Source: TradingView, CNBC, Bloomberg, Messari
Putting The Importance Of Last Week’s Elections Into Focus
Written by Christopher Macpherson, Analyst at Arca
For the first time in the history of digital assets, crypto policy played a material role in the U.S. elections. Crypto PACs raised $245 million to support nationwide candidates supporting digital assets innovation in America. Of the 48 candidates supported by crypto’s largest PAC, Fairshake, all 48 candidates won their respective races.
To be very clear, crypto and blockchain technologies are inherently nonpartisan in nature. This technology is intentionally designed to be open to all people of the world, irrespective of political affiliation, nationality, or economic status. Crypto’s ethos would typically dictate that jumping into the murky waters of political lobbying is very anti-crypto. But the prior four years of attacks against the good faith actors in the crypto industry were certainly not typical. So, the crypto community participated in the democratic process and made their voices heard. Through the lens of our industry, the result was not a red wave nor a blue wave, but rather a Bitcoin-orange wave. And now that the election is over, investors are working through what this means for the future of our industry.
However, the near 30% weekly return for digital assets in the immediate aftermath of the elections is a good barometer for how impactful this election can be.
Simply put, the outcome of the 2024 US election is a renaissance moment for the crypto industry.
Events in crypto with this level of significance are rare. When they happen, they immediately expand the world’s collective outlook about the potential of the crypto movement and where this technology will take the world going forward. Some events have originated from breakthroughs in blockchain technologies, while other events occurred due to the endorsement of crypto from outside parties that helped legitimize blockchain technology to the broader world:
- In 2009, the creation of Bitcoin introduced the idea of the world’s first digital currency that can be electronically exchanged peer-to-peer via a permissionless, decentralized, uncensorable, and immutable cryptographic ledger known as a blockchain.
- In 2014, the rise of stablecoins introduced the idea of global payments on blockchain in tokenized United States dollars. Stablecoins on blockchains now account for $178 billion USD in total value.
- In 2015, the creation of smart contracts on the Ethereum blockchain allowed code to automatically execute actions on blockchains, which expanded the potential for use cases immensely.
- In 2020, “DeFi Summer” popularized the concept of Decentralized Finance (DeFi). DeFi is an ecosystem of applications that leverage smart contracts to accomplish traditional finance and banking functions (trading, borrowing, and lending) in a permissionless, global system. The total value locked (TVL) in the DeFi ecosystem today is over $101 billion USD.
- In 2020, Microstrategy became the first publicly traded company to adopt a Bitcoin strategy by buying 21,454 Bitcoin to protect its balance sheet from inflation. In total, Microstrategy has spent $9.91 billion USD to purchase 252,220 Bitcoin ($20.17 billion USD at current prices). Elon Musk followed suit in 2021 by purchasing $1.5 billion of Bitcoin for Tesla’s balance sheet.
- Later in 2021, El Salvador became the first country to accept Bitcoin as legal tender and purchase Bitcoin for its reserves.
- Also, in 2021, the proliferation of Non-Fungible Token (NFT) technologies introduced use cases on the blockchain for digital art, tokenized assets such as real estate, and token-gated social communities. NFTs are now a regular fixture at the biggest art auction houses in the world, such as Sotheby’s and Christie’s.
- In 2023, Blackrock filed for the first Bitcoin ETF. Blackrock’s CEO Larry Fink went on live television to admit that he was wrong about Bitcoin and repeatedly advocated for the potential of Bitcoin and tokenization. Blackrock’s Bitcoin ETF (IBIT) has been the most successful ETF launch in the history of ETFs, amassing ~$33 billion in assets in less than 12 months from launch.
- In July 2024, US presidential candidate Donald Trump publicly endorsed Bitcoin and other digital assets while speaking at the Bitcoin 2024 conference in Nashville. Trump also stated the strategic importance of the U.S. government holding Bitcoin as a reserve asset during that speech.
Then Versus Now
In the same analogical vein, the period leading up to now could be described as the Middle Ages, a time encompassed by stagnation and a general decline in ingenuity. 2022 kicked off crypto’s Middle Ages, with three notable black swan events defining the period:
- The blow-up of once prominent blockchain Terra
- The insolvency of Three Arrows Capital
- The shocking bankruptcy and subsequent findings of FTX Exchange.
These events set off a combination of:
- Negative external sentiment toward the crypto industry
- An exodus of previously enthusiastic participants and general malaise from remaining participants
- The SEC’s approach of “regulation by enforcement” mostly against the good-faith actors of crypto-based in the US
The SEC has insisted that the
Howey Test, established in 1946 before the concept of computers existed, is sufficient for regulating cryptographic blockchain tokens. The SEC filed an unprecedented
flurry of enforcement actions and went to court to establish a legal precedent that tokens are securities. One of the most high-profile cases was the Ripple Labs ($XRP) case, where Judge Annalisa Torres from The Southern District of New York was unequivocal in stating that $XRP, as a digital asset, is not in and of itself an investment contract (security). The SEC was also sanctioned and ordered to pay over $1.8 million dollars in the Debt Box case for “
gross abuse of power”, and soon after that, the SEC’s Salt Lake City office was shut down. These are just two of the many cases that have yielded unfavorable rulings. Keep in mind that in the SEC’s 90-year history, the SEC rarely ever receives unfavorable rulings when taking cases to court. This has resulted in members of the SEC being called to
speak in front of Congress multiple times to discuss their approach to regulating crypto. Despite all the attention, congress failed to pass meaningful legislation relating to crypto, and the SEC has not passed new rules for a formal digital assets framework. This has caused serious damage to the industry, ranging from capital formation, token design, developer talent, and innovation moving abroad.
Thankfully, the crypto industry in the U.S. can now turn the page on the prior three years of crypto. Below are the most important takeaways from the election for our industry going forward:
- Political Alignment: Not only did the United States elect the first ever pro-crypto president, but it also appears likely that both chambers of Congress will have a Republican majority. As mentioned, Congress will have more pro-crypto members than ever before. Some of those wins included defeating staunchly anti-crypto congress members, such as anti-crypto incumbent Sherrod Brown’s loss to the pro-crypto challenger Bernie Moreno in Ohio. Additionally, Donald Trump’s team, JD Vance, Robert F Kennedy, Elon Musk, and Vivek Ramaswamy have publicly advocated for crypto for many years. Pairing an executive branch that is outwardly pro-crypto with a pro-crypto congressional majority greatly increases the likelihood of material and constructive crypto legislation passing.
- US Government Purchasing Bitcoin: Wyoming Senator Cynthia Lummis proposes a bill for the United States government to purchase up to 1,000,000 Bitcoin (~$80 billion US dollars at current price) over five years to diversify and bolster the US government’s strategic reserve. The idea of governments buying Bitcoin to protect against currency debasement, irresponsible spending, and spiraling debt has been an ‘endgame’ scenario theorized by Bitcoin believers since the early days. That is because it would create a game theory scenario where all governments worldwide would also need to buy Bitcoin to protect themselves from being left behind in fiat currencies that naturally decline in value over time as governments. This would cause a land grab for a mathematically fixed supply and scarce asset.
- Regulatory Regime Change: During Donald Trump’s speech at Bitcoin 2024, he vowed to fire SEC Chairman Gary Gensler, on day one of his presidency. To be fair, this was expected regardless of which presidential candidate was elected. The rumored replacements for Chairman Gensler include pro-crypto Chief Legal Officer at Robinhood, Dan Gallagher, and pro-crypto SEC commissioner Hester Pierce (affectionately nicknamed Crypto Mom). Regardless of who is chosen for the role of SEC Chairman, it will most likely result in a more favorable regulatory climate for crypto innovation to thrive in the United States.
- Investor Protections: The new regime at the SEC also has the opportunity to create rules that will accomplish one part of the SEC’s mission statement: protecting consumers. Many common sense rules can be created to prevent blow-ups and scams that have marred the public image of crypto in its infancy. For example, most people still do not understand that the shocking fraud of FTX was not at all enabled by a blockchain or crypto. Ironically, if centralized exchanges in crypto, such as FTX, were hosted natively on transparent blockchain ledgers, the fraud would have been obvious and caught immediately. The reason why FTX was able to perpetrate such a massive fraud undetected is that there is no legal pathway for a crypto exchange to legally do business in the United States, evidenced by the recent Wells Notices issued to Coinbase, Robinhood, Kraken, and Crypto.com. So FTX was incorporated in the Bahamas, where there are no exact legal requirements for public disclosure of audited financial statements or market surveillance. The fraud that FTX was able to pull off would have been almost impossible if incorporated in the United States, even at a dramatically smaller scale, because public companies and exchanges in the United States are required to release audited financial statements publicly, meet market surveillance rules, and complete other regulatory reporting requirements.
- Improved Token Design: DeFi Summer in 2020 ushered in “value accrual tokenomics.” The term refers to designing tokens to have tangible financial value derived from providing direct value back to token holders. For example, a lend/borrow DeFi protocol collects a small fee on all loans created on the platform, and the platform disburses a percentage of that revenue back to token holders (similar to stock dividends). With that tokenomic model, the token has a true inherent value that scales with the success of the underlying protocol. Including functions like revenue sharing puts tokens in conflict with the legal definition of an investment contract, and thus, founders moved away from this type of token. This is why memecoins, which have no inherent financial value (and are very prone to abuse), have gained popularity. The industry now has the opportunity to enact legislation that can create a clear path for registering tokens with direct value accrual tokenomics. Developers will be able to focus on creating and growing businesses that provide value to the world. Investors will be able to confidently make informed decisions that they are purchasing a token with a value that is directly correlated to the measurable growth of the underlying protocol. It has always been our opinion at Arca that token value accrual is an extremely important concept for the growth of protocols on blockchains and efficient market structure.
- Capital Formation: Capital formation in crypto has been greatly damaged by the perceived regulatory risks under the current administration. A few shrewd financial institutions and governments did not wait for the election to enter the space, such as the state of Florida purchasing $800 million of Bitcoin and the Wisconsin Retirement Board investing over $160 million into Bitcoin ETFs. The approval of the Bitcoin and Ethereum ETFs has helped in some regards. Still, these approvals have narrowed new investors’ knowledge, who often believe that these are the only legitimate assets that exist in the ecosystem. Most other capital has entered through crypto venture capital vehicles which has caused overfunding of new projects and oversaturation of new token launches that don’t necessarily push the industry forward. Anecdotally, from Arca’s conversations with investors, many institutions, governments, and high-net-worth individuals, we’re waiting for the election to yield a positive result before committing capital to the space. Now that the regulatory environment is more promising, we expect a significant increase in capital inflows to the crypto ETFs, private funds, and altcoins.
While crypto in America was put in timeout, countries worldwide carried the baton of crypto adoption. Europe passed legislation creating a comprehensive framework for digital assets called
MiCA, many users across Asia made their crypto wallet their primary bank, and
young women in Afghanistan used crypto rails to receive aid & escape financial oppression from the Taliban. It would be remiss not to point out that there is no guarantee of what will happen over the next four years. Campaign promises can be fickle, but it is clear that the efforts of the crypto industry during the 2024 election campaigns have shown politicians that this is a top priority for many voters going forward. US politicians’ understanding of the industry is no longer restricted to salacious headlines in the news, Democrats are starting to realize that
hating crypto was a major political miscalculation – as we wrote in
May, and all politicians are starting to understand why this small niche of the world is so passionate about this topic.
At its core, blockchain technology was created to be a force for good in the world and embodies American values.
Blockchain technology was created with the ideals of freedom from tyranny, entrepreneurial innovation, and equality for all. During the internet boom in the 1990s and early 2000s, US politicians made the extremely consequential decision to support American innovation. America would likely not hold its place in the world today if it had chosen not to support American innovation. The decisions US politicians will make over the next four years regarding digital asset innovation in America will be equally consequential. To Life, Liberty, and the Pursuit of Economic Freedom.
