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Author: Matt Hougan Source: Bitwise Translation: Shan Oppa, Bitchain Vision
The U.S. Securities and Exchange Commission is expected to decide this week whether to approve the Ethereum spot ETF application.But that’s not even the most important thing in Washington right now.
Later this week, the SEC will determine the fate of Ethereum spot ETFs.The market is full of complex signals about whether it will approve or reject it.You might think I’m waiting for this decision with my breath, but in fact, another big thing happening in Washington right now will reshape the future direction of cryptocurrencies.While this incident has made me a little uneasy (the reason I will explain below), it is a huge positive catalyst and I think it will push cryptocurrencies to new all-time highs no matter what happens in Ethereum.
Let me explain.
Votes that shocked the world
A remarkable thing happened in Washington late last week:A group of bipartisan senators and representatives passed the first legislation in history to support cryptocurrencies.
Even better: they accomplished this under the possible threat of veto from the White House.
This is why it is so bullish on the future of cryptocurrencies.
what happened
Last April, the Securities and Exchange Commission (SEC) issued what it calls “Employee Accounting Notice No. 121” (SAB 121).The announcement effectively prevented Wall Street Bank from custodializing crypto assets on behalf of its clients.
Specifically, it stipulates that if a bank provides crypto custody services, these custody crypto assets must be treated as liabilities on its own balance sheet.In other words, if a bank receives $1 billion in Bitcoin for custody, it must find $1 billion in cash to balance it.If Bitcoin’s price doubles, it needs to find another $1 billion to keep up.
This is ridiculous.This is not the way to custody any other asset.After all, the assets custodial do not belong to the bank, but to the client.It doesn’t make sense to treat it as a liability.
This also makes it economically impossible for banks to provide custody services.Crypto custody fees are less than 1% per year, while borrowing costs are 5-7% per year.You can’t make the numbers true.
That’s why today’s crypto custody services are only provided by entities regulated by state trust companies, such as Coinbase custody trust companies and Fidelity digital assets, rather than by banks.This is why all major banks, such as New York Mellon and State Street, have abandoned plans to build crypto custody businesses over the past year.
This is a bad rule.It is bad for banks, bad for cryptocurrencies, bad for investors because it makes crypto custody more expensive and insecure than other ways.
Worse, the SEC did not follow the standard rule-making procedures when implementing SAB 121.The SEC should follow formal procedures when implementing the new rules, including public comment periods that allow public and industry to provide input.The SEC skipped the process and tried to secretly implement SAB 121 through lower “non-rule” standards.
In October 2023, the Office of Government Accountability (an independent, nonpartisan federal agency acting as a supervisor in Congress) expressed opposition, declaring SAB 121 a “rule” and saying that the SEC should follow standard procedures.This opened the door to congressional review and led to a historic bipartisan vote last week.
How to emerge a bipartisan consensus on pro-cryptocurrency
So, how exactly did the two parties agree to oppose SAB 121?Democrats have historically opposed cryptocurrencies with the support of the SEC, which is why Washington has never passed any cryptocurrency legislation.What has changed?
The answer is simple: money.
The record launch of Bitcoin ETF has made Wall Street realize that custodial crypto assets can earn a lot of money.They don’t want crypto startups to have all the fun!
I’m not guessing this.In February, a coalition of bank lobby groups—the Institute of Banking Policy, the American Bankers Association, the Securities Industry and Financial Markets Association, and the Financial Services Forum— jointly sent a letter to the SEC against SAB.121’s open letter.As I wrote on X/Twitter,“If you’re wondering if Bitcoin ETFs will change Washington’s crypto-regulatory attitude, that’s the answer.”
Wall Street’s support is why Senate Majority Leader Chuck Schumer (D-NY) voted to overturn SAB 121.Wall Street is the largest donor to Schumer’s campaign fund.
Schumer is not alone.He has support from 10 other Democrats in the Senate; 21 Democrats in the House voted for the bill.This support is even more significant considering that the Biden administration announced plans to veto the bill before it was passed.
Wall Street’s lobbying power is so strong—or, if you want, you can think that the logic of overturning the bill is so clear (I’ll let you judge for yourself)—that Democrats feel they can defy their president.
Emerging alliances between Wall Street, cryptocurrencies and Washington
The importance of this matter has nothing to do with crypto hosting.No one really cares if the Wall Street giant offers crypto hosting.The custody options we have in cryptocurrencies today are already very good, more competition and more familiar names would be better, but that’s not the key.
The importance of this thing is that it shows a bigger trend: emerging alliances between Wall Street, cryptocurrencies and Washington.
You can see evidence of this alliance everywhere.It pushed the overthrow of SAB 121, obviously.It facilitated the approval of Bitcoin spot ETFs, thanks to the addition of BlackRock.As I wrote two weeks ago, that’s why I’m becoming more confident that we’ll see full stablecoin legislation pass through Congress later this year.
Wall Street will not stand idly by, allowing Tether to make more money than Goldman Sachs.
This is not a perfect league.Wall Street doesn’t care about the values of cryptocurrencies, such as permissionless finance or the ability to hold wealth in an autonomous way.But that may not matter.These small advances – whether custodial or stablecoins – will open the door to further gains.
If Wall Street cares about crypto hosting, things that increase demand for crypto hosting—like more ETFs—are more likely.If Wall Street cares about stablecoins, things that increase demand for stablecoins become more attractive.This is a huge improvement compared to the open hostility we have faced in Washington over the past decade.
Our overall view at Bitwise is,Cryptocurrencies are going mainstream, and this progress will drive cryptocurrencies to record highs.
This new support for cryptocurrencies in Washington—whether we have obtained approval from the Ethereum spot ETF or not—is the latest proof.
