• Cryptocurrency is pulled into the domain of the financial industry as governments begin a "policy of bold embrace"

I have been watching Bitcoin for more than six years, since 2014. Over that time there has been a good deal of important news, and each time the price of Bitcoin convulsed. The most important news of the past six years broke on July 22. Thanks to it, the prices of Bitcoin and other cryptocurrencies have taken on some life for the first time in a while, but compared with the shock of the news, the market's reaction has been unexpectedly calm.

The Office of the Comptroller of the Currency (OCC), an agency under the U.S. Treasury Department, declared that federally chartered banks may engage in the custody and safekeeping of crypto assets. Before long we will actually be able to see Bank of America or Citibank open dedicated crypto windows, offering investment portfolio consultations and custody services.

This carries as much significance as -- or perhaps even more than -- news that the U.S. Securities and Exchange Commission (SEC) had approved a Bitcoin exchange-traded fund (ETF), and yet the market's reaction has been muted. That appears to be the influence of analyses arguing that even if America's first-tier financial institutions begin offering Bitcoin custody, the business will not be especially lucrative and demand for Bitcoin will not explode. But it is worth recalling that approval of a Bitcoin ETF, too, has been eagerly awaited less for its marketability than for its meaning as a signal to institutional investors worldwide to treat Bitcoin as one of their investable assets.

The Advance of Institutional Investors Begins in Earnest

It is also worth examining the event of banks offering Bitcoin custody in the American context. The United States is a country where banks flourished before the government did. Banks were also institutions that supplied currency by freely printing banknotes in the form of receipts for gold coins. The first time money was issued under the leadership of the federal government was during the presidency of Abraham Lincoln. The need for paper money to finance a war is, in effect, the backdrop to the standardization of the dollar. Naturally, the multitude of private banknotes had to be sorted out, and so the National Bank Act (1863) was enacted during the war. The body established under that law to supervise banks at the federal level is precisely the Office of the Comptroller of the Currency. Although the word "currency" appears in its name, it is in fact a federal bank regulator that handles the chartering and licensing of banks to operate nationwide. Among financial supervisory bodies, the OCC wields the most formidable authority over banks after the U.S. central bank (the Fed). Unlike the Fed, however, the OCC belongs to the executive branch.

Until now it was the SEC and the U.S. Commodity Futures Trading Commission (CFTC) that had been speaking out on Bitcoin and cryptocurrency. Neither agency has anything to do with money. When members of Congress asked the Fed chair, "Given that Bitcoin has the properties of money, shouldn't the Fed, which manages the currency, do something?" the Fed chair at the time replied that Bitcoin was not within their jurisdiction. But if banks begin conducting lending business using Bitcoin, the Fed or the U.S. Treasury becomes the authority with jurisdiction over Bitcoin. In other words, this is a passage that may be read as a signal that an important sorting-out of turf has been carried out behind the scenes in the struggle among financial firms over the new domain of cryptocurrency. Until now, it was the agency that polices derivatives that had been sounding out whether Bitcoin should enter the regulated system. And yet, before anyone quite noticed, Bitcoin has walked in through the ordinary teller windows of first-tier banks.

There is little basis for imagining that banks will be content with a passive service -- waiting for someone to walk in with Bitcoin, collecting a modest fee, and storing it in a vault. Banks that hire specialists will actively pitch crypto investment portfolios, mainly to older, wealthy clients. Since this comes bundled with investment advice that analyzes the relevant news on the basis of expert knowledge, products will emerge in which the custody fee varies with returns. Banks will be able to actively develop and sell products that include a range of cryptocurrencies.

The OCC did, of course, draw a line: customers' crypto assets must be managed individually. Because customers' assets cannot be pooled and managed together, they must be held in kind. That is to say, banks cannot conduct lending business with the cryptocurrency their customers entrust to them. But once the banking sector has secured a large volume of crypto assets, lobbying to expand the business appears inevitable.

What is more, Bitcoin and other cryptocurrencies are highly fungible. They can be aggregated and divided with ease. Their accounting is so much simpler than that of paintings or real estate, each of which has individual characteristics, that managing pooled assets is a straightforward matter. In other words, the OCC's measure may be the starting point of a long journey toward the creation of bank money whose base money is Bitcoin. Whether the authorities allowed crypto custody with such a prospect in mind hardly matters. Sometimes elementary knowledge matters more. Creating credit on the basis of customers' demand-deposit assets is precisely the essential function of first-tier banks. The core of a banking license is the exclusive right to earn interest over and over by lending out to others the assets that others have entrusted to you.
A Bitcoin That Government Power Can Never Eliminate

To those who have thought of Bitcoin only as a tulip bubble or as part of the underground economy, the U.S. government's sudden declaration will seem to come out of nowhere. President Donald Trump has let slip negative views of Bitcoin. Even so, it is hard to dismiss this as an isolated happening unrelated to administration policy. Brian Brooks, the Comptroller of the Currency appointed by the Trump administration, had until immediately beforehand served as chief legal officer of Coinbase, America's largest crypto exchange. In a recent interview, Brooks said that as an advocate of decentralized systems he believes blockchain is superior to the existing banking network. When the U.S. administration installs a man like this as the head of the agency that supervises banks, it is reasonable to assume there is a plan.

Why has the U.S. administration taken the lead on a measure that could push Bitcoin's price higher? The timing may have been unknowable, but the choice itself must be seen as inevitable. To achieve the practical goal of anti-money-laundering, Bitcoin has to be actively drawn into the regulated system.

Unlike conventional financial assets, Bitcoin and other cryptocurrencies require no financial network for transfer or storage. Two people on opposite sides of the globe can remit value to each other exactly as if handing over cash in person, without relying on any security system within the government's reach. It is an innovative technology that, if the establishment does not take it in, is likely to be used in the shadows.

It is easy to treat the worry that Bitcoin and cryptocurrency may be used by criminal organizations as the reason Bitcoin will struggle to go mainstream. But reality is unfolding in precisely the opposite direction. For the United States and for other governments alike, the first goal regarding Bitcoin is to kill off Bitcoin and the technology behind it. In the course of studying it, however, they come to learn that this goal is in practice impossible. They have no choice but to recalibrate their policy goals to match what government can actually do. Realizing that a policy of bold embrace is the only recourse if a substantial share of it is to be managed within the regulated system is merely a matter of time.

In fact, the more of their customers' Bitcoin the banks hold, the better the government can identify who owns Bitcoin. It can also get a picture of the holdings of people who have not entrusted their coins to a bank, because Bitcoin moves within a network of wallets. The real owner of a wallet that has transacted with a known wallet can be traced, if the investigating authorities have the will to do so.

Taken as a signal that it is better for banks than for Facebook to take the lead, this measure hints that the deliberations of other governments have in fact already reached a foregone conclusion. It also serves as a reminder that not much time is left. The posture of dismissing Bitcoin -- whether as an object of intellectual inquiry or as an investment -- on the grounds that governments will never recognize it has become an excessively dangerous and expensive choice.