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 Information Officer at Bitwise

Translated by: TechFlow

This week, the SEC will decide the fate of the spot Ethereum ETF. You might think I'm holding my breath for this decision, but in reality, something bigger is happening in Washington right now that will reshape the trajectory of cryptocurrency for years to come. While this makes me a bit uneasy (for reasons I'll explain below), it's a huge positive catalyst that I believe will push cryptocurrencies to new all-time highs regardless of Ethereum's situation. Let me explain.

The Globally Watched Vote

Late last week, something extraordinary happened in Washington: a group of bipartisan senators and representatives passed the first pro-cryptocurrency legislation in U.S. history. Even better, they did it under the threat of a possible White House veto, which speaks volumes about the positive impact on the future of cryptocurrency.

The Backstory

In April last year, the Securities and Exchange Commission (SEC) issued a document called “Staff Accounting Bulletin No. 121” (SAB 121). This bulletin effectively prevented Wall Street banks from custodizing crypto assets for clients. Specifically, if a bank offered crypto custody services, it had to treat those custodized crypto assets as liabilities on its own balance sheet. In other words, if a bank custodized $1 billion worth of Bitcoin, it had to find $1 billion in cash to balance it. If Bitcoin's price doubled, it would have to find another $1 billion to keep up.

This is absurd; this is not how custody of any other asset works. After all, the custodized assets don't belong to the bank; they belong to the clients, so treating them as liabilities makes no sense.

This also made it economically impossible for banks to offer custody services. Crypto custody fees are less than 1% per year, while borrowing costs are 5-7% per year. You can't make those numbers work.

That's why current crypto custody services are only provided by entities regulated as state trust charter institutions, like Coinbase Custody Trust Company LLC and Fidelity Digital Assets, not by banks. It's also why all major banks over the past year—like BNY Mellon and State Street—have abandoned plans to establish crypto custody businesses.

This is a bad rule. It's bad for banks, bad for crypto, and bad for investors because it makes crypto custody more expensive and less secure than other methods.

Worse, the SEC did not follow the standard rule-making process when implementing SAB 121. The SEC should 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 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 Congress's watchdog—objected, declaring SAB 121 a “rule” and stating that the SEC should follow the standard procedure. This opened the door for congressional review and led to last week's historic bipartisan vote.

How Did the Bipartisan Core Group Supporting Crypto Form?

So, how did a bipartisan consensus against SAB 121 form? The Democratic Party has historically opposed crypto on SEC issues, which is why Washington has never passed any crypto legislation. What's changed now?

The simple answer is: money.

The record issuance of Bitcoin ETFs made Wall Street realize there's a lot of money to be made in custodizing crypto assets. They don't want crypto-native startups to have all the fun!

I'm not speculating here. In February this year, after the record ETF issuance, an alliance 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—sent a joint letter to the SEC opposing SAB 121. As I wrote on X/Twitter at the time, “If you're wondering whether Bitcoin ETFs will change Washington's attitude towards crypto regulation, this is your answer.”

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

Schumer is not alone. Ten other Senate Democrats supported the bill; 21 House Democrats voted in favor. This support is even more remarkable considering the Biden administration's rare announcement of plans to veto the bill before it passed.

Wall Street's lobbying power is so strong—or, if you prefer, the logic for overturning the rule is so clear (I'll let you decide)—that Democrats felt they could go against their president.

The Emerging Alliance Between Wall Street, Crypto, and Washington

The importance of this issue is not about crypto custody. No one really cares whether Wall Street giants offer crypto custody. More competition and more familiar names are certainly nice, but the custody options we have in crypto today are already pretty good.

The importance of this issue is that it signals a larger trend: the emerging alliance between Wall Street, crypto, 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'm increasingly convinced we'll see comprehensive stablecoin legislation pass through Congress later this year.

Wall Street won't sit idly by while Tether makes more money than Goldman Sachs.

This is not a perfect alliance. Wall Street doesn't care about crypto values like permissionless finance or the ability to hold wealth in a self-sovereign form. But that might not matter. These small steps—whether in custody or stablecoins—will open the door to further gains.

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

Our overall view at Bitwise is that crypto is going mainstream, and this progress will drive cryptocurrencies to new all-time highs.

This new support for crypto in Washington—whether or not we get spot Ethereum approval—is the latest evidence.