The Far-Reaching Impact of Bitcoin ETF Approval: The Difficulty for the U.S. to Ban Digital Assets

The discussion on the approval of the Bitcoin spot ETF by the US SEC mainly focuses on its short-term impact on Bitcoin prices. However, this is just the surface. The profound impact of the ETF in institutionalizing Bitcoin lies in the fact that it makes it difficult for the US to ban digital assets, thereby allowing Bitcoin to continue driving the evolution of the fundamental functioning of currency.

The Political Motives Behind Currency Devaluation

Fifteen years ago, when the Bitcoin white paper was published, it reiterated people's long-standing concerns about the political economy of currency: governments have strong political motives to devalue official currency in order to achieve the goal of spending more than income.

Increasing government spending is politically popular, while increasing taxes is unpopular. Therefore, governments often increase spending through borrowing rather than raising taxes, and when borrowing is no longer sustainable, they create more money out of thin air.

In the short term, this approach is politically feasible, as politicians can win re-election by increasing spending on their supporters. However, in the long run, an increase in the money supply will lead to a decrease in the purchasing power of each unit of currency, which is inflation.

The founder of Bitcoin and his supporters attempt to solve this problem by limiting the supply of Bitcoin to 21 million. Unlike the supply of fiat currency, which increases over time, the total circulation of Bitcoin cannot be altered by politicians. Theoretically, this makes Bitcoin a more reliable long-term store of value compared to modern fiat currencies.

Can the US government ban Bitcoin?

If Bitcoin really becomes a superior store of value compared to the US dollar, some people worry that the US government will ban this cryptocurrency. A well-known investor stated in an interview in 2021: "The possibility of banning Bitcoin is very high." He pointed out that in the 1930s, the government was worried about funds fleeing from the dollar to gold, so "they banned private ownership of ( gold... and established foreign exchange controls because they didn't want funds to flow elsewhere."

Technically, the U.S. government cannot ban Bitcoin, just like it cannot ban the internet. Bitcoin operates on a distributed computer network outside the jurisdiction of the U.S. In fact, despite China banning Bitcoin mining in 2021, it is estimated that about one-fifth of Bitcoin mining electricity consumption still occurred in China at the beginning of 2022. Cryptocurrency traders in China often use tools like VPNs to circumvent government enforcement.

But this does not mean that the U.S. government has no influence. In theory, the U.S. could prohibit the exchange of Bitcoin for dollars on exchanges, ban mainstream banks from cooperating with Bitcoin companies, prevent companies from holding Bitcoin on their balance sheets, or set up barriers to stop retail businesses from accepting Bitcoin payments.

In other words, although the United States cannot prohibit the operation of the Bitcoin network, it could theoretically make it extremely difficult for mainstream Americans to use and purchase Bitcoin, similar to Roosevelt's ban on private ownership of gold in 1933.

The ETF makes it extremely difficult to prohibit Bitcoin.

This is where the new Bitcoin ETF comes into play. With the SEC's approval, some of the largest and most influential companies in the financial sector, including several well-known asset management firms, will hold billions of dollars in Bitcoin. The ETF allows a large number of investors who have never traded or privately held Bitcoin to gain immediate access to Bitcoin.

This is important because it greatly expands the special interest groups that support maintaining and strengthening Bitcoin's position in the U.S. financial market. If there are lawmakers or regulators who want to create restrictive policies, they will not only hear the opinions of those holding Bitcoin but also the voices of major financial players who have considerable influence in Washington.

Based on this alone, it is difficult for policymakers to proactively restrict the application of Bitcoin. As someone who frequently deals with Washington, I can confirm that special interest groups play a very important role in the policymaking process. Lobbyists are particularly adept at opposing new policies that adversely affect their clients' interests.

Today, the Bitcoin held in ETFs has exceeded $25 billion, with approximately $1 billion generated in the two weeks following the SEC's green light for new ETFs. This is a significant amount even for large financial institutions.

The SEC understands what its decision means

The SEC understands all of this, which is why the struggle to approve the Bitcoin ETF is so intense. According to relevant laws, the SEC's responsibility is not to determine whether Bitcoin is a good investment, but rather for investors and the market to decide. However, over the past 10 years, the SEC has been resolutely opposed to allowing investors to access Bitcoin through mainstream, regulated tools. This is precisely because the SEC knows that its approval could significantly increase investor interest in digital assets.

The SEC only approved the spot Bitcoin ETF under pressure from the U.S. Court of Appeals, which deemed the SEC's resistance to the Bitcoin ETF as "arbitrary and capricious," since the agency had already approved nearly identical Bitcoin futures and other commodity products.

The SEC chairman stated that the court's opinion forced him to take action. Based on these circumstances, he wrote in a statement, "I believe the most sustainable path forward is to approve the listing," although he criticized Bitcoin as "primarily a speculative and volatile asset, also used for illegal activities." Meanwhile, two other members of the committee voted against the ETF listing in January.

What will happen during a crisis?

I have explained why the approval of the Bitcoin ETF makes it difficult for the government to ban the Bitcoin market in the U.S., at least for the foreseeable future. However, what if Bitcoin rises to a level that competes with the U.S. dollar as a store of value? Will the U.S. intervene and crack down on Bitcoin at that time?

You can give it a try. But by then, it will actually be too late. Take Argentina as an example. The Argentine government prohibits its citizens from exchanging more than $200 worth of local currency into dollars each year. Despite this restriction, the Argentine central bank estimates that the dollars held by Argentinians account for 10% of the total dollars in circulation: over $200 billion in cash.

Currently, the U.S. federal debt is approximately $34 trillion, which effectively means there are about $34 trillion in government bonds in circulation. The liquidity of Bitcoin -- that is, its appeal to large institutions as a store of value -- may start to compete with U.S. government bonds at about one-fifth of the value, around $7 trillion, which is about 9 times the current market value of Bitcoin, at ). As federal debt continues to rise, the threshold for liquidity competition will also increase.

However, if we look at it from the perspective of circular reasoning, Bitcoin's market value can only reach 7 trillion dollars when it is recognized more widely as a store of value than it is now. At that time, the U.S. crackdown on Bitcoin could very well backfire, similar to Argentina's current capital controls, because the crackdown would send a signal to the world market that the U.S. no longer believes in the inherent advantages of the dollar.

Support for Financial Reform

Ideally, the United States should address its fiscal issues -- most notably the excessive spending on healthcare benefits -- and put federal debt on a sustainable path. But before that, Americans can purchase Bitcoin as insurance against the devaluation of the dollar due to soaring federal debt. The SEC has just ensured the long-term existence of this insurance.