The new alliance between Wall Street and Washington drives the crypto market to historic highs

Original Title: The Shocking Alliance That Could Drive Us to New All-Time Highs

Author: Matt Hougan, Chief Investment Officer of Bitwise

Translated by: Shenchao TechFlow

This week, the SEC will decide the fate of the spot Ethereum ETF. You might think I am holding my breath for this decision, but in reality, something bigger is happening in Washington that will reshape the trajectory of cryptocurrency over the next few years. While this makes me a bit uneasy (which I will explain below), it is a huge positive catalyst that I believe will push cryptocurrencies to new historical highs, regardless of the situation with Ethereum. Let me explain.

A Vote of Global Attention

Late last week, something unusual happened in Washington: a group of bipartisan senators and representatives passed the first piece of legislation in U.S. history supporting cryptocurrency. Better yet, they did this under the threat of a potential veto from the White House, which speaks volumes about the positive impact on the future of cryptocurrency.

The Background

In April of last year, the Securities and Exchange Commission (SEC) released a document titled "++Staff Accounting Bulletin No. 121++" (SAB 121). This announcement effectively prevented Wall Street banks from custodializing crypto assets for their clients. Specifically, if a bank offers crypto custody services, it must treat those custodialized crypto assets as liabilities on its own balance sheet. In other words, if a bank custodies $1 billion worth of Bitcoin, it must find $1 billion in cash to balance that. If the price of Bitcoin doubles, it must find another $1 billion to keep up.

This is absurd; it is not how any other asset custody operates. After all, the custodialized assets do not belong to the bank, but to the clients, so treating them as liabilities makes no sense.

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 around 5-7% per year. You cannot make those two numbers align.

That is why the current crypto custody services are only provided by entities regulated as state-chartered trust companies, such as Coinbase Custody Trust Company LLC and Fidelity Digital Assets, rather than banks. This is also why all major banks—like BNY Mellon and ++State Street++—have abandoned plans to establish crypto custody businesses over the past year.

This is a bad rule. It is detrimental to banks, harmful to cryptocurrency, and disadvantageous to investors, as it makes crypto custody more expensive and less secure than other methods.

Worse still, the SEC did not follow standard rule-making procedures when implementing SAB 121. The SEC is supposed to follow a formal process when implementing new rules, including an open comment period that allows the public and industry to provide input. The SEC skipped this process and instead tried to sneak SAB 121 in under a lower "non-rule" standard.

In October 2023, the Government Accountability Office (GAO)—an independent, nonpartisan federal agency that serves as a watchdog for Congress—raised objections, declaring SAB 121 a "rule" and stating that the SEC should follow standard procedures. This opened the door for congressional review and led to last week's historic bipartisan vote.

How Was the Bipartisan Core Group Supporting Cryptocurrency Formed?

So, how did a bipartisan consensus against SAB 121 come about? The Democrats have traditionally been at odds with cryptocurrency on SEC issues, which is why Washington has never passed any cryptocurrency legislation. What has changed now?

The simple answer is: money.

The record issuance of Bitcoin ETFs made Wall Street realize there is a lot of money to be made in custodializing crypto assets. They do not want to let crypto-native startups have all the profits!

I am not guessing here. In February of this year, following the record ETF issuance, a coalition of banking lobby groups—including the Bank Policy Institute, the American Bankers Association, the Securities Industry and Financial Markets Association, and the Financial Services Forum—jointly sent a letter to the SEC opposing SAB 121. As I wrote at the time on X/Twitter, "If you are wondering whether the Bitcoin ETF will change Washington's attitude towards crypto regulation, this is the answer."

That is why Senate Majority Leader Chuck Schumer (D-NY) voted to overturn SAB 121. Wall Street is far and away Schumer's largest industry donor.

Schumer is not alone. Ten other Democrats in the Senate supported the bill; 21 Democrats in the House voted in favor. Given that the Biden administration rarely announced plans to veto the bill before its passage, this support is even more noteworthy.

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 judge for yourself)—that Democrats felt they could go against their president.

The Emerging Alliance Between Wall Street, Cryptocurrency, and Washington

The significance of this matter is not about crypto custody. No one really cares whether Wall Street giants provide crypto custody. More competition and more familiar names are certainly welcome, but the custodial options we already have in cryptocurrency are quite good.

The importance of this matter lies in what it signals: the emergence of a new alliance between Wall Street, cryptocurrency, and Washington.

Evidence of this alliance is everywhere. Clearly, it drove the overturning of SAB 121. It also facilitated the approval of the spot Bitcoin ETF, thanks to BlackRock's involvement. As I wrote two weeks ago, I am increasingly convinced that we will see comprehensive stablecoin legislation pass Congress later this year.

Wall Street will not sit idly by while Tether makes more money than Goldman Sachs.

This is not a perfect alliance. Wall Street does not care about the values of cryptocurrency, such as permissionless finance or the ability to hold wealth in a self-sovereign manner. But that may not matter. These small advances—whether in custody or stablecoins—will open the door for further gains.

If Wall Street cares about crypto custody, then things that increase the demand for crypto custody—like more ETFs—will become more likely. If Wall Street cares about stablecoins, then things that increase the demand for stablecoins will become more attractive. Compared to the open hostility we faced in Washington over the past decade, this is a huge improvement.

Our overall view at Bitwise is that cryptocurrency is moving into the mainstream, and this progress will drive cryptocurrencies to historical highs.

This new support for cryptocurrency in Washington—regardless of whether we get spot Ethereum approval—is the latest evidence.