Bitcoin ETF Approved: Far-Reaching Impact Beyond Short-Term Price Movement

The approval of the Bitcoin spot ETF by the U.S. Securities and Exchange Commission has sparked widespread discussion, but most of it focuses on the short-term impact on Bitcoin prices. However, the long-term significance of this decision is that it makes it difficult for the U.S. to ban digital assets, thus giving Bitcoin the opportunity to continue driving changes in the way currency operates.

The Short-term Temptation of Government Increasing Currency Issuance

When the Bitcoin white paper was released 15 years ago, it reiterated long-standing concerns about the political economy of currency: governments have strong incentives to devalue official currency to achieve the goal of spending more than income.

Increasing government spending is usually popular, while raising taxes is not. Therefore, governments tend to increase spending through borrowing, and when borrowing is ineffective, they will create more money out of thin air.

In the short term, this approach can gain political support, as politicians can win re-election by increasing spending on specific voters. 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 its supporters attempt to solve this problem by limiting the supply of Bitcoin to 21 million coins. Unlike the supply of major fiat currencies, which can increase 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 better store of value than the US dollar, some are concerned that the US government will ban this cryptocurrency. There is a view that the government may ban Bitcoin in the same way it prohibited private ownership of gold in the 1930s.

Technically, the U.S. government cannot completely ban Bitcoin, just as it cannot ban the Internet. Bitcoin operates on a distributed computer network outside of U.S. jurisdiction. Even after China banned Bitcoin mining in 2021, about one-fifth of Bitcoin mining activities still occurred within China in early 2022.

But this does not mean that the U.S. government has no influence. Theoretically, the U.S. could prohibit the exchange of Bitcoin for U.S. dollars on major exchanges, ban mainstream banks from cooperating with Bitcoin businesses, prevent companies from holding Bitcoin on their balance sheets, and create obstacles to stop retail businesses from accepting Bitcoin payments.

Although it is impossible to completely prohibit the operation of the Bitcoin network, the U.S. government could theoretically make it very difficult for ordinary Americans to use and purchase Bitcoin.

ETF makes it extremely difficult to prohibit Bitcoin

This is where the new Bitcoin ETF comes into play. With the approval of the U.S. Securities and Exchange Commission, some of the largest and most influential companies in the financial sector will hold billions of dollars in Bitcoin. The ETF allows many investors who have never traded in cryptocurrency exchanges or privately held Bitcoin to gain immediate access to Bitcoin.

This greatly expands the special interest groups that support maintaining and strengthening Bitcoin's position in the U.S. financial market. If any members of Congress or regulators want to restrict Bitcoin, they will not only face opposition from ordinary Bitcoin holders but also from major financial players who have considerable influence in Washington.

This alone makes it difficult for policymakers to proactively restrict the use of Bitcoin. Special interest groups play an important role in the policymaking process, and lobbyists are particularly skilled at opposing new policies that are not beneficial to their clients' interests.

Currently, the Bitcoin held in ETFs has exceeded 25 billion USD, of which about 1 billion USD was generated within two weeks after the approval of the new ETF by the U.S. Securities and Exchange Commission. This is still a huge amount of money, even for large financial institutions.

The SEC's Considerations

The U.S. Securities and Exchange Commission understands all of this, which is why the fight to approve the Bitcoin ETF is so fierce. According to relevant laws, the SEC's responsibility is not to determine whether Bitcoin is a good investment, but rather to let investors and the market decide. However, for the past 10 years, the SEC has been firmly opposed to allowing investors to access Bitcoin through mainstream regulated instruments, precisely because they know that its approval would greatly increase investor interest in digital assets.

The Securities and Exchange Commission ultimately approved the spot Bitcoin ETF under pressure from the court. A court opinion stated that the SEC's resistance to the Bitcoin ETF was "stubborn and arbitrary," as the agency had already approved nearly identical Bitcoin futures and other commodity products.

The chairman of the Securities Regulatory Commission stated that he believes approving the listing is "the most sustainable way forward," although he still criticized Bitcoin as "primarily a speculative and unstable asset that is also used for illegal activities." Two other committee members voted against the ETF listing in January.

Possible Scenarios in Future Crises

The approval of the Bitcoin ETF makes it difficult for the government to ban the Bitcoin market in the United States in the foreseeable future. But if Bitcoin really rises to a level where it can compete with the US dollar as a store of value, will the US intervene to suppress Bitcoin?

Even if attempts to suppress are made, it may be too late by then. Take Argentina as an example; despite the government restricting citizens from exchanging more than 200 USD worth of pesos into dollars each year, the dollars held by Argentinians still account for 10% of the total circulating dollars, exceeding 200 billion USD in cash.

Currently, the federal debt of the United States is approximately $34 trillion. The liquidity of Bitcoin may start to compete with U.S. Treasuries when its market capitalization reaches around $7 trillion, which is about 9 times the current amount (. As federal debt increases, this threshold will also rise.

However, the market value of Bitcoin can only reach 7 trillion dollars when it is more widely recognized as a store of value. By then, the U.S. crackdown on Bitcoin may backfire, as it would send a signal to the market that the U.S. no longer believes in the inherent advantages of the dollar.

Support Fiscal Reform

Ideally, the United States should address its fiscal issues, particularly the excessive spending on healthcare benefits, to put federal debt on a sustainable path. Until then, Americans can purchase Bitcoin as a hedge against the devaluation of the dollar due to soaring federal debt. The U.S. Securities and Exchange Commission has just ensured the long-term existence of this hedge.