The Federal Deposit Insurance Corporation (FDIC) has agreed to pay $188,440 in legal fees and drop its defense for withholding cryptocurrency-related "pause letters," reaching a settlement in a Freedom of Information Act (FOIA) lawsuit connected to banking restrictions described as "Operation Choke Point 2.0." The resolution of the case has compelled the regulator to release records indicating that banks were allegedly pressured to halt or limit crypto-related activities.

In a joint status report filed last Friday in Washington D.C. federal court, the FDIC stated it would fully cover the attorney fees incurred by History Associates Inc., a research firm engaged by cryptocurrency exchange Coinbase to request the records. The agency also committed to revising certain procedures under the FOIA framework.

The status report revealed that the FDIC, in its denial letter, acknowledged that its decision to withhold the records was based on categorizing the requested documents as exempt from disclosure, rather than conducting an individual exemption review for each file.

The release of these records follows a report from the FDIC Office of Inspector General in October 2023, which disclosed the existence of the documents and criticized the agency for sending letters to multiple banks "requesting them to pause or not expand planned or ongoing cryptocurrency-related activities."

Prior to this settlement, the court ruled in November of last year that the FDIC had violated FOIA. The court found the agency initially denied access to the pause letters categorically and "redacted information from the pause letters that was not exempt under FOIA Exemption 8, or the disclosure of which would not harm interests protected by Exemption 8."

Joe Ciccolo, Founder and President of crypto anti-money laundering advisory firm BitAML, commented to news media that the ruling demonstrates crypto regulatory efforts during the previous administration were shaped not only by traditional safety and soundness analysis but also significantly by "political and reputational considerations."

Ciccolo stated, "The FDIC's actions are deeply disappointing. The agency has a statutory duty to protect consumers and insure public deposits; it should be a model of transparency."

The term "Operation Choke Point 2.0" refers to allegations that U.S. banking regulators, including the FDIC, the Federal Reserve, and the Office of the Comptroller of the Currency, coordinated actions to restrict cryptocurrency firms' access to banking services. The name references a policy from the Obama administration where regulators pressured banks to sever ties with gun dealers and payday lenders.

When Coinbase requested these letters in November 2023, the FDIC denied the application, claiming the letters were "categorically exempt." The agency later stated its denial was based on record type rather than a file-by-file exemption review.

After History Associates Inc. filed a lawsuit in June 2024, U.S. District Judge Ana Reyes ordered the FDIC to produce the letters. Judge Reyes subsequently criticized the agency for not acting in "good faith" regarding its redactions and demanded more judicious handling of the information.

The FDIC complied with four court orders and made six document productions before finally submitting all responsive files.

"Years of litigation effort were worth it," Paul Grewal, Chief Legal Officer at Coinbase, posted on platform X following the settlement. "We successfully disclosed dozens of crypto 'pause letters,' which are clear evidence that 'Operation Choke Point 2.0' is real and that regulators are coordinating to suppress the crypto industry."

Under the settlement agreement, the FDIC pledged several policy adjustments, including adding guidance to training materials instructing staff to interpret FOIA requests "liberally." The agency also explicitly stated it does not have a blanket policy of exempting all bank supervisory documents from disclosure under FOIA Exemption 8.

Ciccolo argued that financial regulation should adhere to "principles of transparency, be risk-based, and built upon clear regulatory standards," rather than applying informal pressure through vaguely worded "pause letters." He also warned that behind-the-scenes actions by regulators erode market trust in the regulatory system.

Following the FDIC's payment, the parties to the lawsuit will file a formal motion to dismiss the case. As of now, the regulator has not responded to requests for comment from news media.