Operation Chokepoint

Notes on an important conversation discussing crypto regulation, proof of reserves, and web3 social

‎The Delphi Podcast: Nic Carter: Operation Choke-Point 2.0's Mission To Cut Crypto Off From The…

This was a fantastic podcast by Delphi Digital, Tommy Shaughnessy, and Nic Carter covering 1) Operation chokepoint & crypto regulation 2) how proof of reserves can create a standard of trust and transparency FAR GREATER than legacy financial ecosystem and 3) web3 social.

1. Operation Chokepoint: the multi-agency effort to cut crypto off of traditional banking system.

Regulation via Executive and Legislative branches (and FDIC)

• Most of government views crypto as a vector for scammers rather than a groundswell of innovation
• Government largely views finance as a means to promote policy objectives (ex. SEC top objective is climate, financial flows to make political change w Ukraine/ Russia)
• Fiat backed stablecoins are not securities under Howey and Reves test (Terra Luna may be exception here).
• Circle wants to share income with tokenholders but cannot legally at this point. Cannot have implicit expectation of interest bearing qualities w stablecoins.
• Gov officials helping the industry include Tom Emmer, Patrick McHenry, Hester Peirce.
• There is an implicit message from the FDIC to banks saying “you can touch crypto but if you do we will bury you in paperwork”
• Likely not going to proactively pass any legislation in the next two years.

SEC

• SEC is using piecemeal strategy to go after small players and set court precedent (cheetah and gazelle analogy).
• The House has subpoena power. Could ask Gensler why was he so close to FTX and why didn’t he spot anything?
• House could launch an investigation of the SEC to look into this coordinated effort
• If House sees that bank regulators are attacking a perfectly legal industry — an American industry — which is thriving, they might ask those questions
• Emmer could *potentially* help launch an investigation of the SEC

2. Proof of Reserves: The potential to create more financial transparency than ever before.

• Involves Proof of assets on chain
• Liabilities are more difficult, involve anonymizing — Binance using ZK tech for proofs of liability.
• With onchain data anyone can audit (this is how people uncovered FTX — via individual/community driven analysis of cold wallets)
• Can actually see dollars in reserves, liquidity ratio, capital buffer. None of this can be seen with banks — have to rely on disclosures on regulator
• This would not require infrastructure of auditors, consulting firms, and regulators — better for the entire system
• Proof of reserves would create standard of trust and transparency FAR GREATER than legacy financial ecosystem, not just matching but EXCEEDING it.

3. Web3 social: The long-term bet to distribute value via open protocols, social graphs, and permissionless building.

• People will understand web3 social because they have been abused in web2 with their data being used and deplatforming at the whims of technocrats
• Web3 social will give actual digital property rights for the first time as well as a better experience for users given that devs will permissionlessly build related apps and experienced based on the underlying protocol and social graph
• We are all surfs and a handful of people in Silicon Valley hold all the power. This would distribute the power more equally to contributors
• Network effects and related switching costs are so high that it will happen over time very slowly and then very fast all at once.

The Content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.