Wall Street and Washington's new alliance is driving the crypto market toward record highs
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Wall Street and Washington's new alliance is driving the crypto market toward record highs
Wall Street won't stand by and let Tether earn more than Goldman Sachs.
Navigating Web3 tides with focused insightsAuthor: Matt Hougan
Translation: TechFlow
This week, the SEC will decide the fate of spot Ethereum ETFs. You might assume I'm holding my breath for that decision, but in reality, something much bigger is unfolding in Washington right now—one that will reshape the trajectory of crypto for years to come. While it makes me slightly uneasy (for reasons I'll explain below), it's a massive positive catalyst that I believe will push crypto to new all-time highs regardless of Ethereum's outcome. Let me explain.
A Vote That Has the World Watching
Late last week, something extraordinary happened in Washington: a bipartisan group of senators and representatives passed the first pro-crypto legislation in U.S. history. Even better, they did so despite the possibility of a White House veto threat—an unmistakably positive signal for crypto’s future.
What Happened
In April last year, the Securities and Exchange Commission (SEC) released a document called “Staff Accounting Bulletin No. 121” (SAB 121). This bulletin effectively prevented Wall Street banks from offering custodial services for crypto assets. Specifically, if a bank provides crypto custody, it must treat those held crypto assets as liabilities on its own balance sheet. In other words, if a bank holds $1 billion worth of Bitcoin in custody, it must find $1 billion in cash to offset it. If Bitcoin doubles in price, it must then find another $1 billion to keep up.
This is absurd—and not how custody works for any other asset. After all, custodied assets don’t belong to the bank; they belong to clients. Treating them as liabilities makes no sense.
It also makes offering custody economically impossible for banks. Custody fees are less than 1% annually, while borrowing costs run 5–7%. Those numbers simply don’t add up.
That’s why crypto custody today is only offered by entities regulated as state trust charter institutions—like Coinbase Custody Trust Company LLC and Fidelity Digital Assets—not traditional banks. It’s also why over the past year, every major bank—including BNY Mellon and State Street—has abandoned plans to build crypto custody businesses.
This was a bad rule. It hurt banks, it hurt crypto, and it hurt investors by making crypto custody more expensive and less secure than it should be.
Worse still, the SEC implemented SAB 121 without following standard rulemaking procedures. The SEC is supposed to follow a formal process when introducing new rules, including an open comment period allowing public and industry input. The SEC skipped this process and instead tried to sneak SAB 121 through under a lower “non-rule” threshold.
In October 2023, the Government Accountability Office (GAO)—an independent, nonpartisan federal agency serving as Congress’s watchdog—objected, declaring SAB 121 a “rule” and stating that the SEC should have followed proper procedure. This opened the door for congressional review and led directly to last week’s historic bipartisan vote.
How Did the Pro-Crypto Bipartisan Coalition Form?
So how did a bipartisan consensus against SAB 121 emerge? Democrats have historically sided with the SEC against crypto, which is why Washington has never passed any crypto legislation. What changed?
The simple answer: money.
The record-breaking launch of Bitcoin ETFs made Wall Street realize there’s serious money to be made in holding crypto assets. They don’t want crypto-native startups to have this opportunity all to themselves!
I’m not speculating here. In February this year, shortly after the record ETF launches, a coalition of banking lobbying groups—including the Bank Policy Institute, American Bankers Association, Securities Industry and Financial Markets Association, and Financial Services Forum—jointly sent a letter to the SEC opposing SAB 121. As I wrote at the time on X/Twitter: “If you’re wondering whether Bitcoin ETFs will change Washington’s attitude toward 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 contributor to Schumer’s campaign fund.
Schumer isn’t alone. Ten other Democratic senators supported the bill; 21 House Democrats voted in favor. Given that the Biden administration rarely announced a planned veto before passage, this level of Democratic support is even more striking.
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 judge)—that Democrats felt comfortable defying their president.
The Emerging Alliance Between Wall Street, Crypto, and Washington
The significance of this event isn’t about custody itself. Nobody really cares whether Wall Street giants offer crypto custody. More competition and more familiar names are nice, but the custody options we already have in crypto today are quite good.
The real importance lies in what it signals: an emerging alliance between Wall Street, crypto, and Washington.
Evidence of this alliance is everywhere. Clearly, it drove the reversal on SAB 121. It also enabled the approval of spot Bitcoin ETFs, thanks to BlackRock’s involvement. As I wrote two weeks ago, I am increasingly confident we’ll see comprehensive stablecoin legislation pass Congress later this year.
Wall Street won’t sit back while Tether earns more than Goldman Sachs.
This isn’t a perfect alliance. Wall Street doesn’t care about crypto values like permissionless finance or self-sovereign wealth ownership. But that may not matter. These small wins—whether in custody or stablecoins—open doors for further progress.
If Wall Street wants custody, then things that increase demand for custody—like more ETFs—become more likely. If Wall Street wants stablecoins, then initiatives that boost stablecoin adoption become more attractive. Compared to the open hostility we’ve faced in Washington over the past decade, this is enormous progress.
At Bitwise, our overarching view is that crypto is going mainstream, and this momentum will drive crypto to new all-time highs.
This new wave of support for crypto in Washington—regardless of whether we get spot Ethereum approval—is the latest evidence.
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