Operation Choke Point 2.0 Exposed: When Regulatory Crackdowns on Fraud Harm Legitimate Crypto Banks

The aggressive regulatory stance known as Operation Choke Point 2.0—described as coordinated federal efforts to restrict cryptocurrency firms from accessing traditional U.S. banking services—has become a double-edged sword for the digital asset industry. While policymakers argue the campaign targets systemic fraud, industry leaders contend that compliant, law-abiding crypto institutions are suffering unintended collateral damage.

At recent industry forums, executives from legitimate crypto banking platforms highlighted a troubling paradox: regulators are using blunt-force intervention to address a genuine $14 billion fraud problem, yet the treatment is proving as harmful as the disease itself.

Operation Choke Point 2.0: The Regulatory Paradox

The core tension centers on the SEC’s approach to the crypto sector. According to BCB Group’s leadership, Operation Choke Point 2.0 functions like a broad-spectrum treatment for financial crimes—but just as chemotherapy damages healthy cells while targeting cancer, this regulatory campaign is affecting legitimate enterprises built to comply with existing frameworks.

The policy wasn’t explicitly designed with specific crypto platforms in mind. Rather, it reflects broader post-FTX sentiment and response to historical Ponzi schemes. However, the $14 billion scope of fraud uncovered in recent years has led regulators to cast an increasingly wide net, catching both culprits and compliant market participants in the same regulatory machinery.

Custodia Bank: A Case Study in Regulatory Burden

Custodia Bank, a Wyoming-based special purpose depository institution founded by prominent crypto advocate Caitlin Long, exemplifies the challenges facing credible firms. Despite rigorous compliance efforts and transparent operations, the Federal Reserve rejected Custodia’s application for system membership in early 2023, citing unspecified “safety and soundness” concerns. The Kansas City Federal Reserve subsequently denied the bank’s master account application—effectively blocking its path into the U.S. banking infrastructure.

What makes this particularly frustrating for industry observers: Custodia’s rejection occurred amid broader banking sector instability. The subsequent collapses of Silvergate, Signature, and Silicon Valley Bank revealed systemic vulnerabilities in traditional banking itself, yet these established institutions faced no comparable rejection based on hypothetical risk.

The message sent by these denials is stark—crypto-affiliated entities face a presumption of guilt, regardless of their operational record or regulatory alignment.

The Domino Effect: Operation Choke Point 2.0’s Ripple Across the Industry

Custodia’s blocked entry represents only one manifestation of Operation Choke Point 2.0’s impact. The broader exclusion from banking rails has forced numerous legitimate crypto companies to explore offshore banking arrangements, creating a brain drain and capital flight that weakens the domestic digital asset ecosystem.

Compliance officers at major crypto institutions argue that the current regulatory approach conflates different problems. The $14 billion Ponzi-scheme issue is real, but so is the reality that well-capitalized, transparent platforms cannot function without domestic banking access. When regulators make banking access contingent on standards that are applied retroactively or inconsistently, they effectively criminalize legitimate business operations.

Some industry voices have noted parallels to previous regulatory overreach—particularly the original Operation Choke Point (2013-2015), which targeted legal but politically disfavored industries and was eventually shelved amid criticism of overreach.

Searching for Solutions: The Trust Model Alternative

Forward-thinking compliance professionals have begun proposing workarounds to Operation Choke Point 2.0’s restrictions. One emerging framework gaining traction is the “trust model” approach—where financial institutions structure operations as trusts rather than traditional banks.

Under this model, institutions can perform nearly all banking functions—custody, settlement, treasury management—without holding assets on their balance sheets. This architectural difference theoretically reduces the “single point of failure” risk that regulators cite when rejecting crypto-affiliated applicants.

The appeal of trust structures lies not in avoiding regulation, but in meeting regulatory objectives through different operational mechanics. Assets held in trust accounts don’t create systemic risk in the traditional sense, yet they provide institutional custody and settlement services that the crypto economy desperately needs.

The Unresolved Tension

As of early 2026, Operation Choke Point 2.0 remains in effect without clear legislative resolution. Industry participants face a choice: migrate operations offshore, restructure as trusts, or accept severely constrained U.S. market access.

The fundamental question remains unanswered: Can regulators effectively target the $14 billion fraud problem without suffocating legitimate innovation in digital asset banking? Until policymakers distinguish more carefully between bad actors and compliant firms, Operation Choke Point 2.0 will continue generating exactly the outcome it purportedly seeks to prevent—pushing credible crypto infrastructure beyond U.S. borders.