Since last week, financial markets have been grappling with the implied U.S. government shutdown as Congress struggles to agree on a new budget for the fiscal year starting October 1st. This scenario has caused some concern in the cryptocurrency markets, so it’s worth examining the possible ramifications.
Government shutdowns are becoming more frequent in the U.S. Of ten instances overall, in the past decade, there have been three notable shutdowns, each leading to a temporary pause in government activities and causing financial strain. Predicting the length of a potential upcoming shutdown is difficult, but given the current political climate, it could be a lengthy one.
Credit rating agencies like Moody’s and Fitch have shown concern about the possible shutdown, hinting at potential downgrades to the U.S.’s credit rating. These agencies worry that the deadlock in Congress reflects poorly on the country’s fiscal policies, especially given the current debt and rising interest rates. Such downgrades could have far-reaching implications for financial markets.
The current situation echoes past credit rating issues, notably the 2011 downgrade by S&P. Then, as now, political infighting was the culprit, leaving investors skeptical about the government’s ability to stabilize its debt. A new downgrade could negatively impact financial markets, though it’s hard to say to what extent.
The Crypto Dimension
A government shutdown would affect two major sectors relevant to the crypto industry: law enforcement and financial regulation. While most Department of Justice (DOJ) employees would likely continue working (meaning that crucial functions like criminal court proceedings would likely continue without significant interruption), a substantial reduction in the Securities and Exchange Commission (SEC) staff could lead to delays in key financial products like crypto ETFs.
In the crypto industry, several Bitcoin and Ethereum ETFs are awaiting SEC approval. The SEC has already begun delaying these decisions, likely anticipating a possible shutdown. This could mean further delays in the rollout of these financial products, particularly spot Bitcoin ETFs, which have a final decision deadline in January 2024.
A shutdown would also put a damper on crypto-related legislation currently making its way through Congress. Bills promoting crypto innovation await votes but are not a priority amid the looming shutdown.
Experts suggest the longer a government shutdown lasts, the more delayed crypto regulations will be. As Congress grapples with funding issues, including controversial topics like border wall funding, the progression of crypto legislation will likely be pushed back.
On the Bright Side: Bitcoin as a Safe Haven?
Interestingly, some market analysts suggest that Bitcoin could benefit from a government shutdown. They argue that investors may see Bitcoin as a more stable asset in times of governmental instability, potentially leading to a surge in bitcoin prices.
At the last moment this weekend, the U.S. government shutdown was postponed for 45 days until November 17.Congress passed a short-term funding bill to avoid a shutdown. The bill received bipartisan support and was signed by President Joe Biden. It ensures pay for federal workers and active-duty military, keeps air travel agencies operational, and provides for natural disaster relief. However, the bill omits additional aid for Ukraine. Lawmakers must work on a long-term spending bill, with contentious debates expected over Ukraine aid and border security.