The Breakdown - Why the SEC Needs the Bitcoin Spot ETF

Episode Date: September 10, 2023

A reading of excerpts from: Who Needs a Bitcoin ETF? Actually, the SEC Does. - Bloomberg Bitcoin ETF Applications Are Bitcoin's Best Marketing Strategy - Tim Haldorsson Stop Thinking About 'Wins' or 'Losses' in the Bitcoin ETF Debate - David Ackerman Enjoying this content? SUBSCRIBE to the Podcast: https://pod.link/1438693620 Watch on YouTube: https://www.youtube.com/nathanielwhittemorecrypto Subscribe to the newsletter: https://breakdown.beehiiv.com/ Join the discussion: https://discord.gg/VrKRrfKCz8 Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW

Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. What's going on, guys? It is Sunday, September 10th, and that means it's time for Long Read Sunday. Before we get into that, however, if you are enjoying the breakdown, please go subscribe to it, give it a rating, give it a review, or if you want to dive deeper into the conversation, come join us on the breakers discord. You can find a link of the show notes or go to bit.ly slash breakdown pod. Hello, friends, welcome back to another Long Read Sunday. One major theme of conversations I've been having recently is what the SEC does next. What do they do now that Grayscale has won this legal decision?

They have, of course, been pretty mum on it, but many have speculated that it creates a shifting narrative opportunity for them. Basically, a way to back off from their reject everything kind of sensibility, and instead almost lay claim to a responsible regulator role by approving a Bitcoin spot ETF saying new information has come to light. Courts clearly see this in a particular way. Our goal has never been to stop innovation. And this is now finally a field that is ready for an ETF. Today we're going to read excerpts from a set of pieces that all discuss some aspect of that. And all I think reflect just how important this ETF and larger institutional conversation is to the Bitcoin and CryptoNarrative right now. We start with a piece from Tim Halterson, the CEO of Lunar Strategy, called Bitcoin ETPF applications

are Bitcoin's best marketing strategy. Tim writes, The biggest financial houses in the U.S. are peddling Bitcoin's message and don't even know it. You see, modern day marketing isn't confined to catchy ads or snappy slogans. It's about how a concept is presented, the narrative that's woven, and the influence it exerts on decision-making. Today, Bitcoin is more than just magic internet money or lines of code. It's actually reshaping the way we think about finance across the board. The point he says is that, quote,

ETF hoopla is a net positive for Bitcoin, regardless of whether these applications get the green light or face the red tape. So why is that? First, he points to Bitcoin's billion-dollar cheerleaders. Tim writes, with each ETF application, the leadership of major financial giants

are signing up to do word-of-mouth marketing for Bitcoin. This canvassing goes beyond press releases, conferences, and interviews, extending beyond the public eye to the private and much more influential circles. Once an obscure outlier, Bitcoin now finds itself a lot. lined with one of the most revered investment vehicles, and Wall Street is definitely starting to

notice. Next, he points to, quote, greasing the wheels of momentum. And this is basically a discussion of just how many resources these big traditional firms have at their disposal to drive public support around their bids to secure approval for Bitcoin spot ETFs. Looking at BlackRock, he said, the impact is near immediate. A powerful mood shift is building on the momentum of conversations in mainstream media channels associating ETFs with Bitcoin. The stats check out too. The price of Bitcoin surge to a 13-month high within a couple weeks of BlackRock filing its ETF application. Why does this matter? Well, Bitcoin's price is more than just numbers dancing on a screen. It's determined by an intricate choreography of supply, demand, and market sentiment,

and now on the verge of breaking into a trillion-dollar playing field, it rightfully deserves to be the heartbeat of a global conversation. The more discussions revolve around ETF applications, the more Bitcoin becomes a household name. Third, Tim argues that that classic phrase, All-Presses Good Press, definitely applies when it comes to Bitcoin ETFs. He writes, bigger picture. The global economy is going through a pretty rough patch. Fiat currencies are buckling in the face of inflation, where Bitcoin stands firm in the eye of the storm. Nowadays, with finance heavyweights such as Larry Fink talking up Bitcoin on the world stage, the masses are finally tuning in. Shortly after BlackRock filed its Bitcoin ETF application, the CEO had this to say.

Instead of investing in gold as a hedge against inflation, a hedge against the onerous problems of any one country or the devaluation of whatever currency you're in, let's be clear Bitcoin is an international asset. It's based not on anyone currency and so it could represent an asset that people can play as an alternative. Tim continues, the narrative of Bitcoin as a hedge against economic uncertainties is gradually taking shape again. This is starting to dawn on the largest market makers in the world, and in turn, they are seeking to use ETFs as gateways for entering the crypto playing field. A fourth reason this matters, Tim argues, is shifting regulatory dynamics. He says that while critics point to Canada and Europe, as examples of a lukewarm response to Bitcoin

ETFs, the impact in the U.S. might be more significant given how hard the SEC and other agencies have historically cracked down on crypto. He writes, there is already a healthy roster of financial behemoths with Treasury's worth hundreds of billions waiting in line for a Bitcoin ETF application approval. The gravitational pull of the U.S. market cannot be underestimated, and the potential involvement of heavyweight players amplifies this influence. This is another clear narrative shift. Bitcoin isn't just digital gold. It's an equal player in a global financial game. As regulation rapidly develops in the United States, this narrative could play a pivotal role in tipping the scales of public and institutional level sentiment in favor of Bitcoin as a viable medium of exchange.

TLDR, he writes, the conversation around Bitcoin ETF applications isn't just about the expansion of financial regulations to include cryptocurrency. It's a strategic marketing move that's transforming Bitcoin's narrative. It's reminding the world that Bitcoin is more than just a niche curiosity. It's real money as far as the definition goes. Now, I've talked about this a lot. I obviously agree with Tim that a huge part of the significant of the Bitcoin ETF process right now. In fact, I think the biggest significance is in this narrative shift. BlackRock's ETF application was a breaker wall that stopped short the questions of whether this industry could survive the chaos of the last couple years. I believe that it will be the most

significant inflection point and shifting moment when we look back at the hinterlands between bear and bull, even if that bull takes a long time from here to materialize. Next up, we turn to a piece from David Ackerman. David is the chief compliance officer and data protection officer from MobileCoin, and he writes, Stop thinking about wins or losses in the Bitcoin ETF debate. Grayscale's appeal shows that crypto innovation is an opportunity for the regulators as much as investors. David begins pointing out the shift that we have been tracking here on the breakdown,

that there are signs of things working in favor of this crypto space, that the language with which the federal judge rejected the SEC's logic around their grayscale Bitcoin ETF denial is of historical significance, and he says, quote, what happens next is where opportunities for the entire crypto industry lie. Opportunities for the Web 3 community, for the SEC, and for the United States to potentially pivot toward a more collaborative, innovation-friendly future. Now, David argues that it is very difficult for the SEC to simply deny the application once again. He writes if the SEC denies the gray scale application a second time, then another federal judge will review it to determine, one, if the denial is essentially similar, two, did the commission

address the previous concerns raised, and three, how does the denial either protect investors or otherwise support the SEC mandate. David continues, if a judge perceives SEC actions as more of an attack on an industry and less about protecting investors or market integrity, judges can flex their muscle. Judges David writes could open the door to future litigation. They could rebuke administrative agencies. And because of all this, he doesn't necessarily think that that's the path that that SEC Chair Gary Gunzer will go for. He writes, the political capital needed to further prevent innovation in this space without clear and convincing evidence that those actions support investor protection is simply not worth it. The United States has a storied history of balancing innovation

with investor protection. We have proven both are concurrently attainable time and time again across every sector. And that brings us to our third piece, which is by the editorial board of Bloomberg. The opinion piece reads, who needs a Bitcoin ETF? Actually, the SEC does. The editors of Bloomberg write, should the U.S. Securities and Exchange Commission approve an exchange traded fund focused on the spot market for Bitcoin? The question has yet again gained relevance thanks to the District of Columbia Court of Appeals, which last week reversed the SEC's decision to reject a Bitcoin ETF proposed by grayscale investments. The answer is yes. With a revised approach to the issue, the SEC could turn its loss into a win. Now, there are a couple points

that the Bloomberg editors make. While deriding Bitcoin and saying it would be ironic to use this very traditional instrument in an ETF to bet on a technology that was, quote, supposedly designed to displace such traditional intermediaries, at the end of the day, quote, it isn't regulators' jobs to stop people from making bad decisions. Next, Bloomberg points out the strangeness of the position of trying to say that the futures ETFs are any different than spot ETFs. They write, the distinction makes little sense. If, say, wash trades on exchanges artificially inflate spot prices, they'll affect futures too. Instead, the Bloomberg editors argue, the SEC should approve spot Bitcoin ETFs from exchanges that meet higher standards. They write,

a different approach could both establish more consistency and give regulators much-needed authority over crypto. The SEC could approve spot Bitcoin ETFs, provided that the exchanges involved meet the same standards that their regulated competitors do. Such conditionality would rationalize the rules while motivating big ETF sponsors, such as BlackRock infidelity, to monitor compliance. They conclude, in the absence of action from Congress, regulators should do what they can to bring crypto into line without killing it off. Here's an opportunity. People would still be free to lose their money on ill-considered bets, but they'd be much less likely to get ripped off along the way. Now, this is something that a lot of people have talked about, that one of the things that

characterizes this bare market is these big traditional firms stepping into the void to basically clean up and reboot crypto as something that is owned, at least in part, by them. Now, we can and should have entire debates around whether that's exactly how we want to see the crypto industry evolve. But the point that the Bloomberg editors are making is that given that all of those traditional firms are stepping in, the SEC could simply hand them the keys to the kingdom. I don't love that, of course, because I believe that crypto-native institutions have a lot to offer, but it's a perhaps rational, if not cynical, take on why at this point it really just doesn't

make any sense by any rationale to keep denying every spot Bitcoin ETF application. Overall, I think that these pieces show that the walls really are closing in on this for the SEC, and it's going to be very, very difficult for them to continue to deny such a basic common-sense product for much longer. Whether it will actually have the market-popping impact that so many hope for, I'm perhaps a little bit more skeptical of, but at the end of the day, that doesn't matter. This is just the right next step, or at least a step that has to happen, and we just have to let the markets figure it out from there. Anyways, guys, that is going to do it for today's Long Read Sunday.

Thanks again to all of the different authors who are quoted herein, and until tomorrow, be safe and take care of each other. Peace.