Speculative and highly volatile,

but Bitcoin itself cannot be stopped

The U.S. approved ETFs to minimize the side effects

Vague aversion is of no help

Bitcoin's advance is relentless. On the 15th of last month, Hong Kong too announced that it would approve spot Bitcoin ETFs. Brazil likewise approved the launch of BlackRock's spot Bitcoin ETF. The U.K.'s Financial Conduct Authority is reportedly set to begin accepting applications for Bitcoin- and Ethereum-based ETNs (exchange-traded notes) from the second quarter of this year. In Korea, too, expectations are rising for permission to trade spot Bitcoin exchange-traded funds (ETFs) now that the general election is over, because the victorious Democratic Party of Korea made allowing the launch of spot Bitcoin ETFs one of its main digital-asset campaign pledges.

Right up until the United States approved Bitcoin ETFs this past January, the mainstream view in Korea's intellectual circles was that Bitcoin would challenge the dollar's position and that Washington would therefore never let it stand. The government's baseline stance, too, had been that blockchain should be nurtured as a technology of the future but that coins, being highly speculative in character, should be banned. For those accustomed to that climate, the scene now unfolding must feel as strange as a season changing overnight.

There is one point that offers some reassurance.

SEC Chair Gary Gensler took care to insert the following passage at the end of the statement approving spot Bitcoin ETFs. “Bitcoin is primarily a speculative, volatile asset that is also used for illicit activity including ransomware, money laundering, sanctions evasion, and terrorist financing. The fact that we approved the listing and trading of spot bitcoin ETPs does not mean that we approve of or endorse bitcoin. Investors should remain cautious about the myriad risks associated with bitcoin and cryptocurrency.”

Why, then, did the SEC approve ETFs and thereby allow institutions, corporations, and the wealthy to hold Bitcoin as an investment asset? The hint lies precisely in that remark.

In fact, the education of senior U.S. Justice Department officials about Bitcoin's properties began long ago. While investigating the dark web marketplace ‘Silk Road’ (a trading platform selling mainly drugs and firearms) in 2013, they began to grasp the impact this new technology could have on the legal order. During that investigation several agents were caught after concealing a criminal's bitcoin; they had assumed bitcoin was the equivalent of cash, which leaves no record. They casually reckoned it would be fine to pocket some bitcoin amid the confusion, and were caught. They did not understand Bitcoin's property that transaction records are made public and preserved permanently. U.S. investigators, meanwhile, also came to realize that this same property helps them trace suspicious transactions without needing a warrant from a court. The Justice Department arrested in 2022 the masterminds (an American couple) behind the 2016 hack of the Hong Kong Bitcoin exchange Bitfinex, and obtained a guilty verdict in 2023, yet it has stayed silent about the route by which it caught them. The hackers presumably trusted Bitcoin's anonymity, but U.S. law enforcement appears already to have developed technology capable of identifying perpetrators by continuously tracing transaction records.

Through this learning and experience, the focus of America's financial regulators and investigative authorities appears to have shifted from banning Bitcoin itself toward choosing a realistic alternative. The Financial Crimes Enforcement Network (FinCEN), under the Treasury Department, has since 2021 been paying close attention to the handling of self-hosted wallets. A self-hosted wallet is a way of storing bitcoin or cryptocurrency (in fact, the private key) on paper or on a device such as a USB drive. To put bitcoin into such a wallet, which the owner manages at his own responsibility, one must withdraw the bitcoin bought on an exchange. From the regulator's standpoint, once a few transactions pass through self-hosted wallets, tracing becomes difficult from that point on. Difficult, however, does not mean impossible. By finding the last person identified and observing him carefully, one may be able to trace whoever received bitcoin from him. But the cost is enormous. For specific transactions, such as a hacker laundering large sums, it may be worth attempting, but tracing an unspecified mass of wallets is, for now, close to impossible.

An ETF is, in the end, a vehicle for indirect investment in Bitcoin. A large financial company buys and custodies the bitcoin on the investor's behalf and issues certificates of entitlement that can be bought and sold like shares. The more indirect vehicles such as ETFs spread, the more cumbersome it comes to feel to store bitcoin directly in a self-hosted wallet. The original reason ETFs were launched was precisely for older investors who find buying and storing bitcoin themselves burdensome and who struggle to grow comfortable handling computer equipment.

This allows us to make sense of the U.S. government's contradictory behavior. Washington regards Bitcoin as a means of money laundering and as a way for rogue states to evade financial sanctions. Yet by acknowledging Bitcoin investment through ETF approval, it expects the range of Bitcoin's use to be constrained. For this line of development to be logical, one powerful premise is required. And this premise is exactly what Korea's intellectual circles have been missing. It is the fact that the United States cannot stop Bitcoin itself. Had it been able to, it would have chosen to outlaw Bitcoin rather than approve ETFs.

This is the lesson Korea's government and intellectual circles should draw from America's abrupt change of direction. Bitcoin is very likely to be used for illegal purposes. Yet the government cannot stop Bitcoin itself. Precisely for that reason, if only to minimize the side effects, Bitcoin must be actively drawn inside. The fact that it leaves us no other option is exactly why Bitcoin, which appeared before us one day out of nowhere, looks like a monster. Depending on how we handle it, we may be able to tame the monster; but the SEC's contradictory course is eloquent testimony that the disregard, ignorance, and vague aversion we have shown until now are of no help.

Oh Tae-min, Adjunct Professor, Department of Blockchain, Graduate School of Information and Communications, Konkuk University