Author: Matt Hougan Source: Bitwise Translation: Shan Ouba, Golden Finance
The U.S. Securities and Exchange Commission (SEC) is expected to decide this week whether to approve the application for an Ethereum spot ETF. But that's not even the most important thing going on in Washington right now.
Later this week, the SEC will decide the fate of the Ethereum spot ETF. The market is full of mixed signals as to whether it will approve or reject it. You might think I'm holding my breath waiting for this decision, but in fact, there's another big thing happening in Washington right now that will reshape the future direction of cryptocurrency. Although this thing makes me a little uneasy (for reasons I'll explain below), it is a huge positive catalyst, and I think no matter what happens with Ethereum, it will drive the cryptocurrency to new all-time highs.
Let me explain.
The vote that shocked the world
Something remarkable happened in Washington late last week: a bipartisan group of senators and representatives passed the first pro-cryptocurrency legislation in history.
Even better: They did it under the threat of a possible veto from the White House.
Here’s why it’s so bullish on the future of cryptocurrencies.
What Happened
Last April, the U.S. Securities and Exchange Commission (SEC) issued what’s known as Staff Accounting Bulletin No. 121 (SAB 121). The bulletin effectively made it impossible for Wall Street banks to custody crypto assets on behalf of their clients.
Specifically, it stipulated that if a bank offers crypto custody services, it must treat those custodyed crypto assets as liabilities on its own balance sheet.
In other words, if a bank takes in $1 billion in Bitcoin for custody, it has to find $1 billion in cash to balance it out. If the price of Bitcoin doubles, it will also need to find another $1 billion to keep up.
This is ridiculous. This is not how custody works for any other asset. After all, the assets in custody don’t belong to the bank, they belong to the customer. It doesn’t make sense to treat them as liabilities.
This also makes it economically impossible for banks to offer 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 add up.
This is why crypto custody services today are only offered by state trust company-regulated entities, like Coinbase Custody Trust Company and Fidelity Digital Assets, and not by banks. It’s also why all the big banks, like BNY Mellon and State Street, have abandoned plans to build crypto custody businesses over the past year.
This is a bad rule. It’s bad for banks, it’s bad for crypto, and it’s bad for investors because it makes crypto custody more expensive and less secure than it would otherwise be.
To make matters worse, the SEC did not follow standard rulemaking procedures when implementing SAB 121. The SEC is supposed to follow a formal process when implementing new rules, including a public comment period that allows the public and industry to provide input. The SEC skipped that process and tried to sneakily implement SAB 121 through a lower “non-rule” standard.
In October 2023, the Government Accountability Office (an independent, nonpartisan federal agency that acts as a watchdog for Congress) objected, declaring SAB 121 a “rule” and saying the SEC should follow standard procedures. This opened the door for congressional review and led to last week’s historic bipartisan vote.
How the Pro-Crypto Bipartisan Consensus Emerged
So how, exactly, did a bipartisan consensus emerge to oppose SAB 121? Democrats have historically opposed cryptocurrencies with the support of the SEC, which is why no crypto legislation has ever passed in Washington. What changed?
The answer is simple: money.
The record-breaking launch of Bitcoin ETFs woke Wall Street up to the fact that there is a lot of money to be made in custodial crypto assets. They don’t want crypto startups to have all the fun!
I’m not speculating on this. In February, following the record-breaking ETF launch, a coalition of bank lobbying groups—the Bank Policy Institute, the American Bankers Association, the Securities Industry and Financial Markets Association, and the Financial Services Forum—jointly sent an open letter to the SEC opposing SAB 121. As I wrote on X/Twitter,“If you’re wondering if a Bitcoin ETF will change the tone of crypto regulation in Washington, this is 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 contributor to Schumer’s campaign fund.
Schumer wasn’t alone. He had the support of 10 other Democrats in the Senate; 21 Democrats voted for the bill in the House. That support was all the more remarkable given that the Biden administration announced plans to veto the bill before it was even passed.
The lobbying power of Wall Street is so strong — or, if you prefer, the logic of overturning the bill is so clear (I’ll let you make your own judgment) — that Democrats felt it was okay to defy their president.
The Emerging Alliance Between Wall Street, Crypto, and Washington
The significance of this has nothing to do with crypto custody. No one really cares if Wall Street giants offer crypto custody. The custody options we have in crypto today are already very good, and more competition and more familiar names would be better, but that’s not the point.
The significance of this is that it indicates a larger trend: the emerging alliance between Wall Street, crypto, and Washington.
You can see evidence of this alliance everywhere. It facilitated the overturning of SAB 121, obviously. It facilitated the approval of a bitcoin spot ETF, thanks to the participation of BlackRock. As I wrote two weeks ago, this is also why I am increasingly confident that we will see comprehensive stablecoin legislation pass Congress later this year.
Wall Street is not going to sit back and let Tether make more money than Goldman Sachs.
It’s not a perfect alliance. Wall Street doesn’t care about the values of crypto, like permissionless finance or the ability to hold wealth in a self-determined way. But that may not matter. These small advances — both in custody and stablecoins — will open the door to further gains.
If Wall Street cares about crypto custody, then things that increase demand for crypto custody — like more ETFs — become more likely. If Wall Street cares about stablecoins, then things that increase demand for stablecoins become more attractive. This is a huge improvement over the open hostility we’ve faced in Washington over the past decade.
Our overall view at Bitwise is that cryptocurrency is on its way to the mainstream, and that progress will drive cryptocurrencies to new all-time highs.
This newfound support for crypto in Washington — whether or not we get approval for an Ethereum spot ETF — is the latest proof of that.
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