The SEC’s approval of Bitcoin ETFs has garnered substantial attention, primarily for its potential to influence Bitcoin’s price in the near term.
However, the more profound and enduring impact lies in the heightened challenge the US faces in regulating or prohibiting Bitcoin in the long run.
Fifteen years ago, Satoshi Nakamoto brought attention to a persistent issue in the realm of monetary politics when he introduced the Bitcoin white paper . He highlighted the concern that governments possess a strong political incentive to devalue their official currencies, enabling them to spend beyond their means.
Consequently, governments are often enticed to augment spending without raising taxes, resorting to borrowing to bridge the gap, and when that approach becomes unsustainable , they resort to creating more money by printing. In the long run, the proliferation of currency can erode the purchasing power of each individual, leading to inflation.
Nakamoto and his peers aimed to address this challenge by capping the supply of Bitcoin at 21 million units. Unlike traditional fiat currencies such as the U.S. dollar, euro, yen, or renminbi, which can be expanded by governmental authorities over time, the total number of Bitcoins in circulation cannot be easily manipulated by political actors.
If Bitcoin outshines the U.S. dollar as a store of value, concerns arise about a potential U.S. government ban on the cryptocurrency. Bridgewater Associates founder Ray Dalio voiced this concern, stating that “Outlawing Bitcoin is a good probability” due to historical parallels, such as the 1930s prohibition of private gold ownership and the imposition of foreign exchange controls.
From a technical standpoint, a direct ban on Bitcoin by the U.S. government is implausible, given Bitcoin’s decentralized nature that operates independently of U.S. jurisdiction. While China banned Bitcoin mining in 2021, a significant portion of mining continued in China through methods like virtual private networks.
Nonetheless, the U.S. could exert its influence by limiting dollar-to-bitcoin exchanges, restricting mainstream banks from engaging with Bitcoin businesses, imposing regulatory challenges on corporate Bitcoin holdings, and creating obstacles for retail businesses accepting Bitcoin as payment. In essence, while it cannot obstruct the Bitcoin network, the U.S. could make it cumbersome for average Americans to access and use Bitcoin, similar to historical measures like the 1933 prohibition of private gold ownership.
The approval of new Bitcoin ETFs is a pivotal development. It has enabled major financial giants like BlackRock, Fidelity, Invesco, and Franklin Templeton to hold billions of dollars in Bitcoin, making this cryptocurrency accessible to a broader range of investors who may have been hesitant to engage with cryptocurrency exchanges or manage private Bitcoin keys.
This shift holds immense significance, intensifying the vested interest in expanding Bitcoin’s role within U.S. financial markets. Policymakers contemplating restrictive measures regarding Bitcoin will now encounter opposition not only from individual enthusiasts but also from influential financial players who wield considerable influence in Washington.
This dynamic heightens the challenges for policymakers looking to actively curb Bitcoin adoption, as special interest groups in Washington hold substantial sway in shaping policy decisions. Currently, over $25 billion in Bitcoin is held in exchange-traded funds, with approximately one billion flowing in just two weeks after the SEC’s approval, representing substantial financial assets, even for industry giants like BlackRock.
The approval of Bitcoin ETFs by the SEC has been a contentious issue, as the Commission recognizes the complexities involved. While the SEC’s regulatory framework dictates that it should not determine Bitcoin’s investment suitability, it has steadfastly resisted offering investors exposure to Bitcoin through a mainstream, regulated financial instrument for the past decade. This resistance is driven by the SEC’s awareness that endorsing Bitcoin in this manner could significantly spur investor interest in the digital asset.
The SEC’s greenlight for spot Bitcoin ETFs came only after unanimous legal pressure, prompted by a ruling from Neomi Rao of the U.S. Court of Appeals for the D.C. Circuit. Rao’s opinion deemed the SEC’s resistance to Bitcoin ETFs as “arbitrary and capricious,” particularly given that the agency had already approved similar products for Bitcoin futures and other commodities.
SEC Chair Gary Gensler, while critical of Bitcoin as a “primarily speculative, volatile asset” with illicit uses, acknowledged that Rao’s opinion compelled the Commission to act. Notably, two other Democratic appointees on the Commission, Caroline Crenshaw and Jaime Lizárraga, voted against the January ETF listings.