Blackrock’s Bitcoin ETF Proposal Stirs Centralization Fears
Advocates of decentralization of the Bitcoin network are closely watching as BlackRock, the world’s largest asset manager — with over US$9.4 trillion in assets — embraces Bitcoin by applying for a Bitcoin ETF.
Supporters consider this a positive move that is likely to send capital rushing into the cryptocurrency market (and already has to some degree). But there is also growing concern that this development might lead to the centralization of Bitcoin, undermining its very ethos.
Seizing the Holy Crypto Grail: BlackRock’s Bitcoin ETF
For years, the prospect of a Bitcoin ETF was the holy grail for Bitcoin investors in the US, potentially attracting significant new capital.
When the Securities and Exchange Commission (SEC) added BlackRock’s spot Bitcoin ETF application to its list of proposed rulemaking filings for the Nasdaq stock market on July 13, 2023, it signaled that the financial regulatory body was taking the application seriously.
Given BlackRock’s dominant standing in the asset management industry, the SEC’s action is seen as an indicator of developing institutional acceptance of Bitcoin and other cryptocurrencies.
It follows BlackRock’s amended Bitcoin ETF application submitted at the end of June after SEC officials reportedly voiced concerns that the original ETF applications by BlackRock and others didn’t provide comprehensive enough information.
To ease regulator worries, BlackRock incorporated a “surveillance-sharing” agreement with U.S. crypto exchange Coinbase in its updated application. Similar amendments are also being added to Bitcoin ETF applications by other contenders, including Ark Invest, Fidelity Investments, and others.
Investors stand to benefit materially from Bitcoin ETFs. The key advantage is that Bitcoin ETFs allow customers to invest in Bitcoin without the need to directly hold the token, thereby providing an avenue for easy trading on conventional stock markets. Notably, the SEC rubber-stamped the nation’s first leveraged Bitcoin futures ETF on June 23 and is yet to greenlight a spot Bitcoin ETF.
Bitter-Sweet Symphony: When Good News Turns Sour
History warns that what seems like good news can lead to detrimental effects in the long term, while seemingly bad news in the short term can ultimately bolster the ongoing argument for Bitcoin.
The story of FTX — which looked set to bring crypto into the mainstream — serves as a strong reminder of how a promising development can end in disaster. Hailed as an embodiment of crypto’s mainstream breakthrough with its Superbowl ads and other high-profile initiatives, FTX ultimately turned out to be a ticking time bomb that detonated, taking with it some of the industry’s legitimacy.
To illustrate an instance where negative news ended up having a positive outcome, we can look at a not-so-distant event: the 2017 “Blocksize War”. During this time, the Bitcoin community was divided into two factions — the big block group (pushing for cheaper, faster transactions) that initiated the Bitcoin Cash fork and the small block group (pushing for decentralization at all costs) that introduced the Segregated Witness upgrade to Bitcoin.
Though the immediate aftermath was disorderly, giving critics an opportunity to predict the downfall of Bitcoin, the event turned out to be an invaluable lesson in decentralized consensus. This opened up a path for the development of a layered scaling system known as the Lightning Network, which we benefit from today.
Inherent Risks Associated with Bitcoin ETFs
Centralization is probably the most significant risk associated with Bitcoin-linked exchange-traded funds (ETFs). The companies running the funds would be the ones holding the keys to the Bitcoin, not the investors. The FTX fallout of late 2022 has shown that centralized exchanges have failed to cater to the broad needs of everyday investors hoping to leverage the vast potential of Bitcoin.
The issue with Bitcoin ETFs extends beyond centralization, however, and into the realm of artificial wealth creations, often referred to as “paper Bitcoin.” This phenomenon occurs when claims, purported to be backed by actual Bitcoin, are not chained to the real-world asset.
Bitcoin ETFs compound this risk as these funds do not provide the option to withdraw the underlying Bitcoin asset. This leaves the door open for the unchecked production of “paper Bitcoin,” potentially flooding the market, suppressing Bitcoin prices, and ultimately undermining Bitcoin’s uncompromising monetary policies.
In the context of Bitcoin, true ownership is defined by possession of the control keys. This is a luxury that Bitcoin ETFs do not afford investors, placing restrictions on one of Bitcoin’s main attractions: independence from third parties and absolute control over funds.
The approval of a Bitcoin ETF like BlackRock’s may offer an appealing short-term price surge, but this could be an insidious trap (intentional or not) with potentially damaging effects on long-term Bitcoin adoption and price.
As a matter of fact, Bitcoin educator Anil (@anilsaidso) recently uncovered a hard fork provision in BlackRock’s application, granting the firm the prerogative to decide which network it deems suitable post-fork.
A hidden gem in the BlackRock ETF filing.#GetForked https://t.co/tER6xxZPui pic.twitter.com/Qdt8BZ2OEZ
— Anil ⚡ (@anilsaidso) June 15, 2023
This implies a potential shift in power dynamics and a deviation from the traditional Bitcoin ethos of decentralized decision-making. With this provision, BlackRock could assert significant control over the Bitcoin protocol, should a hard fork event transpire. The revelation has kicked up a whirlwind of questions among Bitcoin investors.
The Double-Edged Sword of Regulation
If Bitcoin is primarily viewed as an investment risk mitigation tool, then it will likely further intensify the regulatory scrutiny surrounding it in Washington. This frame of reference will bring Bitcoin under increased pressure from entities like the SEC to impart stricter control on cryptocurrency, potentially hindering the growth of Bitcoin use.
The expansion of Know-Your-Customer (KYC) regulations can have far-reaching, restrictive effects on the cryptocurrency arena, for example. If Bitcoin continues to be viewed primarily as an investment vehicle rather than a form of money, it becomes increasingly difficult to advocate against the rising demands for KYC by regulatory bodies.
These measures could predominantly favor investment institutions well versed in absolute compliance to the vague and complex regulations without consideration for prospective cryptocurrency adopters or those under repressive regimes that utilize Bitcoin as an escape hatch for secure financial transfers.
The potential denial of wider Bitcoin-based financial inclusion due to these restrictive strategies is not an encouraging prospect for the millions enthused by the promise and potential of the Bitcoin protocol for decentralization, and lack of government and institutional manipulation of their financial lives.
Complying with mounting regulations may detract from the objectives of these individuals who hope to introduce Bitcoin to those disenfranchised by traditional financial systems, thus curtailing its transformative potential.
Bitcoin: The Resilient Rebel
Despite mounting concerns, there is no denying that the Bitcoin protocol is resilient. Upticks in its price or hash rate only serve to solidify its security proposition. Regardless of regulatory interventions or market shifts, the decentralized protocol inherent in Bitcoin has so far defied sweeping control attempts.
This “unstoppable-ness” could strengthen as more investment flows into the Bitcoin ecosystem via approved Bitcoin ETFs and otherwise.
The resultant regulatory hurdles don’t necessarily signify defeat for the Bitcoin ecosystem. Innovation has always been a cornerstone of the cryptocurrency industry and developers are eyeing ways to harmonize Bitcoin’s use cases with the existing regulations.
However, the enthralling prospect of BlackRock’s Bitcoin ETF carries a mixed bag of potential repercussions. On one hand, it signals a mainstream acceptance of Bitcoin, but on the other, it introduces questions around unprecedented centralization and market distortion.
It’s a tightrope walk balancing the appetite for large-scale institutional adoption with the core principles that birthed Bitcoin.
Through all this, one thing is clear: the only way to truly “own” Bitcoin is through self-custody. Beyond the allure of Bitcoin ETFs lies the lifelong lesson that user-controlled private keys are the pathway to genuine digital ownership. All else may just be traps veiling the real value of Bitcoin.
BlackRock’s interest in Bitcoin is a potential game-changer, but pitfalls could come with such monumental shifts. Any investment should be done with an understanding of both the potential rewards and the inherent risks associated with Bitcoin ETFs. The rule of the game remains the same: caveat emptor.
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