Insight
November 8, 2024
Greg Cipolaro

Research Weekly - What Comes Next

IN TODAY'S ISSUE:

  • Bitcoin and crypto are clear winners as Republicans take the White House, Senate, and likely hold the House.
  • While the event was unequivocally positive for the industry, we look at next steps and how they may impact the industry.
  • Bitcoin hits new highs in the wake of the election, but ironically, this is all playing out just like prior cycles.

Crypto is a Clear Winner as Blue Wall is No Match for Red Wave

Tuesday’s election marked a historic turning point for the crypto industry as Republicans took control of the White House with Donald Trump’s victory, flipped the Senate, and likely hold their majority in the House. This consolidation of power by the GOP is a massive boost for the crypto industry, which has long sought a more favorable regulatory environment or the very least, regulatory clarity.

Trump himself made a bold embrace of the industry in July with his keynote at the Bitcoin 2024 conference in which he promised a strategic bitcoin reserve for the US, full-throated support for bitcoin mining in the US, and vowed to fire SEC chief Gary Gensler. Trump has also dabbled in NFTs, selling limited edition collections, and is in the process of launching a DeFi project, World Liberty Financial.

One of the significant changes anticipated is a rollback of stringent regulatory policies, explicit and implicit, that have created barriers for cryptocurrency companies in recent years. 2025 will likely see new heads of nearly every major agency and department with finally, real potential for pro-crypto legislation and regulation. Sherrod Brown, head of the Senate Banking Committee, is out. Gary Gensler will almost certainly be out. We’ll have a new FDIC chair, head of the OCC, Attorney General, and head of Treasury. These are just some of the high-profile changes in store, to name a few.

For the crypto community, this election result is viewed as a unique opportunity, a place at the table at the highest levels of government. This could lead to a new era where cryptocurrencies and blockchain technologies become more accepted into the mainstream financial system. The outlook is extremely promising, many unknowns about the particulars remain. What ultimately gets enacted will be left up to the appointed individuals, and while we have some ideas of who those individuals might be, all is not known.

Crypto PACs Had an Undeniable Impact

The crypto industry has been seeking regulatory clarity on numerous measures for going on 8 years now. While the meetings, pleadings, and lawsuits have yielded some hard-fought results, the industry found out what works in politics – money. Crypto-focused political action committees (PACs) played a significant role in the recent election, with substantial spending aimed at influencing key races and candidates sympathetic to the crypto industry. Major crypto PACs invested millions in campaign contributions and advertising to support candidates who favor a more supportive regulatory framework for cryptocurrencies. Estimates indicate that these PACs spent $135 million during the election cycle, contributing to Senate, House, and presidential campaigns alike. This influx of capital reflects the crypto industry's efforts to shape U.S. policy by supporting candidates who understand the potential of digital assets and are willing to advocate for less restrictive policies that foster innovation and market growth.

Agency Heads to Change Over, Likely to be More Pro-Crypto

As Republicans assume control of the White House and Congress, the leadership of major government agencies such as the SEC, OCC, FDIC, and Treasury, are expected to shift toward a more pro-crypto stance. The new administration is likely to appoint leaders who view digital assets as an opportunity for economic growth and innovation, rather than primarily as regulatory challenges. At the SEC, new leadership may ease restrictions on crypto assets by prioritizing developing a clear framework to facilitate mainstream adoption. Similarly, the OCC and FDIC may allow banks to engage with crypto services more freely, such as digital custody. Federal Reserve Chair Jerome Powell is unlikely to change, a point he made hilariously clear in the press conference on Wednesday. While he has expressed openness to some digital currency initiatives, an official US central bank digital currency (CBDC) is not going anywhere under a Trump administration.

Legislation Should be Significantly More Crypto Friendly Under Republicans

Outstanding crypto legislation, particularly the Financial Innovation and Technology for the 21st Century Act (FIT21) and proposed stablecoin legislation, could see significant changes under a Republican-controlled Congress. The FIT21 Act, aimed at creating a comprehensive framework for digital assets, and stablecoin legislation, designed to establish clear standards for stablecoin issuance and backing, have been hotly debated topics. With Republicans generally favoring a lighter regulatory approach, the legislation might be revised to prioritize innovation and limit restrictive oversight, which could benefit crypto companies. However, with Congress entering a lame-duck session following the election, significant legislative action on these bills is unlikely, as Republicans may prefer to defer negotiations until they assume full control. This delay means that crypto legislation will likely stall temporarily, with the GOP expected to push for revisions that reflect their regulatory philosophy when the new Congress convenes next year. Still crypto legislation might not be the highest priority the Republicans seek to enact once they assume control and may take some time in 2025 before being passed.

Senator Cynthia Lummis’s BITCOIN Act proposes the creation of a strategic bitcoin reserve in the United States, allowing the federal government to hold bitcoin as a hedge against potential economic instability. By establishing a government-controlled reserve of bitcoin, the legislation aims to bolster national economic security and signal the U.S.’s support for digital assets as part of the future financial system. With Republicans now in control and with Donald Trump’s endorsement of the concept (but a slightly different spin), the BITCOIN Act stands a greater chance of gaining approval. The act seeks to have the Treasury acquire 1M bitcoins and eventually acquire 5% of the total supply of bitcoins (1.05M). While that would be worth about $76B at today’s value, no doubt an acquisition of such size would move the price of bitcoin.

Trump’s idea was to take the US’s existing holdings of 204K bitcoins (~$15B), forfeited as the result of law enforcement actions, and convert that to a strategic reserve, an action that might run into legal headwinds given that some of those coins belong to identifiable victims. Over half the coins, 120K, belong to Bitfinex, for example, which is a sister company to Tether (banked by Cantor Fitzgerald, headed by Howard Lutnick, co-head of the Trump transition team).

SEC May Settle or Drop Entirely Existing Enforcement Actions

With the recent election bringing shifts in leadership and regulatory perspectives at the SEC, there is potential for changes in how the agency approaches high-profile lawsuits against crypto companies like Ripple Labs, Coinbase, Binance, Kraken, and Cumberland. These lawsuits, which have dominated the industry’s regulatory landscape, were driven by the SEC’s aggressive stance on treating numerous crypto assets and services as unregistered securities. A post-election leadership change may usher in a more accommodating regulatory philosophy. This could lead to the SEC seeking settlements with these companies, allowing them to operate within a clarified regulatory framework or, in some cases, dropping certain lawsuits entirely, especially if they’re viewed as not serving the best public interest. Regulation by enforcement is likely to be a thing of the past.

Similarly, the SEC may choose not to follow through on Wells notices issued to entities such as Uniswap, Consensys, Immutable, Crypto.com, and Robinhood. These notices were early warnings that the SEC might file lawsuits alleging securities violations. However, a recalibrated SEC could reconsider the legal grounds for pursuing such actions against firms that serve primarily as infrastructure providers or platforms for decentralized services. Not acting on these Wells notices would signal a shift toward prioritizing oversight and guidance over litigation, potentially fostering a more collaborative approach to regulation that encourages compliance and development within the crypto space.

Banks and Custodians Could Get More into Crypto

There is growing speculation that the SEC’s SAB 121, which has significantly impacted banks’ ability to engage with crypto assets by requiring them to recognize customer-held digital assets on their balance sheets, may be repealed under the new administration. This rule, while impactful, has seen workarounds already with BNY Mellon receiving an exemption, but a repeal would eliminate the need for banks and custodians to individually apply for exemptions. Additionally, the anticipated changes in leadership at key federal banking regulators such as the OCC and FDIC could create a more favorable regulatory environment for banks to work with digital assets. New heads at these agencies could adopt a more crypto-friendly stance, potentially supporting banks in providing custody services for digital assets including stablecoins. This shift could allow banks to integrate blockchain technology more directly into their services, enhancing their role in the evolving digital economy.

Investors Must Get Off Zero

While some investors have allocated to bitcoin, the most common allocation for investors is still zero. There are no excuses now. Not only is the asset available through easy-to-access, well-regulated products such as ETFs, but it is now becoming a political imperative. Investors who may have found it easy to dismiss or ignore the asset for various reasons will continue to do so at their financial peril. Bitcoin is already up 80% year to date, easily outperforming every asset class. Not owning the asset is going to become a liability in the future.

Market Update

Bitcoin rocketed higher on the news of the Trump win, up 9.5% on the week, setting numerous all-time highs in the wake. Bitcoin’s new high now stands at $76,999.00 (on Coinbase) but given the positivity surrounding the market, we’d be surprised if that stands. Bitcoin usually does not typically “eek out” new all-time highs.

The strange thing about the bump in bitcoin’s price is that it is just in keeping with its 4-year price cycles. We had theorized that if the cycles were to continue to repeat, the sideways trading over the past 6 months was due to the pull-forward effect of demand created by the ETFs. Bitcoin had been running ahead of the recovery from prior cycles before the rangebound trading we’ve been in since March. Now, with the bump in price, it appears as though the repeating cycles may continue.

ETF flows were a tale of two halves this week – outflows on Monday and Tuesday ahead of the election results with IBIT showing its first outflows ever, and then massive inflows since the election. Inflows on Wednesday and Thursday topped $2.0B, with IBIT registering a single-day inflow record of $1,120M on Thursday. We would guess much of these flows were associated with basis trading as the futures basis widened with the rally in spot. That doesn’t mean this a somehow neutral for spot, however, as bitcoins are still being acquired by liquidity providers and put into the ETFs.

Important News This Week

Regulation and Taxation:

Crypto’s $135 Million Campaign Is Undefeated in 48 Races So Far - Bloomberg

The Newest Pro-Crypto Faces on Capitol Hill - Blockworks

Revisiting Trump’s Crypto Promises After His Election Win - Blockworks

SEC Crypto Enforcement Slated for Major Rollback Under Trump - Bloomberg

Website Related to Multi-Billion Dollar Bitfinex Hack Established - DOJ

Robinhood Attorney, Republican Regulators Being Considered for Trump Financial Agency Short List - Reuters

Investing:

Trump Wins, Bitcoin Unlikely to See Big 'Sell-The-Fact' Price Drop - CoinDesk

Bitcoin Investment Urged by British Pension Specialist Cartwright - CoinDesk

Federal Cuts Rates by 25 Basis Points, Bitcoin Price Hits Record After Powell's First Speech Since Trump Win - CoinDesk

Companies:

New Global Dollar Stablecoin Backed by Robinhood, Kraken, Paxos and Other Crypto Heavies - CoinDesk

Semler Scientific Added 47 Bitcoin to Holdings, Bringing Stack to 1,058 BTC - CoinDesk

Upcoming Events

Nov 13 - Oct CPI reading

Nov  29 - CME expiry

Dec 6 - Jobs report

Dec 11 - Nov CPI reading

Dec 18 - FOMC rate decision

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