Wall Street’s Influence on Crypto

On Jun 28, 2023

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After a challenging year for cryptocurrencies, BlackRock’s recent application for a spot Bitcoin ETF brought positive news and a surge in Bitcoin prices. However, the influx of Wall Street influence raises questions about the potential risks associated with the growing involvement of traditional financial firms in the crypto space.

Inflows and SEC Concerns

CoinShares reported that BlackRock’s spot Bitcoin ETF application resulted in the highest inflows to cryptocurrencies in a year, amounting to nearly $200 million. However, gaining approval from the Securities and Exchange Commission (SEC) remains an uphill battle for BlackRock. The SEC has previously rejected around 30 spot Bitcoin ETF applications, primarily due to concerns regarding market manipulation.

Impact on Bitcoin’s Purpose

If approved, BlackRock’s spot Bitcoin ETF, along with others that may follow, could attract significant investments and potentially trigger a new bull market, leading to a surge in Bitcoin prices. Nevertheless, market participants raise concerns about Wall Street firms’ extensive control over millions of tokens as portfolio assets, which could give them disproportionate influence over the crypto space.

Potential Harm to the Bitcoin Network

Steven Lubka, head of Swan Private at Swan Bitcoin, warns that including even a third of all Bitcoin in financial products could harm the network’s original purpose. He believes that widespread ownership and direct usage of Bitcoin are crucial for maintaining its value and intended purpose. Lubka emphasizes the importance of maintaining a healthy balance between self-custody and ownership within the network.

Risk of Blockchain Changes

There is also the risk that influential firms like BlackRock could use their power to advocate for changes to the underlying Bitcoin blockchain. Lubka highlights the potential for a “fork” that would create two separate cryptocurrencies, with BlackRock having the authority to determine which one is considered the “real Bitcoin.” This could result in the firm selling its holdings in the other fork, leading to a significant price decline.

Differing Perspectives

Jay Jog, cofounder of Sei Labs, offers a differing perspective, suggesting that Wall Street firms like BlackRock are unlikely to push for major changes to Bitcoin due to the legal and financial implications involved. Jog argues that their substantial financial stake in the network would deter malicious actions, as it would be economically disadvantageous for them.

The Benefit of Traditional Financial Firms

Despite the associated risks, both Lubka and Jog believe that the entry of traditional financial firms into the crypto market will ultimately benefit Bitcoin and the broader cryptocurrency industry. Historically, the participation of traditional financial firms has driven significant inflows. When ProShares launched one of the first Bitcoin futures ETFs in 2021, it resulted in a $1 billion influx into digital assets within a week.

BlackRock’s application for a spot Bitcoin ETF has sparked a debate about the increasing influence of Wall Street on the crypto market. While concerns about market manipulation, changes to the Bitcoin network, and concentration of power exist, there is also optimism that the entry of traditional financial firms will bring additional investments and legitimacy to the crypto space. The SEC’s decision on BlackRock’s application will be a crucial factor in shaping the future landscape of Bitcoin and its interaction with the traditional financial industry.