Amid a looming government shutdown over the stalled federal appropriations bill for the budget year beginning Oct. 1, 2023, the financial industry is holding its breath. The ripple effects of the potential shutdown are poised to extend beyond traditional markets and into the cryptocurrency sphere, especially Bitcoin, according to Greg Cipolaroglobal head of research at NYDIG.
Federal Shutdowns: An Emerging Norm
The occurrence of federal shutdowns is becoming less and less sporadic. Ten cases have been recorded over the years, with the most recent in 2018-2019 lasting a record 35 days, costing the government an estimated $5 billion. It is difficult to predict the duration of a shutdown because it largely depends on lawmakers’ negotiations. However, increasing political polarization signals a longer standoff this time.
Credit rating agencies are on alert
Moody’s, with an AAA rating for the US, sounded the alarm on September 27, 2023 and warned of the negative consequences of a shutdown. This reflects past sentiments, such as the 2011 downgrade of S&P amid debt ceiling debates, which put a spotlight on weakened US fiscal policymaking. Ongoing discord between political factions continues to unsettle rating agencies, potentially foreshadowing broader disruptions to financial markets.
Bitcoin ETF awaits SEC green light
An immediate casualty of the potential shutdown is the delay in the Securities and Exchange Commission (SEC) approval for a spot Bitcoin ETF. The furloughs would significantly reduce SEC staff from 4,604 to just 437, stalling the approval of critical financial products. Notably, the SEC has already postponed decisions on most ETFs in anticipation of a prolonged shutdown. The spotlight is off on the iShares Bitcoin Trust Black rockincluding awaiting SEC’s nod, which now hinges on the resumption of federal operations after the shutdown.
Law enforcement and financial supervision: the double impact
Two crucial areas within the crypto realm will bear the brunt: law enforcement, primarily the Department of Justice (DOJ), and financial regulation, primarily the SEC. While the DOJ is somewhat isolated, with 84% of its 114,521 staff exempt from furlough, the SEC faces a grimmer reality. The greatly reduced workforce could mean that the crypto industry will have to wait longer for the approval of crucial financial products, especially the Bitcoin ETF.
Market reactions amid uncertainty
Bitcoin rose 1.9% last week despite the postponement of the ETF decision, potentially finding a silver lining in the US budget woes. Conversely, traditional hedgerows and markets felt the heat. Gold fell 2.9%, the S&P 500 fell 1.3% and the Nasdaq Composite fell 0.2%. The bond market also slumped, while oil bucked the trend with a 2.3% rise, reflecting a mixed bag of market reactions as the shutdown looms.
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