A Sudden Shift in Political Sentiment

Welcome back Bitcoiners. The month of May could go down in the books as one of the most consequential in Bitcoin’s short history as it marked a sea change in sentiment among law makers in Washington. America’s predominance in global finance makes this shift consequential for the world at large, and we expect to see other countries follow their example. Let’s dive into what happened over the past few weeks.

Source: Bloomberg

The excitement kicked off on May 8th with the House of Representatives voting in favour of a bill to overturn an overly restrictive SEC requirement regarding custody of crypto assets. The Senate then passed the bill on May 16th, sending it to the White House for either signature or veto. The bill would eliminate an SEC rule that requires banks to custody crypto assets on their balance sheets, which has effectively prevented US banks from acting as crypto custodians to-date. Critics of this rule pointed out that it is bad policy, that the SEC was likely acting outside their mandate, and that they had not followed appropriate consultation and process. Critics of the policy in general terms have been upset that preventing the America’s largest financial institutions from being involved in crypto was preventing the country from taking a leadership role. Whichever arguments were most persuasive probably doesn’t matter. For a variety of reasons a pro-crypto stance took hold with both parties, and most notably high profile Democrats crossed the aisle to vote with Republicans in favour of the bill. Former House Speaker Nancy Pelosi along with Senate Majority Leader Chuck Schumer, both voted for the bill. These votes showed a clear fracture between Congressional Democratic leadership, and the White House.

This fracture was only made more clear late on Friday May 31st when Biden vetoed the bill, surprising many who thought that the bipartisan support, combined with other news discussed below, was a clear signal that the White House had changed their views as well. In a written statement, Biden argued that SAB121 should remain in place because there are insufficient other regulations to provide consumer protection. This is laughable when you consider that SAB121 is preventing the most highly regulated financial institutions, banks, from providing custody services while doing nothing to prevent non-bank businesses like Coinbase from doing so. It seems clear the Biden administration is determined to be on the wrong side of history on this issue and willing to hand the entire pro-crypto lobby to Donald Trump. It seems that the Elizabeth Warren wing of the party continues to call the shots at 1600 Pennsylvania Avenue for reasons that continue to be unclear.

Leaving the schism within the Democratic party aside, it’s clear that political support for crypto is stronger and more bi-partisan than anyone expected. Some of this support is likely the result of record breaking flows into Bitcoin ETFs. Wall Street’s giants are not happy to be left on the sidelines while Gemini and Coinbase get all the custody business. Nor do they want to be left out from offering other crypto related products and services to their clientele where demand is growing by the day. No doubt they were somewhat responsible for lobbying lawmakers to give them a level playing field.

It is worth recognizing the tireless work of countless people who have been educating Washington on crypto over the past several years. The Bitcoin Policy Institute has been actively involved in championing Bitcoin in DC and trying to craft responsible policy positions. Most developed countries have similar efforts, and it looks to be slowly working. The impact of this cannot be understated. We need responsible regulation to ensure the public has reliable products and services for accessing digital assets. This is a huge step in the right direction.
On the subject of responsible regulatory policy, the Financial Innovation and Technology for the 21st Century Act, with the catchy nickname of FIT21, passed the House on May 22nd. Among other things this bill provides guidelines for which crypto assets are likely to be securities (under the purview of the SEC) and which are commodities (falling under the CFTC). Simple agreement over this basic question has been challenging for several years and is a first principle for deciding what comes next.
On May 23rd, the House passed the CBDC Anti-Surveillance State Act to prevent the Federal Reserve from issuing a central bank digital currency. If you’re not familiar with CBDCs, they are effectively crypto currencies issued by a government which, on the surface, sounds OK until you realize that programmable money is a very dangerous thing from the standpoint of government control. The typical example is China’s social credit score which rewards or penalizes citizens based on whether they are behaving as expected by the regime. The nightmare scenario for a CBDC is currency you can only spend in pre-approved places, with pre-approved vendors, and only if you fall in line with the powers that be. While this sounds like a Black Mirror episode, digital currency offers the opportunity for social control that simply was not possible when all transactions were settled in bank notes, or gold. To add weight, Former President Donald Trump pledged to never allow a CBDC in a rally in the month.

Outside of Congress, on May 20th, Bloomberg broke the news that American spot Ether ETF issuers had been asked to update their listing applications with a deadline of the following morning. By May 23rd all these applications had been approved, pointing to an inevitable launch of spot Ether ETFs south of the border. The following week, issuers were asked to update their prospectuses, and it seems likely that a launch in June or early July is possible. This is a major turning point considering that the SEC had remained silent on these filings until this month and most people assumed they would be delayed and eventually denied as had been the case for spot Bitcoin ETFs until this year.

We still believe it is possible for the Biden administration to come around on crypto, as the SEC approval for spot Ether ETFs is a sign that they might be open to taking some steps in the right direction. They could be further incented by the fact that Donald Trump is openly courting the crypto-community. Speaking at the Libertarian National Convention on May 25th, Trump said “I will ensure that the future of crypto and Bitcoin will be made in the USA.” He also pledged to commute the sentence of Silk Road Founder, Ross Ulbricht who has been serving a draconian sentence as a result of what most people think was an anti-crypto example being sent. To cheers from the crowd, he further made political hay by saying “I’ll keep Elizabeth Warren and her goons away from your Bitcoin.”, accurately pointing at the most anti-crypto national politician. This same week, the Trump campaign opened up its website to crypto currency donations, further signaling support for the asset class.

Source: Trump Campaign website

Given Trump’s strength in recent polls and his courting of voters who own crypto is notable. Approximately 20% of Americans hold some form of cryptocurrency which is roughly 67 million people. This is a problem for Democrats: voters are either pro-crypto, or indifferent. There is no anti-crypto voter base. It seems likely both parties reached this conclusion this month and are now competing to be the most crypto friendly. It’s hard to see how this can be a bad thing.
Bitcoin ETFs Exceed 1 Nakamoto

In Bitcoin ETF news, the total global AUM of Bitcoin ETFs now exceed 1 million Bitcoin which is colloquially known as “1 Nakamoto” (named for Satoshi Nakamoto, Bitcoin’s creator). Furthermore Blackrock’s IBIT ETF became larger than Grayscale’s GBTC as the former continued to attract strong inflows and the latter continued to see redemptions. In aggregate the Bitcoin ETF group continues to thrive and see positive net inflows week after week. ETF investors are the marginal buyer showing no signs of fatigue. As astonishing as this growth is, we are still in early innings: most investment advisors, family offices and institutions are still evaluating the asset class. It seems likely that legal and regulatory support will accelerate this process. Let’s hope the rest of the year is as eventful, and we hope you are enjoying the summer.

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