The SEC’s Bitcoin ETF Approvals Have Forever Altered The Global Monetary System (2024)

Much of the chatter about the Securities and Exchange Commission’s long-awaited approval of bitcoin exchange-traded funds has revolved around how the SEC’s action will affect bitcoin’s price. But that’s the short-term story.

The most far-reaching consequence of the ETF-driven institutionalization of bitcoin is that it will become extremely difficult for the U.S. to ban the digital asset, enabling bitcoin to permanently push forward the evolution of how money fundamentally works.

Why creating more money is popular—in the short term

15 years ago, when Satoshi Nakamoto published the Bitcoin BTC white paper, he re-articulated a long-standing concern with the political economy of money: that governments have a powerful political incentive to devalue their official currencies, in order to spend more than they take in.

Higher government spending is politically popular, while higher government taxes are not. Hence, governments are always tempted to spend more without raising taxes, by borrowing the difference, and when that stops working, creating more money by fiat out of thin air.

In the short term, this works politically, because politicians get re-elected by spending more on favored constituencies. Over the long term, however, the larger quantity of money can lead each unit of money to have less purchasing power: put simply, inflation.

Nakamoto and his compatriots strove to solve this problem by fixing the supply of bitcoin at 21 million units. Unlike the supply of U.S. dollars or euros or yen or renminbi, which increases over time, the total number of bitcoin in circulation cannot be feasibly altered by political actors. This, in theory, makes bitcoin a more reliable store of value over the long term, relative to modern fiat currencies.

Can the U.S. government ban bitcoin?

If bitcoin in fact becomes a superior store of value to the greenback, some fear that the U.S. government will ban the cryptocurrency. “Outlawing Bitcoin is a good probability,” said Bridgewater Associates founder Ray Dalio in a 2021 interview with Andy Serwer of Yahoo Finance. “Back in the Thirties in the war years,” Dalio observed, the government feared flight from the dollar to gold, and so “they outlawed [private ownership of] gold…and they also established foreign exchange controls, because they [didn’t] want the money to go elsewhere.”

Technically speaking, the U.S. government can no more ban bitcoin than it can ban the internet. Bitcoin operates on a decentralized computer network that functions outside of U.S. jurisdictions. Indeed, despite the fact that China banned bitcoin mining in 2021, the Cambridge Centre for Alternative Finance estimates that roughly one-fifth of bitcoin miners’ electricity consumption still took place in the PRC in early 2022. Chinese crypto traders commonly use virtual private networks and other tools to evade government enforcers.

But that doesn’t mean the U.S. government has no leverage. In theory, the U.S. could ban the exchange of dollars for bitcoin on exchanges like Coinbase or Kraken. The U.S. could forbid mainstream banks from doing business with bitcoin-oriented enterprises. The U.S. could make it impossible for corporations like Microstrategy to own bitcoin on their balance sheets, through SEC or accounting regulations. The government could create obstacles preventing retail businesses from accepting bitcoin as payment.

In other words, while the U.S. can’t prevent the bitcoin network from operating, it can—in theory—make it extremely difficult for mainstream Americans to use and buy bitcoin, just as it did in 1933 when Franklin D. Roosevelt barred the private ownership of gold.

ETFs make banning bitcoin extremely difficult

This is where the new bitcoin ETFs come in. With the stroke of the SEC’s pen, we now have a situation where some of the financial world’s largest and most powerful players—including BlackRock BLK , Fidelity, Invesco IVZ , and Franklin Templeton—will have billions of dollars of bitcoin holdings. ETFs instantly make bitcoin accessible to a large number of investors who never got comfortable with trading on crypto exchanges or privately holding their bitcoin keys.

This matters, because it massively enlarges the special interest in favor of preserving and growing bitcoin’s role in U.S. financial markets. If you’re a member of Congress, or an ambitious regulator, who dislikes bitcoin and wants to enact some of the restrictive policies I described above, you’re not merely going to hear from hodling plebes, but from major financial players who—like it or not—have considerable influence in Washington.

That fact alone makes it much harder for policymakers to actively restrict bitcoin adoption. As someone who deals with Washington all the time, I can confirm the conventional wisdom that special interests have an outsized influence on how policymaking works. Lobbyists are especially skilled at opposing new policies that adversely affect their clients’ interests.

Today, more than $25 billion of bitcoin is held in exchange-traded funds, with about a billion of that coming in the two weeks since the SEC greenlighted the new funds. That’s real money, even for financial giants like BlackRock.

The SEC knows what it’s doing

The SEC understands all of this, which is why approving bitcoin ETFs has been such a pitched battle. Under the laws that govern the SEC, it’s not the Commission’s job to decide whether or not bitcoin is a good investment—that’s for investors and markets to decide. Nonetheless, the SEC has, for the last 10 years, adamantly resisted giving investors exposure to bitcoin through a mainstream, regulated instrument. This is precisely because the SEC knows that its imprimatur could dramatically increase investors’ interest in the digital asset.

The Commission only approved spot bitcoin ETFs under the duress of a unanimous opinion, authored by Neomi Rao of the U.S. Court of Appeals for the D.C. Circuit, which described as “arbitrary and capricious” the SEC’s resistance to bitcoin ETFs, because the agency had approved nearly identical products for bitcoin futures and other commodities.

SEC Chair Gary Gensler has repeatedly said that Rao’s opinion forced his hand. “Based on these circ*mstances,” Gensler wrote in a statement, “I feel the most sustainable path forward is to approve the listing,” even though he attacked bitcoin as “primarily a speculative, volatile asset that’s also used for illicit activity including ransomware, money laundering, sanction evasion, and terrorist financing.” Two of the other Democratic appointees on the Commission, Caroline Crenshaw and Jaime Lizárraga, voted against the January ETF listings.

What would happen in a crisis?

I’ve explained why the approval of bitcoin ETFs makes it very difficult for the government to abolish the U.S. market for bitcoin, at least for the foreseeable future. But what if the Satoshi bulls are right, and bitcoin rises to a scale at which it really is competitive with the dollar as a store of value? Could the U.S. step in then and crack down?

It could try. But by then, it would effectively be too late. Take the example of Argentina. The Argentine government prohibits its citizens from exchanging more than $200 of Argentine pesos into dollars per year. Despite this restriction, the Argentine central bank estimates that Argentines hold 10 percent of all the U.S. dollars in circulation: more than $200 billion in cash.

The U.S. federal debt stands at about $34 trillion today, which effectively means that there are about $34 trillion in Treasury bonds in circulation. Bitcoin’s liquidity—and therefore its attractiveness to large institutions as a store of value—might start to become competitive to Treasuries at about one-fifth of that value: say, $7 trillion, about 9x the market capitalization of bitcoin today. As the federal debt continues to increase, that threshold of competitive liquidity would go up.

But to use some circular logic, bitcoin can only reach a market cap of $7 trillion if it gains far wider acceptance as a store of value than it has today. A U.S. crackdown on bitcoin, at that point, would likely backfire, just as Argentina’s capital controls do now, because the crackdown would serve as a signal to world markets that the U.S. no longer had confidence in the dollar’s inherent superiority.

Rooting for fiscal reform

In the best-case scenario, the U.S. tackles its fiscal problems—most notably, its runaway spending on health care entitlements—and puts the federal debt on a sustainable path. But until that happens, Americans can buy bitcoin as an insurance policy against a U.S. dollar weakened by the skyrocketing federal debt. The SEC has just made sure that this insurance policy will be around for a very long time.

I have a deep understanding of the topics discussed in the article, particularly regarding the Securities and Exchange Commission's (SEC) approval of bitcoin exchange-traded funds (ETFs) and its potential implications. My expertise in finance and cryptocurrency allows me to analyze the evidence presented in the article and provide insights into the concepts involved.

The central theme of the article revolves around the long-term consequences of the ETF-driven institutionalization of bitcoin. Here are key concepts discussed:

  1. Bitcoin's Evolution as Money: The article highlights how the institutionalization of bitcoin through ETFs can have far-reaching consequences for the evolution of money. It suggests that, with increased institutional involvement, it will become challenging for the U.S. to ban bitcoin, thus allowing the cryptocurrency to shape the fundamental workings of money.

  2. Government Devaluation of Official Currencies: The article refers to concerns articulated by Satoshi Nakamoto in the Bitcoin white paper about governments having incentives to devalue their official currencies. This is often done by increasing the money supply through borrowing or fiat creation, leading to inflation over the long term.

  3. Bitcoin's Fixed Supply: To address the devaluation issue, Nakamoto fixed the total supply of bitcoin at 21 million units. This fixed supply is contrasted with traditional fiat currencies, whose supplies can be altered by political decisions. Theoretically, this makes bitcoin a more reliable store of value over time.

  4. Possibility of U.S. Government Banning Bitcoin: The article explores the possibility of the U.S. government banning bitcoin, drawing parallels with historical events such as the outlawing of private ownership of gold in the 1930s. While technically challenging to ban the decentralized Bitcoin network, the U.S. government could impose restrictions on exchanges, banks, and businesses dealing with bitcoin.

  5. Role of ETFs in Bitcoin Adoption: The approval of bitcoin ETFs by the SEC is presented as a significant development. Major financial players, including BlackRock, Fidelity, Invesco, and Franklin Templeton, now hold billions of dollars in bitcoin through ETFs. This makes bitcoin more accessible to a broader range of investors, including those uncomfortable with traditional cryptocurrency exchanges.

  6. Influence of Financial Giants on Policy: The article emphasizes that the involvement of major financial players in bitcoin, through ETFs, creates a significant interest group that may oppose restrictive policies. This makes it politically challenging for policymakers to actively restrict bitcoin adoption.

  7. SEC's Role and Approval of Bitcoin ETFs: The SEC's role in approving bitcoin ETFs is discussed, acknowledging the regulatory body's resistance over the past decade. The recent approval is seen as a result of external pressure, with the SEC recognizing the potential impact on investor interest in the digital asset.

  8. Bitcoin as an Insurance Policy: The article concludes by suggesting that, until the U.S. addresses its fiscal challenges, Americans may view bitcoin as an insurance policy against a weakened U.S. dollar. The approval of bitcoin ETFs by the SEC is seen as ensuring the longevity of this option.

In summary, the article explores the intersection of finance, regulation, and cryptocurrency, providing insights into the evolving landscape of bitcoin and its potential impact on the traditional financial system.

The SEC’s Bitcoin ETF Approvals Have Forever Altered The Global Monetary System (2024)


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