The recent Bitcoin conference held in Las Vegas last month was notable for its participants more than its content: so many government representatives and traditional finance participants attended the event that cypherpunks, who describe themselves as “early investors” in Bitcoin, began to worry about losing their peer-to-peer digital cash system to “the suits.”

From BlackRock’s first pitch for a spot Bitcoin exchange-traded fund in the summer of 2023 to US President Donald Trump embracing crypto, all signs point to institutions finally flocking to crypto.

“Years of Bitcoiners shouting ‘institutional investors’ and pursuing price growth more proactively than privacy, self-custody and other cypherpunk ideals have led to Bitcoin rapidly becoming just another traditional finance (TradFi) instrument,” Seth For Privacy, vice president of Cake Wallet, told CoinTelegraph Magazine.

But Darius Moukhtarzade, crypto research strategist at spot Bitcoin ETF issuer 21Shares, notes that the merger has its pros and cons:

“Institutional adoption brings scale, reliability, and infrastructure maturity, increasing liquidity, reducing volatility, and improving compliance clarity. But it also brings custody risk, potential censorship, and ideological bias.” As Bitcoin has grown into a $2 trillion asset, the growing influence of traditional institutions was perhaps inevitable. So are institutions influencing Bitcoin, or is it the other way around?

Bitcoin was created as an alternative digital financial system that eliminated the centralized powers found in the old financial system, such as the power of central banks to increase the money supply and the ability of banks to access personal financial data. But with TradFi’s growing interest in Bitcoin as a neutral, apolitical store of value, many of these centralized touchpoints have begun to infiltrate the Bitcoin network.

Seth For Privacy is concerned about the current lack of privacy on the Bitcoin network, particularly the underlying cypherpunk philosophy that drove Bitcoin’s creation: “The real problem is that the incentives of the network are changing. If the majority of money and influence in Bitcoin has a perverse financial incentive to eliminate privacy and keep the power for themselves, we will see less funding and resources being allocated to improving Bitcoin’s privacy or self-protection technology.”

But Orkun Mahir Kilic, co-founder of Citrea, takes a more balanced view.

“Bitcoin itself is inherently resilient to external influence,” Kilic says, adding that this relationship is reciprocal, and that TradFi is starting to see the value in Bitcoin:

“However, they rarely use Bitcoin in its purest form (e.g. self-custody). Instead, they often adopt custody solutions, which increases the demand for centralized and custodial tools. This demand leads developers to focus on building such tools, thus creating a virtuous cycle.”

It’s a two-way dynamic, Moukhtarzade says: “Bitcoin has undeniably shaped the narrative in TradFi and policy circles, from El Salvador’s legal tender to the global ETF race that has pushed institutions and governments to take it seriously. At the same time, the entry of TradFi through ETFs and regulated custody solutions is impacting the perceived legitimacy and usefulness of Bitcoin, especially for institutional portfolios.”

But Bitcoin advocates are not happy about the same old custodians returning to the fold. Still, Moukhtarzade argues that large-scale institutional products need regulated custodians to meet compliance, security, and investor protection standards. “While this introduces a degree of custody centralization, these platforms are also subject to rigorous auditing, employ best-in-class cold storage, and are held to a high standard of reliability that is not guaranteed in retail self-custody.”

So what happens next? Right now, there is a widening divide between Bitcoin purists and those open to TradFi centralization.
There’s an argument that centralized TradFi will swallow up much of what’s currently considered decentralized finance (DeFi).

Some say the worst-case scenario would be the Bitcoin equivalent of Franklin D. Roosevelt’s Executive Order 6102, which banned citizens from hoarding gold.

But traditional financial institutions and the governments that regulate them also have good reasons to support decentralized Bitcoin to protect the asset’s core value proposition, whether out of greed or simply to win local voters’ votes.

The positive aspects of TradFi’s involvement in Bitcoin cannot be ignored. Despite the centralization of ETFs and other custody options, they effectively provide millions of people with exposure to the price of Bitcoin without having to pay on-chain fees or learn about wallets and seed phrases. Still, Seth For Privacy warns: “[The situation] could change rapidly as mining becomes more industrialized and regulated, governments prosecute open-source developers, and more. Fortunately, there are ‘mysterious supercoders’ who will continue to develop powerful tools no matter what, but it’s still worth considering.”