Can the government shutdown have a significant effect on the crypto space?

The U.S. government is facing a shutdown due to the inability of Republicans and Democrats to agree on the budget. Various sources evaluate the probability of a shutdown as high. If it happens, a shutdown may have multiple repercussions. Among other implications, it could bring more uncertainty to the crypto market and slow the pace of crypto regulation.

Probability of shutdown

Uncompromising disagreement on healthcare spending between the GOP and Democrats delayed budget finalization. On Sept. 29, Vice President JD Vance said that the government is “headed for a shutdown.” Earlier, President Donald Trump warned that Americans would likely “end up with a closed country for a period of time.” JD Vance accused Democrats, saying:

“You don’t put a gun to the American people’s head and say, unless you do exactly what Senate and House Democrats want you to do, we are going to shut down your government. I think we are headed to a shutdown because the Democrats won’t do the right thing.”

The Democratic Senate minority leader, Chuck Schumer, is mirroring Vance’s claims, stating that “it’s up to Republicans whether they want to shut down or not.”

This rigidness of both parties left little space for possible agreement. As of Sep. 30, 89% of voters on Polymarket believed the U.S. government would go through a shutdown before the year-end.

Possible implications for the economy 

Shutdowns furlough public workers, put government contractors at risk, and block state agencies from doing their jobs. Given that the U.S. is already going through a shaky period, a shutdown may bring more harm than usual.

The harm level depends on the economy’s health at the time of the shutdown and the shutdown’s length. The latest shutdown, which took place during Trump’s first presidential tenure in December 2018 and January 2019, was the longest one. It lasted 35 days and saw the biggest consumer sentiment decline. 

The drop in consumer sentiment indicates that people are not comfortable spending their money on nonessential goods, which generally undermines economic growth and hinders business conditions.

What’s at stake for the crypto community?

Government shutdowns don’t usually affect the markets that much. However, it has an indirect impact, and the crypto space may take a soft hit. TV personality and author Jim Cramer said to CNBC, addressing the possible market impact of a shutdown:

“I’m not worried about most of this stuff. My biggest fear is that a shutdown will delay important pieces of economic data, making life more difficult for the Federal Reserve and potentially postponing their plans to cut interest rates.”

There are several ways the looming shutdown may impact the crypto space:

• It will hinder data collection for investors.
• It will stop the government from passing the much-anticipated CLARITY Act.
• It will block the SEC’s work on rulemaking in the crypto space and approval of spot crypto ETFs.

Traders will not have key metrics from the Federal Reserve, such as inflation and unemployment rates, available. They will have to trade without factoring this data in.

The CLARITY Act, the market structure bill aimed at setting clear rules for various types of cryptocurrencies, was set to be signed into law before Thanksgiving. The possibility of a shutdown brings uncertainty about whether the act will be passed that soon or even this year.

Finally, a shutdown will hinder the work of the Securities and Exchange Commission, slowing the realization of Project Crypto. Recently, SEC Chair Paul Atkins outlined the main directions of the agency aimed at regulating the crypto space and facilitating innovation in the U.S.

He talked about the upcoming innovation exemption that will let crypto businesses launch freely without being “torpedoed” by bureaucratic burdens. On top of that, Atkins said the SEC is going to do a lot of work related to rulemaking in the crypto space. Evidently, if a shutdown takes place, this work gets delayed. The same goes for reviewing and approving crypto spot ETFs, which usually galvanize trading when they get approved.

The latest shutdown implications

The latest shutdown took place in 2018-2019 due to disagreement between Democrats and Republicans over funding for the wall on the southern border. It was the longest and one of the most destructive. It affected 800,000 public workers. Half of them were furloughed, while others continued to work without pay. The 2018-2019 shutdown saw consumer sentiment declining by 7 points.

As for crypto, Bitcoin’s price was crumbling ahead of the shutdown in November, going from $6,400 to $3,200 in a single month. However, when the shutdown started, the price rebounded to more than $4,000. When the shutdown ended, Bitcoin’s price was above $3,500.

In general, it is safe to say that the biggest decline took place weeks before the shutdown itself. This September, the last two weeks were harsh for the crypto market. Soon, we will learn if this was a repetition of the past shutdown’s price action.