This is an opinion editorial by Dave Weisberger, co-founder and CEO of cryptocurrency trading platform CoinRoutes.
“Blockchain not Bitcoin” is dead… May that nonsense rest in peace.
None other than Larry Fink, CEO of BlackRock, the world’s largest asset manager, recently echoed a sentiment I have been stressing for years: Bitcoin is uniquely positioned as a monetary instrument for the digital world, as a sound money store of value, while “tokenization” of the financial system will improve efficiency and cut costs.
Tokenization, in this context, describes using smart contracts to represent “real world assets,” enabling global, multi-currency and peer-to-peer trading. This argument goes against both Bitcoin maxis (“Bitcoin not blockchain”) and traditional financial types (“blockchain not Bitcoin”) who want to be seen embracing the technology, but don’t really understand it.
Fink’s televised appearances were timed in support of BlackRock’s application for a bitcoin spot exchange-traded fund (ETF), which has significantly influenced the entire narrative around both Bitcoin and cryptocurrency. This move, along with other recent events in the digital asset space, has sparked a renewed interest in cryptocurrency regulation and legislation in the corridors of power in Washington, D.C. The proof is the introduction of bipartisan crypto market structure bills in both the House of Representatives (through the Financial Innovation And Technology For The 21st Century Act) and the Senate (through the Lummis-Gillibrand Responsible Financial Innovation Act). The House bill, in particular, is relatively comprehensive and confers jurisdiction over different aspects of cryptocurrency to both the Commodity Futures Trading Commission (CFTC) and U.S. Securities and Exchange Commission (SEC). It is extremely clear, in any case, that regulation by enforcement must end and new rules must be written.
If approved, this bitcoin spot ETF would provide a regulated and secure avenue for many financial intermediaries to include bitcoin in their client portfolios. Such intermediaries, including registered investment advisors, institutional asset managers and brokerage firms have direct or indirect control over more than $110 trillion in assets under management. If a meaningful proportion of those firms agreed that bitcoin should have a small allocation in their investment portfolios, the impact would be enormous in the long term.
The New Gold Standard For Bitcoin ETF Applications
It is worth noting that BlackRock’s application was different from all of the preceding applications, because of the firm’s near-perfect record of seeing applications through, its sheer size and political influence, but also because of the design of the product. Its application and subsequent amendments has proposed a surveillance-sharing arrangement with Coinbase and Nasdaq, which is clearly designed to provide the SEC with enough oversight to satisfy its desire for jurisdiction, while assuaging its concerns over market manipulation. This would allow Chair Gary Gensler the ability to claim a political “win” by gaining surveillance over spot bitcoin trading, which would reign in an asset that, by his own admission, he has no direct jurisdiction over as it is a commodity.
It is also worth noting the BlackRock bitcoin ETF is structured very similarly to the GLD gold ETF, as well as several other approved spot precious metal products. Those products rely on spot trading that is not even close to Bitcoin’s transparency or auditability, making it hard to understand how potentially denying these applications for spot bitcoin ETFs could be viewed as anything but “arbitrary and capricious,” which is the assertion made by Grayscale in its suit against the SEC for rejection over their own filing.
The comparison with gold is particularly relevant for bitcoin investors as that a popular value proposition for bitcoin is that it can, at a minimum, become a store of value for the digital world and a measure of the value of fiat currencies, in the same way that gold has been for thousands of years.
Today, however, bitcoin is valued at less than one-twentieth of the market capitalization of gold, so it has a long way to go, and its future is considered more uncertain. That is why I postulate that the proper way to look at bitcoin’s value is as an option on that eventuality. An approval of BlackRock’s ETF could prove pivotal, as an entirely new class of investors would be able to invest on the basis of the digital gold narrative, just as a new class of gold investors was able to buy gold when GLD and IAU were introduced.
To put this in perspective, global ETF gold holdings amount to roughly 3,400 tons, which represents a significant amount on the margin, particularly when one considers central banks hold roughly 35,000 tons. I would expect a bitcoin ETF to grow to be significant as well, but that will not happen overnight as many investors will need to be convinced that the risks involved are not too substantial to overcome.
The Time Is Now
The involvement of a large traditional financial institution like BlackRock or Fidelity, which also recently updated its own spot bitcoin ETF filing, could help mitigate some of the perceived risks associated with bitcoin, particularly by assuaging investor concerns that their assets could be stolen from them. A regulated ETF product offered by one of the world’s largest asset managers would likely be seen as safe, ameliorating those concerns. As a result, the stakes are high with regard to this decision.
If the SEC continues to stonewall spot bitcoin ETFs, including denying institutions as reputable and secure as BlackRock and Fidelity, it would suggest that the SEC’s decisions regarding cryptocurrency are more political than principled. This is particularly obvious since the SEC recently approved a leveraged Bitcoin ETF based on futures. It is quite literally impossible to argue that such a product is “safe” for investors while a fully-backed, spot ETF is too dangerous. The result would be an acceleration of the trend of U.S.-based crypto companies migrating overseas and, as we heard from numerous members in recent Congressional hearings, could well create a political issue going into the 2024 election cycle.
Hopefully, cooler heads will prevail and Gensler will “take the win” by approving BlackRock and Fidelity’s filings, but we shall see. The one thing that is certain is that the narrative has changed.
We have just seen support from both Democrats and Republicans in Congress for ending the “regulation by enforcement” regime, as the Financial Innovation And Technology For The 21st Century Act was approved by a 35-15 vote, with multiple Democrats joining the Republican sponsors. We also just witnessed a major accounting firm publish a study saying Bitcoin could be positive for the environment, so even that FUD is collapsing.
The bottom line is that the winds of change are upon us. Bitcoin is joining the mainstream and that bodes well for the future.
This is a guest post by Dave Weisberger. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.