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
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
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 circumstances,” 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.