The potential dark side of Bitcoin ETFs
HERE we are in the 'Brave New World', post-spot Bitcoin ETFs approval. But what does that really mean for crypto going mainstream? And, despite the hype, does it actually present new reasons to be worried?
Firstly, my contention would be that the excitement over ETFs has largely been priced into the market, and their use will not lead to mass adoption of Bitcoin. In fact, the very thing supposed to lead to ETFs has arguably distanced that ambition.
Why, you may ask? Because the entrenched legacy financial behemoths – or traditional finance (TradFi) as they might be called – have subverted Bitcoin’s very essence and bent it to their collective will.
ETFs do not encompass Bitcoin’s ethos at all. The point of Bitcoin was always that there was no intermediary, transactions were peer-to-peer, and you, as an individual, had absolute control of your own wallet and its holding of Bitcoin.
What few people are talking about is that ETFs essentially mean that all of this has gone in a nano-second. Arguably, ETFs merely replicate the functions of existing financial markets in that there are now intermediaries. That instantly adds counterparty risk, something that is fortuitously missing from existing Bitcoin protocols.
What would you rather have: assets you personally have absolute control over? Or money you have deposited in a bank – which means you are a creditor – and its being returned relies on the bank’s survival? I’m sure the depositors in Lehman Brothers and more recently Silicon Valley Bank – along with all the other US banks that went bust – would have preferred the former, volatility or not.
Ignoring quite a few things for the moment – and I may return to them in a later article – I am indebted to The Digital Commonwealth for allowing me to vent my very mixed feelings on Monday at its excellent event at Mansion House in London.
My co-panellists concentrated my mind on the potential pitfalls. Just as a taster, did you realize that Coinbase is acting as custodian for 10 of the existing 12 ETFs? Is that either wise or prudent? An asset manager’s task is to increase its assets under management, with its fees dependent on that figure. So why would they want an asset the main feature of which is self-custody? In other words, you shouldn’t need an asset manager to hold it for you.
And think about this: if the ETFs are wildly successful, more and more of the existing Bitcoin supply would inevitably fall under financial intermediaries’ control. That can’t be considered anything other than a final victory for the establishment.
Could these once disruptive assets potentially be subject to an FDR, 1930s-style appropriation? Think about what happened not that long ago in Cyprus and Ireland, where entire banks were simply subsumed into the relevant treasuries, along with all of the depositors’ money.
What about if they were wildly successful and hoovered up all the Bitcoin supply, which could result in only authorized financial intermediaries having crypto wallets? Quite feasibly, banks would then end up with the majority of hash power.
As I said at the event, ETFs are the Trojan Horse which the TradFi powers-that-be have inveigled into the disruptive crypto economy. They have spent years trying to figure out how to get their hands on the profits to be made on Bitcoin – and now they have.
Remember, this simply can’t happen with self-custody Bitcoin. But it may well be a fact lost on those who prefer to see Bitcoin purely as a means of speculation, rather than the empowering technology that lies beneath a dollar figure.
Temple Melville is the CEO of The Scotcoin Project Community Interest Company (CIC)
