By Emile Phaneuf, American Institute of Economic Research
On January 10, over a decade after the first Bitcoin spot Exchange-Traded Fund (ETF) application, the Securities and Exchange Commission (SEC) finally approved eleven applications on the same day. Trading began the next day, January 11. The recent round of approvals comes after much anticipation. The first-ever application for a Bitcoin spot ETF was back in 2013, from Gemini, a company co-founded by the Winklevoss brothers. The SEC rejected Gemini’s application in 2017 as well as subsequent application from the same company again in 2018.
Exchange-Traded Funds allow investors to gain exposure to Bitcoin’s price volatility without having to invest in Bitcoin directly. Note that the SEC usually refers to ETFs as ETPs (Exchange-Traded Products); ETFs are just one type of ETPs.
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The general sentiment across the Bitcoin-sphere was one of excitement. Bitcoin Magazine called the SEC’s approval “a historic milestone in the evolution of Bitcoin adoption within traditional financial markets.” Investor Balaji Srinivasan called it “the spiritual reversal of Executive Order 6102” (referring to FDR’s 1935 seizure of America’s privately-held gold). For many, the SEC’s reluctant approval was seen as a bit of institutional validation for Bitcoin – especially after years of dismissal by the likes of establishment figures such as Warren Buffet, Jamie Dimon, and Elizabeth Warren.
Even in SEC Chair Gary Gensler’s public statement announcing the Bitcoin spot ETF approval, he warned that “bitcoin is primarily a speculative, volatile asset that’s also used for illicit activity including ransomware, money laundering, sanction evasion, and terrorist financing.” (Gensler conveniently overlooks that fiat currencies, including the US dollar, are also used for all of the above).
Gensler also noted that the SEC essentially had little choice but to approve the Bitcoin spot ETFs since “The US Court of Appeals for the District of Columbia held that the Commission failed to adequately explain its reasoning in disapproving the listing and trading of Grayscale’s proposed ETP…”
But a refreshing bit of sentiment came from SEC Commissioner Hester Peirce in a statement of her own. In the statement, Peirce accused the SEC of treating Bitcoin spot ETPs unequally to (more harshly than) other types of ETP applications over the years. As she put it, “The goalposts kept moving as the Commission slapped ‘DENIED’ on application after application.”
Commissioner Peirce’s full statement deserves a read, but the final paragraph in particular reflects what I think is a principled stance consistent with a free society:
I am not celebrating bitcoin or bitcoin-related products; what one regulator thinks about bitcoin is irrelevant. I am celebrating the right of American investors to express their thoughts on bitcoin by buying and selling spot bitcoin ETPs. And I am celebrating the perseverance of market participants in trying to bring to market a product they think investors want. I commend applicants’ decade-long persistence in the face of the Commission’s obstruction.
A personal perspective
Whether regulators that happen to be more hostile to Bitcoin (and “crypto” more generally) like it or not, the SEC’s Bitcoin spot ETF approval does provide a strong counter-narrative to the “Bitcoin is for drugs, money laundering” objection. The approval certainly has the potential to substantially increase Bitcoin’s purchasing power over time (which we can easily measure using its fiat-denominated price) as new institutional money flows into Bitcoin.
There are two things to watch for here, however: one regarding Bitcoin’s consensus and the other regarding self-custody.
As Bitcoin has a highly-decentralized governance model, no single stakeholder or multiple colluding stakeholders (miners, full node operators, programmers, users, exchanges, wallet providers, payment processors) are able to change it to their own benefit without reaching an overall consensus from the others. Satoshi Nakamoto, Bitcoin’s creator, understood incentives and a bit of game theory.
As huge financial institutions increase their holdings (directly or indirectly) of Bitcoin over time, there is likely to be enormous pressure to bend Bitcoin’s rules towards, say, compliance with the US Treasury’s Office of Foreign Assets Control (OFAC) sanctions. (To understand the present regulatory climate, note that in 2022, OFAC began sanctioning crypto mining operations in Russia and even Ether wallet addresses alleged to be connected to North Korean hackers).
In Bitcoin, existing norms serve as a Schelling point: a consensus point where people converge without much coordination. As such, it isn’t difficult to imagine a so-called hardfork happening over competing visions of the Bitcoin protocol, resulting in a split into two separate coins, both calling themselves “Bitcoin” (this wouldn’t be the first time). The first “Bitcoin” would be regulator-friendly and institutionally backed. The second would be a permissionless, censorship-resistant, “OG” Bitcoin, as I will refer to it here for simplicity.
If such a split were to happen, we could imagine regulators in the United States and Europe, for example, forbidding cryptocurrency exchanges from facilitating trades of the “OG” Bitcoin that exists today. Additionally, miners of the “OG” Bitcoin could come under heavy attack for various reasons (with a green energy agenda, for example), pushing their operations to countries less politically aligned with the United States and Europe. (And, as a side note, this would even further complicate the American and European governments’ ability to sanction any country at will).
To be clear, none of these attacks on the free and open “OG” Bitcoin payment network would kill it. Far from it. But it does push its stakeholders to the fringes, legally speaking. Additionally, what Bitcoin’s political and regulatory enemies overlook is that the more they ramp up attacks against it using (sometimes) legally questionable and authoritarian means, the more they – quite ironically – increase the value proposition for a free and open payment network. That is, crackdowns against it create new demand for it. This is because people who find themselves living in authoritarian regimes seek out tools to maintain some element of human dignity.
As for self-custody, it is worth a quick revisit of what Satoshi originally had in mind. His whitepaper called Bitcoin a “Peer-to-Peer Electronic Cash System.” Peer-to-peer meant no centralized third-party custodians needed. In fact, getting away from centralized third-parties altogether was the key breakthrough that Bitcoin achieved after a couple of decades of Cypherpunk debates and previous attempts. (See my detailed table for more on this).
As David Waugh rightly noted, taking self-custody of Bitcoin yourself protects you against a government that “might be able to seize the asset manager’s bitcoin or order it to liquidate the ETF.”
Perhaps unsurprisingly, the US Treasury Department refers to self-custody (“non-custodial”) cryptocurrency wallets in a sort of derogatory manner, labeling them “unhosted wallets” – a name that implies that a legitimate way of doing payments (from Treasury’s point of view) is for cryptocurrency users to trust third parties (a “host”) that can be easily coerced by the regulatory apparatus to hand over user funds at will. But even if we dismiss the risk of a predatory state, the exchanges themselves can be unreliable, to say the least. Blockchain analytical service Glassnode noted that in the aftermath of the FTX collapse of November 2022, both institutional and retail users withdrew funds from centralized exchanges, en masse, resulting in significant net outflows, with users moving funds into self-custody. Self-custody radically protects property rights.
While the SEC’s long-overdue approval of a Bitcoin spot ETF deserves a bit of celebration, watch out for what’s next. The state apparatus will, for the most part, increasingly treat Bitcoin as a regulated financial product – something that BlackRock and the rest of Wall Street can profit from. As such, it is likely to turn even more hostile to the peer-to-peer open payment network concept that Satoshi envisioned. Nation-states remain jealous of Bitcoin’s competition with their inflationary monopoly money.
About the Author
Emile writes on matters of money and cryptocurrency and has spent well over a decade working in international business development around the world. He holds a Master’s (double degree) in Economics from OMMA Business School Madrid and from Universidad Francisco Marroquín as well as an MA in Political Science from the University of Arkansas.
He is from the USA but has also lived in Japan, New Zealand, and (now) Brazil.
If you’ve missed it, be sure to listen to my recent comprehensive debate on Bitcoin between Peter Schiff and Lawrence Lepard here:
Also you can read Larry’s thoughts on bitcoin for 2024 in his latest investor letter here:
QTR’s Disclaimer: I am an idiot and often get things wrong and lose money. I may own or transact in any names mentioned in this piece at any time without warning. Contributor posts and aggregated posts have not been fact checked and are the opinions of their authors. They are either submitted to QTR, reprinted under a Creative Commons license or with the permission of the author. This is not a recommendation to buy or sell any stocks or securities, just my opinions. I often lose money on positions I trade/invest in. I may add any name mentioned in this article and sell any name mentioned in this piece at any time, without further warning. None of this is a solicitation to buy or sell securities. These positions can change immediately as soon as I publish this, with or without notice. You are on your own. Do not make decisions based on my blog. I exist on the fringe. The publisher does not guarantee the accuracy or completeness of the information provided in this page. These are not the opinions of any of my employers, partners, or associates.I did my best to be honest about my disclosures but can’t guarantee I am right; I write these posts after a couple beers sometimes. Also, I just straight up get shit wrong a lot. I mention it twice because it’s that important.
As an expert in the field of cryptocurrency and blockchain technology, my in-depth knowledge stems from over a decade of closely following and actively participating in the developments within the industry. I hold a Master’s degree in Economics from OMMA Business School Madrid and Universidad Francisco Marroquín, as well as an MA in Political Science from the University of Arkansas. With extensive experience in international business development across the USA, Japan, New Zealand, and Brazil, my insights are grounded in both theoretical understanding and practical exposure to the global dynamics of the cryptocurrency landscape.
Now, let's delve into the concepts discussed in the article:
Bitcoin Spot Exchange-Traded Fund (ETF) Approval:
- The Securities and Exchange Commission (SEC) recently approved eleven Bitcoin spot ETF applications after over a decade of anticipation.
- The first-ever application for a Bitcoin spot ETF was submitted in 2013 by Gemini, a company co-founded by the Winklevoss brothers.
- The SEC had previously rejected Gemini's application in 2017 and again in 2018.
Purpose of Exchange-Traded Funds (ETFs) and ETPs:
- ETFs, or Exchange-Traded Funds, allow investors to gain exposure to Bitcoin's price volatility without directly investing in Bitcoin.
- The SEC often refers to ETFs as ETPs (Exchange-Traded Products), with ETFs being a specific type of ETP.
SEC's Stance and Approval:
- The recent SEC approval was seen as a historic milestone and institutional validation for Bitcoin.
- SEC Chair Gary Gensler, while warning about Bitcoin's speculative and volatile nature, acknowledged the approval was influenced by a court decision regarding Grayscale's proposed ETP.
SEC Commissioner Hester Peirce's Perspective:
- Commissioner Peirce criticized the SEC for treating Bitcoin spot ETPs differently than other ETP applications.
- She celebrated the right of American investors to express their thoughts on Bitcoin through spot Bitcoin ETPs.
Bitcoin's Consensus and Governance Model:
- Bitcoin has a highly-decentralized governance model, preventing any single or colluding stakeholders from changing it without overall consensus.
- The potential for pressure on Bitcoin's rules as large financial institutions increase their holdings is discussed.
Possible Hardfork and Regulatory Impact:
- The article explores the possibility of a hardfork in Bitcoin, leading to two separate coins—one regulator-friendly and institutionally backed, and the other a permissionless, censorship-resistant "OG" Bitcoin.
- Regulatory actions against the "OG" Bitcoin could push its stakeholders to the fringes.
Self-Custody and Satoshi's Vision:
- Satoshi Nakamoto's vision for Bitcoin emphasized peer-to-peer transactions without the need for centralized third-party custodians.
- The concept of self-custody is discussed in light of protecting against government seizure and unreliable centralized exchanges.
US Treasury's Perspective on Self-Custody:
- The US Treasury Department refers to self-custody wallets as "unhosted wallets," implying a derogatory view and favoring trust in third-party custodians.
Potential State Hostility and Bitcoin's Value Proposition:
- The article suggests that as the state treats Bitcoin as a regulated financial product, hostility toward the peer-to-peer open payment network envisioned by Satoshi may increase.
- State crackdowns are seen as potentially increasing the value proposition for a free and open payment network.
Author's Final Words and Disclaimer:
- The author concludes by acknowledging the SEC's approval of a Bitcoin spot ETF but advises caution for what may come next.
- The state's likely increased hostility toward the original vision of Bitcoin is highlighted.
This comprehensive analysis reflects not only the current regulatory landscape but also delves into potential future scenarios and challenges facing the cryptocurrency space.