The ‘crypto’ community has found a new/old boogeyman to blame for their recent woes, but less zealous observers aren’t convinced.
Some vocal factions of the digital asset community rose in revolt over the weekend with claims that Operation Choke Point 3.0 was well underway. For those who don’t recall, the original Choke Point involved the U.S. government (under President Obama) pressuring banks to cut ties with companies providing products/services the feds purportedly didn’t like (gun sales, payday lenders, etc.).
Choke Point 2.0 under President Biden involved the alleged debanking of digital asset firms and their founders, although the actual evidence for this claim was scant. In fact, the evidence offered a stronger case for banks simply being uneasy with the more questionable financial practices of these firms/founders.
Regardless, the current crypto-friendly administration in Washington set about righting this alleged wrong by, among other things, issuing directions to banks that made it clear future actions of this kind would not be tolerated.
However, no one seems to have informed JPMorgan Chase (NASDAQ: JPM), which is accused of debanking Jack Mallers, founder/CEO of the digital payment platform Strike. Mallers is also CEO of Twenty-One Capital, the BTC-focused ‘digital asset treasury’ (DAT) firm backed by stablecoin issuer Tether and Bitfinex, the digital asset exchange that operates under the same corporate umbrella as Tether.
On November 23, Mallers tweeted that JPM “threw me out of the bank” for unexplained reasons. When he tried to ascertain why his business was no longer welcome at Chase Bank, Mallers claims the bank told him, “We aren’t allowed to tell you.”
Mallers tweeted a photo of the letter he received (and framed) from Chase that states “we have decided to close your accounts” after the bank’s “ongoing monitoring … identified concerning activity on your account or an account that you are associated with.”
The letter goes on to state that under the Bank Secrecy Act (BSA) and other regulations, “financial institutions have an obligation to periodically review our customer relationships.” The letter adds that Chase is “committed to regulatory compliance and ensuring the security and integrity of the financial system. Because of this commitment, we may not be able to open new accounts for you in the future.”
Mallers claimed this ejection happened “last month,” although the letter he received from Chase is dated September 2. On November 2, Mallers tweeted a reference to having been “thrown out” of the bank at some unspecified date, although that revelation didn’t get the same online traction as this more recent one. He later tweeted a reminder that his Strike firm had been similarly “kicked out of Chase under Biden and Chokepoint 2.0.”
Bo Hines, a Tether exec who formerly served on President Trump’s ‘crypto council,’ tweeted at the bank to check whether “you guys know Operation Choke Point is over right?”
JPM v MSTR: shots fired
Maller’s missives followed a weekend of outrage directed JPM’s way by numerous other crypto fans. Seems the firm’s analysts had the temerity to issue a note last week suggesting that Strategy (NASDAQ: MSTR)—the largest DAT firm with 639,870 BTC tokens, 3% of the total supply–could see $11.6 billion in outflows if it’s excluded from leading stock market indices.
In October, index provider MSCI opened a consultation on whether it should follow Australia’s lead and exclude from its indices any company whose digital asset holdings represent over 50% of their total assets. MSCI’s indices don’t include investment funds, which MSCI believes DATs resemble. MSCI will render its DAT verdict in its next update on January 15.
MSTR’s presence in indices like the Nasdaq 100, MSCI USA, and MSCI World has resulted in many passive investors unknowingly having MSTR’s proxy-BTC in their portfolios. JPM’s analysts warned that, should MSCI pull the plug, “this previous indirect encroachment could go into reverse.”
JPM estimated that MSTR could see $2.8 billion in outflows if excluded from MSCI’s indices, and a further $8.8 billion if other equity indices followed MSCI’s lead. “With less index-related trading, the company may also see lower trading volumes and liquidity, making it even less attractive to large investors.”
MSTR’s BTC buying sprees have been fueled by a mix of debt/equity funding and dilution of existing shareholders. JPM claimed the indices exclusion would raise “concerns about the cost and the ability of [Strategy] to raise equity and debt in the future.”
It’s not like institutions weren’t already dumping MSTR, with nearly $5.4 billion being pulled from the company by major fund managers in the three months ending September 30. That sum represented nearly 15% of total institutional exposure to MSTR. In October, S&P Global did its first-ever rating of MSTR, saddling the company with a ‘B-‘ rating, firmly relegating the company to ‘junk bond’ territory.
Strategy’s shares have fallen by ~50% in the last six months, a steeper tumble than the BTC token has endured. The result was the erasure of the premium that MSTR’s share price once enjoyed compared to the total value of its BTC. This ‘mNAV’ ratio had ranged as high as 3.4x one year ago but recently fell below 1.20, according to MSTR. Other sources indicate that MSTR’s mNAV figure is below 1.0.
MSCI’s preliminary list of DATs that could face the index axe (you can download the list by clicking this link) includes not only MSTR but other prominent names like BitMine Immersion Technologies (NASDAQ: BMNR), Metaplanet (JPX: 3350.T), Sharplink Gaming (NASDAQ: SBET), Kindly MD Inc (NASDAQ: NAKA), and many, many more.
Also on the list are several block reward mining companies that have amassed significant treasuries, including MARA Holdings (NASDAQ: MARA), Hut 8 (NASDAQ: HUT) and American Bitcoin Corp (NASDAQ: ABTC), Unlike the pure DATs, miners actually generate revenue and (occasionally) profits, but with some of them holding significant quantities of BTC—MARA has 53,250 tokens, second only to MSTR—the math may work against that ‘50% of total assets’ tripwire.
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MSTR responds
As one might imagine, MSTR’s share price took a beating following the JPM note, which coincided with yet another steep BTC value erosion. That said, both recovered slightly on Monday, with MSTR closing up 5% while BTC gained ~$3,000 to ~$88,000 as of early evening on the eastern U.S. time zone.
Strategy CEO Michael Saylor felt compelled to counter the JPM narrative, tweeting on November 21 that Strategy “is not a fund, not a trust, and not a holding company. We’re a publicly traded operating company with a $500 million software business and a unique treasury strategy that uses Bitcoin as productive capital.”
For the record, MSTR’s business analytics software business generated $128.7 million in revenue during Q3, compared to $3.9 billion in operating income, nearly all of which came from unrealized gains on the company’s BTC.
TD Cowen analysts weighed in with their own analysis (which mirrors much of the language in Saylor’s tweet), saying they expect MSTR and other DATs “will be dumped from all MSCI indexes this coming February.” TD Cowen offered only slightly less dire forecasts of $2.5 billion in outflows from MSCI indices and another $5.5 billion if other indices follow suit.
TD Cowen said this “may be as misguided as it is unfortunate” and suggested that MSCI is “simply expressing a bias against bitcoin.” That’s certainly the view that Saylor fanboys and the crypto bro community have adopted, echoing Mallers’ view that Operation Choke Point 3.0 is well underway.
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The crypto empire strikes back
Two days after the JPM note, the official X account of Empery Digital (NASDAQ: EMPD), a DAT holding 4,081 BTC, tweeted its case against JPM, accusing the bank of secretly launching a “coordinated attack” on MSTR back in July by imposing higher margin requirements. (In case you were wondering, Empery shares are currently trading at less than one-quarter of the value they enjoyed immediately following the July launch of their DAT strategy.)
Empery’s tweet was retweeted by Tyler Winklevoss, co-founder of the Gemini (NASDAQ: GEMI) exchange, along with the question “Operation Choke Point 3.0?” Tyler and his brother Cameron just launched a new treasury firm based on the Zcash (ZEC) privacy token. That company, Cypherpunk Technologies Inc (NASDAQ: CYPH), closed Monday’s trading down one-fifth to $1.83, slightly more than half of last week’s peak price.
That same day, David Bailey, CEO of Kindly/NAKA, tweeted that he found it “highly suspect” that the MSCI notice was published in October just as BTC was hitting its all-time high, calling it “likely a significant contributor” to BTC’s ongoing struggles. Bailey claimed that the sector had “fought and won fair access to banking” and now had to “fight (and win) for fair access to the investing public.”
For the record: NAKA, which holds 5,398 BTC, has seen its shares fall 98% in the past six months and risks being delisted from the Nasdaq should its share price fail to recover above $1 from its current $0.44. (Do you sense a pattern here yet?)
There’s now a push on to boycott JPM, a campaign that probably won’t move the needle much for JPM, given that there’s only so many crypto diehards who’d be willing to disrupt their tradfi ties for a cause this murky. Recognizing that, the campaign seems more about changing the narrative surrounding DATs and pumping some air into this rapidly deflating balloon.
In this preferred narrative, the fall in DAT share prices isn’t because these companies offer no benefits to investors who could easily acquire and hold the tokens themselves. It’s not because the hype has faded and investors see no reason why a DAT’s share price should be any higher than the value of the tokens it holds. No, it must be the work of a shady cabal of traditional finance execs intent on defending their entrenched positions.
The reality is, long before any alleged plot was orchestrated by JPM or MSCI, the bloom was already off the DAT rose, and doubts were raised about MSTR’s ability to continue to fund its BTC buys. In August, Saylor reneged on a promise not to issue new MSTR stock if its mNAV fell below 2.5x, a forced shift toward dilution after the company’s multiple preferred stock vehicles proved unable to attract sufficient investor interest.
As a result, MSTR began offering higher and higher dividends to attract investors, with no indication of how it would pay these dividends (now worth nearly $700 million annually). And Saylor’s comments that MSTR can withstand BTC going to $1,000 without his debts being called aren’t exactly encouraging new investors to come off the sidelines.
Honestly, the Mallers debanking is (for the moment, at least, until the details emerge) a more compelling case to make for the Choke Point 3.0 allegations. But it all might come down to having friends in high places who hate the same people you do. Read on…
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Trump v JPM
On November 10, Florida’s Attorney General James Uthmeier announced that his office had launched an investigation into JPM regarding “their coordinated efforts with [special counsel] Jack Smith and the Department of Justice (DoJ) as part of the Biden administration’s Operation Arctic Frost [probing President Trump’s efforts to overturn the 2020 election result].”
Uthmeier said JPM “debanked” the Florida-based Trump Media & Technology Group (TMTG) (NASDAQ: DJT) “right before the business went public” last year. Uthmeier further alleged that JPM “solicited tons of information from Trump Media unrelated to their business practises, and we believe provided sensitive banking information to the [DoJ] without real probable cause. This is wrong. We will not tolerate it. And we will hold them accountable.”
In January, Trump called out JPM, its CEO Jamie Dimon, and other banks in a virtual speech to the World Economic Forum in Davos, saying, “Many conservatives complain that the banks are not allowing them to do business within the bank … what you’re doing is wrong.” That speech followed Trump issuing an executive order demanding “open access to banking services” for digital asset operators.
In response to Uthmeier’s probe announcement, JPM told Fox Business that it “follows the law in responding to subpoenas from the government and will do so.”
TMTG is the parent company of the Truth Social platform, but its primary financial reason for being is its BTC treasury, having raised $2.4 billion this spring to acquire its current stack of 11,542 BTC tokens. TMTG later announced plans for a new treasury firm based on the Crypto.com exchange’s native CRO token.
TMTG’s Q3 earnings report showed the company booked a net loss of $54.8 million in the three months ending September 30, nearly triple the $20 million it lost in Q2 and its third consecutive money-losing quarter. Revenue was $972,900, a modest improvement over Q2’s $883,300, but still an embarrassingly paltry figure for a social media firm.
A major contributor to Q3’s red ink was the negative trajectory in the fiat value of the tokens it holds. TMTG’s purchase of $2 billion in BTC was made when the token was worth ~$115,000, so with the token currently stuck below $90k, that end-of-Q3 devaluation has since taken an even greater tumble.
Saddling one’s worth to the value of the utility-free assets you control is proving a rough ride for a lot of DATs, including TMTG. The company’s stock is currently trading ~$10.60, down nearly 70% for the year and representing barely one-sixth of its peak price following its March 2024 Nasdaq listing.
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Watch: Bringing the Metanet to life with Teranode
Source: https://coingeek.com/choke-point-3-0-or-rejection-of-utility-free-crypto-treasuries/