its deposits coming from the sector by early 2023. Signature Bank had also accrued a large proportion of uninsured deposits, worth some $79.5 billion and constituting almost 90% of its total deposits. It was holding relatively little cash on hand — only about 5% of its total assets (compared to an industry average of 13%) — so it was poorly prepared for a run on crypto-friendly banks spurred by SVB’s issues. On March 12, 2023, the New York State Department of Financial Services closed Signature Bank and placed it under FDIC receivership as it faced a mountain of withdrawal requests. At the time, this represented the third-largest bank failure in U.S. history.

Following their seizures of SVB and Signature Bank, the U.S. Department of the Treasury, Federal Reserve, and FDIC described the takeovers as “decisive actions to protect the U.S. economy by strengthening public confidence in our banking system”. But others suggested the actions, particularly against Signature Bank, signified a blatant reemergence of the prejudice displayed during Operation Choke Point and connected to a larger effort to stymie cryptocurrency businesses.

“I think part of what happened was that regulators wanted to send a very strong anti-crypto message”, Barney Frank, a Signature Bank Board member and former congressman who helped draft the seminal “Dodd-Frank Act” to overhaul financial regulation following the Great Recession, told CNBC in March 2023. “We became the poster boy because there was no insolvency based on the fundamentals.”

Following an FDIC announcement that Flagstar Bank would assume all of Signature Bank’s cash deposits except for those “related to the digital-asset banking businesses”, the editorial board of The Wall Street Journal announced that Frank was right to call out this bias.

“This confirms Mr. Frank’s suspicions — and ours — that Signature’s seizure was motivated by regulators’ hostility toward crypto”, the board wrote. “That means crypto companies will have to find another bank to safeguard their deposits. Many say that government warnings to banks about doing business with crypto customers is making that hard.”

TARGETING A NEW CHOKE POINT

Public officials, financial professionals, and Bitcoin advocates had been pointing out an apparent bias against cryptocurrency businesses from the Biden administration well before the March 2023 bank runs. There were numerous policy events in the early part of 2023 to back up those sentiments.

A January 3, 2023, “Joint Statement on Crypto-Asset Risks to Banking Organizations” from the Federal Reserve, FDIC, and Office of the Comptroller of the Currency (OCC) noted that, “The events of the past year have been marked by significant volatility and the exposure of vulnerabilities in the crypto-asset sector. These events highlight a number of key risks associated with crypto-assets and crypto-asset sector participants that banking organizations should be aware of…”, effectively serving to dissuade financial institutions from taking on those risks.

A White House “Roadmap to Mitigate Cryptocurrencies’ Risks” released on January 27, 2023, indicated that the Biden administration sees the proliferation of cryptocurrencies as a threat to the country’s financial system and warned against the prospect of granting cryptocurrencies more access to mainstream financial products.

“As an administration, our focus is on continuing to ensure that cryptocurrencies cannot undermine financial stability, to protect investors, and to hold bad actors accountable”, per the roadmap. “Legislation should not greenlight mainstream institutions, like pension funds, to dive headlong into cryptocurrency markets… It would be a grave mistake to enact legislation that reverses course and deepens the ties between cryptocurrencies and the broader financial system.”

On February 7, 2023, the Federal Reserve pushed a rule to the Federal Register clarifying that the institution would “presumptively prohibit” state member banks from holding crypto assets as principal in any amount and that “issuing tokens on open, public, and/or decentralized networks, or similar systems is highly likely to be inconsistent with safe and sound banking practices”.

And on May 2, 2023, the Biden administration proposed a Digital Asset Mining Energy (DAME) excise tax, suggested as a way to force cryptocurrency mining operations to financially compensate the government for the “economic and environmental costs” of their practices with a 30% tax on the electricity they use.

For Brian Morgenstern, the head of public policy at Riot Platforms, one of the largest, publicly traded bitcoin miners based in the U.S., these policy suggestions, updates, and rule changes clearly indicate a larger attempt to hinder Bitcoin advancement by targeting financial choke points.

“The White House has proposed an excise tax on electricity use by Bitcoin mining businesses specifically — an admitted attempt to control legal activity they do not like, in the name of environmental protection”, Morgenstern explained in an interview with Bitcoin Magazine. “The only explanation for such inexplicable behavior is deep-rooted bias in favor of the status quo and against decentralization.”

Collectively, this behavior could influence the conduct of regulated banks, just as the pressure applied by the DOJ in the 2010s unduly limited the businesses in its crosshairs back then. For many, it’s clear that Operation Choke Point has been reinstated.

“‘Operation Choke Point 2.0’ refers to the coordinated effort by the Biden administration’s financial regulators to suffocate our domestic crypto economy by de-banking the industry and severing entrepreneurs from the capital necessary to invest here in America”, U.S. Senator Bill Hagerty, a member of the committees on banking and appropriations, told Bitcoin Magazine. “It appears that financial regulators have bought into the false narrative that cryptocurrency-focused businesses solely exist to facilitate or conduct illicit activities, and they seem blind to the opportunities for the potential innovations and new businesses that can be built.”

PRESSURE WHERE IT HURTS

It may be fairly obvious how such a pressure campaign by federal regulators would hurt cryptocurrency-focused projects that depend on access to banks. But the larger ramifications of such financial prohibitions for retail customers and the advancement of Bitcoin in particular may not be.

Why should proponents of Bitcoin, a decentralized financial rail designed to function outside of the legacy system, care about a choke point in regulated financial institutions?

Caitlin Long, the founder of Custodia Bank, which is focused on bridging the gap between digital assets and legacy financial services, recognizes that for users in the U.S. to legitimately participate in Bitcoin, the regulatory landscape must be accommodating.

“I’ve been working for years to help enable laws to be enacted, in multiple U.S. states and federally, precisely because in the absence of legal clarity about Bitcoin, legal systems can become attack vectors on Bitcoiners”, she said in an interview with Bitcoin Magazine. “All of us live under legal regimes of some sort, and we should be aware of legal attack vectors and work toward resolving them in an enabling way.”

Long’s advocacy may best represent the potential that favorable or even just equitable financial access could mean for Bitcoin adoption and the advancement of its technology for everyone. Through her work, Custodia (then under the name Avanti) obtained a 2020 bank charter in its home state of Wyoming that made it a special-purpose depository institution capable of custodying bitcoin and other cryptocurrencies on behalf of clients. But, following a prolonged delay in approval of Custodia’s application for a master account with the Federal Reserve that would allow it to leverage the FedWire network and facilitate large transactions for clients without enrolling intermediaries, Custodia filed a lawsuit against the Fed last year.

“Operation Choke Point 2.0 is real — Custodia learned about its existence in late January when press leaks hit and reporters started calling Custodia to say they learned that all bank charter applicants at the Fed and OCC with digital assets in their business models, including Custodia, were recently asked to withdraw their pending applications”, Long said. “Reporters told us that the Fed’s vote on Custodia’s application would be a foregone conclusion before the Fed governors actually voted.”

But, more than just stifling innovators who seek to build bridges between Bitcoin and legacy financial services, targeting the choke points of Bitcoin platforms will only push these platforms outside of the scope of regulators, giving those with malicious intent an advantage over those who are attempting to play by the rules.

“Internet-native money exists. It won’t be uninvented”, Long added. “If federal bank regulators have a prayer of controlling its impact on the traditional U.S. dollar banking system, they will wake up and realize it’s in their interest to enable regulatory-compliant bridges. Otherwise, just as with other industries that the internet has disrupted — corporate media, for example — the internet will just go around them and they will face even bigger problems down the road.”

As was laid bare by the collapse of cryptocurrency exchange FTX, Bitcoin is still very much tied to the world of cryptocurrency at large in the portfolios of investors and the eyes of most people around the world. Indeed, the revelations around FTX’s criminal operations have been a case in point for regulators who seek the financial prohibition of cryptocurrency businesses. But this very prohibition may have enabled FTX’s operators to fleece billions in customer funds: Based on a Caribbean island, the vast majority of FTX’s business was outside of the jurisdiction of U.S. regulators. As U.S. regulators limit the growth of domestic businesses, offshore alternatives like FTX benefit.

And while many Bitcoiners may think that policymakers are powerless to determine the success of this permissionless technology, adverse or absent regulations can limit Bitcoin-specific businesses just as harshly as they do broader, cryptocurrency-related ones. In fact, it may be Bitcoin’s unique properties that make the current regulatory landscape such a daunting one for growth.

“Bitcoiners should care about Operation Choke Point 2.0 because certain policymakers are trying to take away our ability to participate in the Bitcoin network”, Morgenstern argued. “Moreover, Bitcoin is different. It is not only the oldest and most tested asset in this space, it is perhaps the only one that everyone agrees is a digital commodity. That means the on-ramp for inclusion into any policy frameworks will have less friction inherently, and Bitcoiners need to understand this.”

RELIEVING THE CHOKE POINTS

Reviewing the recent, hostile policy updates from federal regulators, it seems clear that Bitcoin is firmly entrenched along with “crypto” in their minds. And, Bitcoin proponents in particular will agree, many businesses focused on other cryptocurrencies are apt to hurt investors. But some in the Bitcoin sector think that more education could help underscore the distinctions between Bitcoin and altcoins, and better protect Bitcoin from more justified regulatory limits on manipulated tokens and vaporware.

“Engage with your elected officials”, Morgenstern encouraged. “Help them understand that Bitcoin’s decentralized ledger technology is democratizing finance, creating faster and cheaper transactions and providing much-needed optionality for consumers at a time when the centralized finance system is experiencing distress. This will take time, effort and a lot of communication, but we must work together to help our leaders appreciate how many votes and how much prosperity is at stake.”

Indeed, for those elected officials who do recognize this bias as unduly harmful to innovation, continued advocacy from Bitcoin’s supporters is the best way out of the choke hold.

“This isn’t an issue where people can afford to be on the sidelines anymore”, Hagerty concluded. “I encourage those who want to see digital assets flourish in the United States to make your voice heard, whether that is at the ballot box or by contacting your lawmakers and urging them to support constructive policy proposals.”

*  *  *

This article is featured in Bitcoin Magazine’s “The Withdrawal Issue”. Click here to subscribe now.

A PDF pamphlet of this article is available for download.

Tyler Durden Mon, 09/18/2023 - 15:45

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Pharma industry reputation remains steady at a ‘new normal’ after Covid, Harris Poll finds

The pharma industry is hanging on to reputation gains notched during the Covid-19 pandemic. Positive perception of the pharma industry is steady at 45%…

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The pharma industry is hanging on to reputation gains notched during the Covid-19 pandemic. Positive perception of the pharma industry is steady at 45% of US respondents in 2023, according to the latest Harris Poll data. That’s exactly the same as the previous year.

Pharma’s highest point was in February 2021 — as Covid vaccines began to roll out — with a 62% positive US perception, and helping the industry land at an average 55% positive sentiment at the end of the year in Harris’ 2021 annual assessment of industries. The pharma industry’s reputation hit its most recent low at 32% in 2019, but it had hovered around 30% for more than a decade prior.

Rob Jekielek

“Pharma has sustained a lot of the gains, now basically one and half times higher than pre-Covid,” said Harris Poll managing director Rob Jekielek. “There is a question mark around how sustained it will be, but right now it feels like a new normal.”

The Harris survey spans 11 global markets and covers 13 industries. Pharma perception is even better abroad, with an average 58% of respondents notching favorable sentiments in 2023, just a slight slip from 60% in each of the two previous years.

Pharma’s solid global reputation puts it in the middle of the pack among international industries, ranking higher than government at 37% positive, insurance at 48%, financial services at 51% and health insurance at 52%. Pharma ranks just behind automotive (62%), manufacturing (63%) and consumer products (63%), although it lags behind leading industries like tech at 75% positive in the first spot, followed by grocery at 67%.

The bright spotlight on the pharma industry during Covid vaccine and drug development boosted its reputation, but Jekielek said there’s maybe an argument to be made that pharma is continuing to develop innovative drugs outside that spotlight.

“When you look at pharma reputation during Covid, you have clear sense of a very dynamic industry working very quickly and getting therapies and products to market. If you’re looking at things happening now, you could argue that pharma still probably doesn’t get enough credit for its advances, for example, in oncology treatments,” he said.

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Q4 Update: Delinquencies, Foreclosures and REO

Today, in the Calculated Risk Real Estate Newsletter: Q4 Update: Delinquencies, Foreclosures and REO
A brief excerpt: I’ve argued repeatedly that we would NOT see a surge in foreclosures that would significantly impact house prices (as happened followi…

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Today, in the Calculated Risk Real Estate Newsletter: Q4 Update: Delinquencies, Foreclosures and REO

A brief excerpt:
I’ve argued repeatedly that we would NOT see a surge in foreclosures that would significantly impact house prices (as happened following the housing bubble). The two key reasons are mortgage lending has been solid, and most homeowners have substantial equity in their homes..
...
And on mortgage rates, here is some data from the FHFA’s National Mortgage Database showing the distribution of interest rates on closed-end, fixed-rate 1-4 family mortgages outstanding at the end of each quarter since Q1 2013 through Q3 2023 (Q4 2023 data will be released in a two weeks).

This shows the surge in the percent of loans under 3%, and also under 4%, starting in early 2020 as mortgage rates declined sharply during the pandemic. Currently 22.6% of loans are under 3%, 59.4% are under 4%, and 78.7% are under 5%.

With substantial equity, and low mortgage rates (mostly at a fixed rates), few homeowners will have financial difficulties.
There is much more in the article. You can subscribe at https://calculatedrisk.substack.com/

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‘Bougie Broke’ – The Financial Reality Behind The Facade

‘Bougie Broke’ – The Financial Reality Behind The Facade

Authored by Michael Lebowitz via RealInvestmentAdvice.com,

Social media users claiming…

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'Bougie Broke' - The Financial Reality Behind The Facade

Authored by Michael Lebowitz via RealInvestmentAdvice.com,

Social media users claiming to be Bougie Broke share pictures of their fancy cars, high-fashion clothing, and selfies in exotic locations and expensive restaurants. Yet they complain about living paycheck to paycheck and lacking the means to support their lifestyle.

Bougie broke is like “keeping up with the Joneses,” spending beyond one’s means to impress others.

Bougie Broke gives us a glimpse into the financial condition of a growing number of consumers. Since personal consumption represents about two-thirds of economic activity, it’s worth diving into the Bougie Broke fad to appreciate if a large subset of the population can continue to consume at current rates.

The Wealth Divide Disclaimer

Forecasting personal consumption is always tricky, but it has become even more challenging in the post-pandemic era. To appreciate why we share a joke told by Mike Green.

Bill Gates and I walk into the bar…

Bartender: “Wow… a couple of billionaires on average!”

Bill Gates, Jeff Bezos, Elon Musk, Mark Zuckerberg, and other billionaires make us all much richer, on average. Unfortunately, we can’t use the average to pay our bills.

According to Wikipedia, Bill Gates is one of 756 billionaires living in the United States. Many of these billionaires became much wealthier due to the pandemic as their investment fortunes proliferated.

To appreciate the wealth divide, consider the graph below courtesy of Statista. 1% of the U.S. population holds 30% of the wealth. The wealthiest 10% of households have two-thirds of the wealth. The bottom half of the population accounts for less than 3% of the wealth.

The uber-wealthy grossly distorts consumption and savings data. And, with the sharp increase in their wealth over the past few years, the consumption and savings data are more distorted.

Furthermore, and critical to appreciate, the spending by the wealthy doesn’t fluctuate with the economy. Therefore, the spending of the lower wealth classes drives marginal changes in consumption. As such, the condition of the not-so-wealthy is most important for forecasting changes in consumption.

Revenge Spending

Deciphering personal data has also become more difficult because our spending habits have changed due to the pandemic.

A great example is revenge spending. Per the New York Times:

Ola Majekodunmi, the founder of All Things Money, a finance site for young adults, explained revenge spending as expenditures meant to make up for “lost time” after an event like the pandemic.

So, between the growing wealth divide and irregular spending habits, let’s quantify personal savings, debt usage, and real wages to appreciate better if Bougie Broke is a mass movement or a silly meme.

The Means To Consume 

Savings, debt, and wages are the three primary sources that give consumers the ability to consume.

Savings

The graph below shows the rollercoaster on which personal savings have been since the pandemic. The savings rate is hovering at the lowest rate since those seen before the 2008 recession. The total amount of personal savings is back to 2017 levels. But, on an inflation-adjusted basis, it’s at 10-year lows. On average, most consumers are drawing down their savings or less. Given that wages are increasing and unemployment is historically low, they must be consuming more.

Now, strip out the savings of the uber-wealthy, and it’s probable that the amount of personal savings for much of the population is negligible. A survey by Payroll.org estimates that 78% of Americans live paycheck to paycheck.

More on Insufficient Savings

The Fed’s latest, albeit old, Report on the Economic Well-Being of U.S. Households from June 2023 claims that over a third of households do not have enough savings to cover an unexpected $400 expense. We venture to guess that number has grown since then. To wit, the number of households with essentially no savings rose 5% from their prior report a year earlier.  

Relatively small, unexpected expenses, such as a car repair or a modest medical bill, can be a hardship for many families. When faced with a hypothetical expense of $400, 63 percent of all adults in 2022 said they would have covered it exclusively using cash, savings, or a credit card paid off at the next statement (referred to, altogether, as “cash or its equivalent”). The remainder said they would have paid by borrowing or selling something or said they would not have been able to cover the expense.

Debt

After periods where consumers drained their existing savings and/or devoted less of their paychecks to savings, they either slowed their consumption patterns or borrowed to keep them up. Currently, it seems like many are choosing the latter option. Consumer borrowing is accelerating at a quicker pace than it was before the pandemic. 

The first graph below shows outstanding credit card debt fell during the pandemic as the economy cratered. However, after multiple stimulus checks and broad-based economic recovery, consumer confidence rose, and with it, credit card balances surged.

The current trend is steeper than the pre-pandemic trend. Some may be a catch-up, but the current rate is unsustainable. Consequently, borrowing will likely slow down to its pre-pandemic trend or even below it as consumers deal with higher credit card balances and 20+% interest rates on the debt.

The second graph shows that since 2022, credit card balances have grown faster than our incomes. Like the first graph, the credit usage versus income trend is unsustainable, especially with current interest rates.

With many consumers maxing out their credit cards, is it any wonder buy-now-pay-later loans (BNPL) are increasing rapidly?

Insider Intelligence believes that 79 million Americans, or a quarter of those over 18 years old, use BNPL. Lending Tree claims that “nearly 1 in 3 consumers (31%) say they’re at least considering using a buy now, pay later (BNPL) loan this month.”More tellingaccording to their survey, only 52% of those asked are confident they can pay off their BNPL loan without missing a payment!

Wage Growth

Wages have been growing above trend since the pandemic. Since 2022, the average annual growth in compensation has been 6.28%. Higher incomes support more consumption, but higher prices reduce the amount of goods or services one can buy. Over the same period, real compensation has grown by less than half a percent annually. The average real compensation growth was 2.30% during the three years before the pandemic.

In other words, compensation is just keeping up with inflation instead of outpacing it and providing consumers with the ability to consume, save, or pay down debt.

It’s All About Employment

The unemployment rate is 3.9%, up slightly from recent lows but still among the lowest rates in the last seventy-five years.

The uptick in credit card usage, decline in savings, and the savings rate argue that consumers are slowly running out of room to keep consuming at their current pace.

However, the most significant means by which we consume is income. If the unemployment rate stays low, consumption may moderate. But, if the recent uptick in unemployment continues, a recession is extremely likely, as we have seen every time it turned higher.

It’s not just those losing jobs that consume less. Of greater impact is a loss of confidence by those employed when they see friends or neighbors being laid off.   

Accordingly, the labor market is probably the most important leading indicator of consumption and of the ability of the Bougie Broke to continue to be Bougie instead of flat-out broke!

Summary

There are always consumers living above their means. This is often harmless until their means decline or disappear. The Bougie Broke meme and the ability social media gives consumers to flaunt their “wealth” is a new medium for an age-old message.

Diving into the data, it argues that consumption will likely slow in the coming months. Such would allow some consumers to save and whittle down their debt. That situation would be healthy and unlikely to cause a recession.

The potential for the unemployment rate to continue higher is of much greater concern. The combination of a higher unemployment rate and strapped consumers could accentuate a recession.

Tyler Durden Wed, 03/13/2024 - 09:25

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