This week in the newsletter we write about new evidence of Chokepoint 2.0, the state of the U.S. government's current bitcoin stockpile, and a Bhutanese city adopting BTC, ETH, and BNB as strategic assets. Christine Kim has notes on the latest Ethereum governance call.

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Speculation Mounts about Government's Handling of Silk Road Bitcoin

On December 30th, the US Government declined to unmask Individual X, the anonymous hacker who stole 69,370 BTC, now worth ~$6.4bn, from the first Darkweb drug market, The Silk Road. Those Bitcoin could form the foundation of the United States Government's Bitcoin strategic reserve under the new administration. Speculation mounted this week that the U.S. government was intending to sell its remaining Silk Road coins, or already had, after market news feed db posted on X that the government was now free to sell.

For background, the court declined the unmask Individual X in response to a lawsuit surrounding a FOIA request from Battle Born Investments, a firm primarily known for its prolonged fight in the US court system claiming that they themselves are the beneficial owners of the 69,370 BTC seized. Battle Born has not had much success in the pursuit of their claim, and the court system has thus far denied their claims due to a lack of evidence of ownership. Battle Born appealed the ruling all the way to the United States Supreme Court, only for that appeal to be denied in October 2024. This latest denial was the last of Battle Born's suits in regard to their case, and the final element preventing the government from moving forward with the civil forfeiture process and selling the tokens.

While the US Government currently holds ~198k BTC (~$18bn) in bitcoin, this recent denial concludes the legal journey for the majority of the United States Government's tokens. Of the US Government's Bitcoins, ~112k BTC of them are from the Bitfinex hack. The legal proceedings for that case ended in October of last year with the sentencing of Illya Lichtenstein and Heather "Razzlekhan" Morgan following their guilty pleas. Subsequently, the government said it believed Bitfinex was the sole victim for restitution of the exchange hack, paving the way for the government to begin returning to the exchange ~112k BTC (~$10bn) they had seized.

On the heels of Bitfinex's hack, they issued the LEO token, which contained provisions for restitution in case the hacked funds were returned; ~80% of the recovered funds expenses will go to buy and burn of LEO tokens. The terms do not specify that recovered tokens have to be sold to buy and burn LEO, or that the LEO must be bought from the open market, only that an equivalent dollar amount of the proceeds is used. Bitfinex could sell the Bitcoins, use cash on hand instead, or even burn the LEO they own (95%+ of the circulating supply is in Bitfinex's EOS wallet).

Despite speculation and the clearing of legal barriers to the government selling these Silk Road coins, at the time of writing the coins have not moved on the blockchain.

OUR TAKE:

While it's certainly possible that the U.S. will sell these remaining BTC, doing so at this time, just 10 days before President-elect Trump takes office, appears almost spiteful. Recall that President-elect Trump promised to "never sell" the government's bitcoin and instead make the government-held coins part of a "national bitcoin stockpile." Because we expect the government to eventually return more than half of its bitcoin to Bitfinex, any remaining Silk Road coins would serve as the primary source for Trump's national bitcoin stockpile. We can hold out hope that a slow start to the year keeps the current administration from rushing the coins out the door in time for the incoming administration to halt the process and formalize what would be the world's largest bitcoin holdings by any nation-state. At this point, it appears the coins have not yet been sold. While some have called for the U.S. government to proactively purchase Bitcoin to become part of a Strategic Bitcoin Reserve, we think the more likely path is that seized bitcoin instead is retained to form a national stockpile. If we can make it through until Jan. 20 without the tokens being sold, then we think it is more likely than not that those tokens will not be sold by the government at all. - Thaddeus Pinakiewicz

FDIC Sent Letters to Banks Pressuring them to Halt Crypto

In response to a Freedom of Information Act (FOIA) lawsuit, the FDIC released 25 partially redacted letters the agency had sent to banks urging them to "pause" crypto-related activities. A group called History Associates sued the Federal Deposit Insurance Corporation, the agency that manages the insurance of bank deposits and serves as a regulatory and examiner of banks in the U.S., seeking to have redactions lifted from some previously produced documents, as well as to release any other documents that showed the FDIC had pressured banks to avoid conducting crypto-related activities. The FDIC published documents responsive to that request on Friday last week (January 3).

The letters, which were sent by the FDIC to banks and bank leadership between March 11, 2022, and May 5, 2023, show a consistent and coordinated policy to request that banks halt any activities related to crypto or blockchains. Some of the activities and services the banks had sought to conduct or offer include allowing customers to buy or sell bitcoin, entering into consortia to utilize blockchain technology for interbank payments, offering or supporting existing stablecoins, custody services, and various tokenization efforts.

OUR TAKE:

While these letters do not provide direct evidence that banks were pressured to debank firms involved in the crypto industry, they do show a coordinated effort to block banks' attempts to provide crypto services themselves. These so-called "pause" letters used consistent language and urged banks to avoid offering a range of services mostly unrelated to each other save for the fact that they involved blockchain technology.

These two activities, asking banks to avoid crypto products and pressuring them to debank crypto firms, have collectively become known as "Choke Point 2.0," named in honor of an official policy during the Obama administration called "Operation Choke Point" which specifically sought to debank the firearms, payday lending, and gambling. While these letters themselves don't show evidence of the debanking, they do show a coordinated effort to stifle innovation. Banking executives and industry analysts like Nic Carter have reported that the debanking widely reported by crypto firms was enacted not via pause letters but through verbal requests from regulators to banks that they cap their crypto-related deposits at 15% of their total deposits in order to remain "safe and sound." For banks like Silvergate and Signature, this effectively ended their ability to operate entirely. For others, this discouragement either resulted in offboarding or deterred them from providing accounts in the first place.

Some critics have argued that, if the 15% threshold was set, it was reasonable in response to "actual crypto-induced runs!" The reality is that Silvergate met all withdrawals and voluntarily liquidated, while Signature was taken over despite having sufficient capital (according to its board member and co-author of the iconic Dodd-Frank legislation Barney Frank). Neither "crypto bank" was felled by a run, and Silicon Valley Bank, which did collapse following a run, had minimal crypto-related exposure. SVB's primary exposure was holding a portion of the cash that backs the USDC stablecoin, which didn't contribute significantly to the run. It's reasonable to conclude that USDC was itself more a victim than a perpetrator of the run that felled SVB. Crypto didn't cause the banking crisis.

But it wasn't just the pause letters or the deposit thresholds that comprised Choke Point 2.0. Joint letters from the Federal Reserve, FDIC, and Office of the Comptroller of the Currency (OCC), White House blogs, and floor speeches from prominent U.S. Senators allied with the White House all formed a coordinated effort to pressure banks and financial services firms, particularly following the collapse of FTX. The crypto industry had its bank accounts closed and/or found it nearly impossible to open one. We think we know why, and it appears to have been coordinated, but we know with certainty that it happened, and suggestions otherwise are gaslighting.

The big questions now are 1) what more will we learn about what happened and 2) will this deterrence be halted and rescinded in the new administration? President-elect Trump promised to "end Operation Choke Point 2.0" in Nashville last summer, and there are rumblings that Congress may conduct hearings on the topic in the 119th Congress, so it is likely that more information comes out. As for whether regulatory pressure on banks will ease materially, that remains to be seen but we are optimistic. The OCC in particular is expected to reinstate Brian Brooks-era interpretive letters allowing banks to engage in certain crypto activities like custody and stablecoins. But we have yet to hear who the President-elect will announce his nominees for the OCC and FDIC, and it's not yet clear that the Fed will change its approach. - Alex Thorn

Momentum Builds Around Strategic Bitcoin Reserves

Bhutan GMC to establish Strategic Crypto Reserve. Bhutan's Gelephu Mindfulness City (GMC) announced plans to add crypto to its strategic reserves - specifically, Bitcoin, Ethereum (ETH), and Binance Coin (BNB) per the announcement. The inclusion of these assets into the strategic reserves is to enhance GMC's economic resilience and will "bolster the growth of the digital asset ecosystem in GMC within a technologically progressive, yet well-regulated environment."

This initiative adds to Bhutan's broader economic strategy around crypto. Since 2017, the Kingdom of Bhutan has been using its abundant hydroelectric resources to mine bitcoin. The Bhutan government has launched literacy programs to grow widespread acceptance and understanding of crypto within the country and aims to attract more blockchain companies to establish Bhutan as a global hub for blockchain innovation. The Bhutan government now holds over $1bn of Bitcoin (11,688 BTC worth ~$1.1bn, according to Arkham estimates), ranking it as the fifth largest government holder of Bitcoin (behind the US, China, UK, and Ukraine).

OUR TAKE:

Bitcoin and crypto are rapidly being integrated into government policies to support innovation policy and even as part of strategic asset reserves. Among the short list of countries with government holdings of bitcoin, Bhutan stands out (with El Salvador) for sourcing bitcoin through environmentally-friendly mining rather than through law enforcement asset seizures. A logical evolution of the nation's crypto-related initiatives in its economic policy would be to establish a strategic crypto reserve. GMC's inclusion of ETH and BNB in its strategic reserves is notable as they do not have the same store-of-value properties as BTC. This could suggest that, beyond just holding crypto to boost economic stability, the government may also be aiming to integrate blockchain technology into the lives of its citizens.

Our team predicted that five nation-states or sovereign wealth funds will add bitcoin to their balance sheets in 2025. Momentum is rapidly picking up as more policymakers around the world are actively discussing the idea of establishing strategic bitcoin reserves -- including here in the US. The case for nation-state adoption becomes clearer amid challenging macro conditions including rising inflation, currency debasement, and growing fiscal deficits. Geopolitical competition should then drive the next wave of adoption, so we expect Bhutan GMC's pioneering efforts to prompt others to follow suit. - Charles Yu

Charts of the Week

Bitcoin's long-term holder supply, which is the total amount of BTC that hasn't moved in at least 155 days, is now 13.16 million BTC - the same level it was at in September 2022. Since October 10, 2024, long-term holders have parted with more than 1 million BTC, marking the largest decline in the long-term holder supply since 2021. Historically, decreasing long-term holder supply has marked bullish periods as holders deep into profit begin to sell their coins. Note, the decline in long-term holder supply doesn't directly correspond to selling from this cohort of holders. Rather, it identifies the movement of coins over the 155-day age threshold which can be an identifier of selling.

From a relative supply perspective, the share of circulating supply held by long-term holders is at 66%. This is the lowest point it has reached since June 2021. So, while the absolute amount of BTC owned by the long-term holder cohort is only at 3Q 2022 levels, the relative share of supply hasn't been this low in more than 3.5 years.

The decline in long-term holder supply comes at a level of spending profitability that has marked peaks in the price of BTC in recent years. The weighted average profitability of spent long-term holder coins reached 347% (3.47) on January 1, 2025. Profitability is calculated as the difference in price at the time a holder receives their coins against the price at the time they spend them. This approximate level was reached in March 2024, which marked the top of ~$73k before an extended period of price consolidation. A SOPR of 3 also marked the top of the 2020-2021 bull cycle; before that, however, it cleared 9.

Other News

• Arbitrum deepens ties with South Korea's Lotte group

• Coinbase granted significant advance in court clash with Gensler's SEC

• Circle donates $1 million in USDC to Trump's inaugural committee, says CEO Jeremy Allaire

• South Korea seeks to lift ban on institutional trading of cryptocurrencies:

• Revolut becomes first banking data publisher to join the Pyth Network

• UK exempts crypto staking from collective investment scheme rules

• Standard Chartered to offer crypto custody services in EU with new Luxembourg license

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