Regulation may be just what Bitcoin needs

    11 Aug 2021
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    Summary

    • Bitcoin has come under regulatory scrutiny in the last few months.
    • I see this as an incredibly bullish sign, showing that Bitcoin is becoming a legitimate financial asset.
    • Regulation will ultimately help increase adoption, which is good news if you own Bitcoin.

    Since its inception, and especially in the last 6 months, Bitcoin (BTC-USD) has been under the threat of a political and regulatory crackdown. The world’s premier cryptocurrency was created independently from any existing legal framework or system, and that is something that big money and governments can’t tolerate.

    In China, Bitcoin has been shunned by the CCP, so it’s only normal for investors to be concerned over what may happen in the US in terms of Bitcoin regulation. Some investors worry that increased regulation will hurt Bitcoin’s value, but nothing could be further from the truth.

    Regardless of what other effects regulation may have, fitting Bitcoin into a legal and fiscal framework will allow for increased adoption and demand from institutions. Ultimately, Wall Street wants Bitcoin to thrive, because it will put more money in their pocket, but they need the SEC, government, and other regulatory bodies to be on board.

    What’s the purpose of Bitcoin?

    Although the Bitcoin network/protocol can be used for multiple purposes, Bitcoin itself was created with a single and specific purpose in mind; to act as a digital payment system. Blockchain technology has a lot more uses, but acting like money is perhaps the most useful and, therefore, the most threatening to governments and big banks who “run the system”. For the last 50 years, since the world de facto abandoned the gold standard, Central Banks have had complete control of the money supply.

    James A Garfield, once said, “He who controls the money supply of a nation controls the nation.” It’s therefore unsurprising that Central Banks and governments are afraid of Bitcoin. Bitcoin gives people the ability to freely transact and completely bypass Central Bank money. Hypothetically, we could turn around tomorrow and do this, but this simply won’t happen. For good or for bad, we live in a world that is heavily controlled by the public sector. This is even more true following covid-19. In 2020, government spending was equivalent to 44% of GDP in the United States.

    Currently, I see a lot of push-back to regulations from the crypto world. Some would even go as far as to say that it goes against the essence of Bitcoin, that the point of Bitcoin is to be able to transact anonymously and shield yourself from the pervasive stare of “Uncle Sam”. In my opinion, this is not the point of Bitcoin. Bitcoin is a tool to facilitate trade, innovation, and a good alternative to fiat money to preserve wealth. For most investors, it’s simply a good way to diversify their portfolio and potentially get a nice return.

    Defining the purpose of Bitcoin is important because this is where its value derives from. Some people believe the point of Bitcoin is to displace all fiat currencies and empower people to transact, trade, and invest without the need of today’s highly cartelized financial institutions. If this is where you stand, then you needn’t worry about the price of Bitcoin, or even what kind of regulations are imposed. Simply hold your Bitcoin and be ready to use it once everything else fails.

    A more pragmatic approach would be to see Bitcoin first and foremost as an investment. An asset you can own to diversify wealth and gain exposure to the exciting world of cryptocurrencies. For Bitcoin to thrive as an investment, it will have to coexist with the current system and institutions. Big banks both fear and like Bitcoin. It has the power to displace them, but also to make them tonnes of money. Through regulation, the banks and government hope to integrate Bitcoin into the system in a way that they can control. We don’t know what this will look like, and it would be even harder to speculate if this will ultimately be good or bad for Bitcoin since this is a subjective valuation that depends on what you believe the purpose of Bitcoin is.

    What I can say is that integrating Bitcoin into the current financial system will be good for the price since it will help to greatly increase adoption.

    Regulation + Profits = Adoption

    Like the internet and so many other wonderful modern inventions, Bitcoin can be used for good, or for bad, and it can bring out the best, and also the worst in people. Yes, Bitcoin is a great tool for criminal organizations, but it is also a great tool for legitimate organizations and law-abiding citizens.

    If we look at the history of Bitcoin, and even other financial assets, regulation is actually a great tool to increase investor confidence. This was the case, for example, with Junk Bonds in the 1970-1980s, as was recently pointed out by the “Wolf of Wall Street” Jordan Belfort. This period saw a great boom in junk bonds, in part thanks to the standardized regulations and the subsequent “market” that was created. In other words, junk bonds began to be traded like other securities.

    A similar thing could be said of Bitcoin. In its origins, Bitcoin could only be traded in obscure peer-to-peer exchanges. It wasn’t until the introduction of the better known “regulated” exchanges, like Coinbase Global, Inc. (COIN) that Bitcoin’s price went parabolic.

    Exchanges like Coinbase did great for Bitcoin adoption by allowing individuals to easily own and hold Bitcoin. However, an even bigger source of demand is waiting to be unlocked. I am, of course, talking about institutional demand from pension funds, sovereign wealth funds, ETFs and so much more. More likely, though, what the financial institutions will sell are financial products that offer exposure to Bitcoin, rather than Bitcoin itself.

    In the last few months, we have seen companies begin to buy Bitcoin, and a strong increase in institutional demand, which is still far from satisfied, according to Goldman Sachs:

    In terms of institutional demand, we have seen no signs of that abating … We see a huge amount of demand institutionally, [and] we’re also seeing that reflected in the private wealth management space as well.

    Source: Interview with Mathew McDermott, head of Digital Assets for Goldman Sachs, on Bitcoin.com

    Banks themselves aren’t necessarily pushing Bitcoin, but it’s obvious that their clients want it. What else can they do but oblige? Conveniently, they also stand to make billions in profit through trading fees and other trading services.

    When there’s cash on the table, things move fast.

    What’s next for Bitcoin?

    That is the million-dollar question. What exactly does the SEC have planned for Bitcoin? Guessing what SEC Chair Gary Gensler will do has become a full-time job for some. The recently appointed chair actually has a strong background in digital assets, having developed a 29-hour course at MIT on Blockchain and Money. He describes himself as having a “deep interest” in the subject, but that shouldn’t be mistaken for a dislike of regulation. He is the SEC chair after all.

    While I’m neutral on the technology, even intrigued – I spent three years teaching it, leaning into it—I’m not neutral about investor protection.

    Source: Gary Gensler, Bloomberg Interview

    So far, Gensler has asked Congress to pass a law that would allow the SEC to “monitor” crypto exchanges. One can see why Gensler feels this is necessary. Investors in South Africa, for example, have lost $4 billion this year in cryptocurrency scams.

    If we dig deeper, we can identify seven different areas of the crypto space which the SEC is looking into: ICOs, trading venues, lending platforms, Defi, stablecoins, custody, and ETFs, and other coin funds.

    Ultimately, a big part of the discussion surrounding Bitcoin comes down to how we define it. Is Bitcoin a commodity or a security? If it is the latter, it would give the SEC a lot more leeway to regulate. However, it would be hard to say Bitcoin is not a commodity, when, for example, it has become legal tender in El Salvador.

    Overall, it seems that Gensler understands the need and potential of cryptocurrencies, and merely wants to create a safer environment. In fact, he aptly compares cryptocurrencies to automobiles, to make the point that was made at the beginning of this article. Only after we had the proper infrastructure, lights and roads, and safety rules, did the industry really take off:

    It’s only with bringing things inside – and sort of clearly within our public policy goals – that a technology has a chance of broader adoption.

    Source: Gary Gensler, Bloomberg Interview

    One thing is very clear, the US is not China. The CCP is fighting hard against the proliferation of Bitcoin going as far as shutting down exchanges and miners. However, the US is taking a clearly different path, trying to understand Bitcoin and finding a place for it in the system. In fact, on August 3rd, Gensler announced that he sees a pathway for a Bitcoin ETF. Approving a Bitcoin ETF will be a huge move towards increasing institutional adoption.

    Final thoughts

    For the Bitcoin naysayers, who claim that Bitcoin is nothing but a Ponzi, it’s time to open your eyes. Even in the highest spheres of government, Bitcoin is seen as something that we have to learn to live with, not something that must be destroyed or shunned. For those that like Bitcoin but don’t want regulation, it’s time to acknowledge that, under the current system, it might be inevitable. Regulation is a double-edged sword, and it can bring about benefits as well as costs. Whether regulation will be “successful” or not, or how much, if any of it, is needed, is another point altogether. What is a fact is that the SEC is trying to regulate Bitcoin, but it seems like it is trying to do so in a way that will help increase its use and adoption. A very different approach to that of China.

    Ultimately, Bitcoin is here to stay for two key reasons. First, because it will allow great progress to be made in the realms of finance. And secondly, because, under the right circumstances, Wall Street will be making juicy profits from trading in Bitcoin and other cryptocurrencies.

    Source: https://seekingalpha.com/article/4445600-regulation-may-be-just-what-bitcoin-needs

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