Wall Street reluctantly embraces crypto

Wall Street has a message for its many clients that have been eager to invest in cryptocurrencies: OK, OK, we hear you.

The largest U.S. banks, securities firms and custodians, many of whom once greeted the emergence of digital assets with skepticism, are now showcasing their forays into the market.

"It’s a moment in time when the traditional industry has woken up and more broadly accepted this is happening," said Walt Lukken, president and chief executive of the Futures Industry Association, a large trade group for the derivatives markets.

Their recent conversion, industry executives said, has less to do with any epiphany about crypto’s utility than it does a simple reality: They don’t want to lose the business to rivals.

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Hedge funds and other professional investors were already trading cryptocurrencies, but many money managers—from mutual-fund giants to pension funds—are increasingly eager to find a way into the crypto markets, executives said. Inflation and rising interest rates have damped expectations for returns on stocks and bonds, making cryptocurrencies more attractive.

Now the money managers, banks’ biggest clients, want to pay them to trade and lend, structure and safeguard crypto. They are uneasy with relying on crypto startups on transactions that involve other people’s money and want mainstream financial firms to settle into their traditional roles as intermediaries. Wall Street’s participation, investors say, might bring stability to the nascent markets.

"It’s gotten to the point where everyone is at some point in the journey," said Mike Demissie, head of digital assets and advanced solutions at Bank of New York Mellon Corp. "If they’re not actively investing [in crypto], then they’re exploring it."

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In response, most banks and custodians are working on plans to move forward with handling crypto—at different paces.

Firms such as Fidelity Investments and Cowen Inc. have started storing and trading cryptocurrencies, either on their own or through ventures with digital-asset startups. Last week, Fidelity announced plans to allow individual savers to add bitcoin to their 401(k)s. The U.S. Labor Department argued the offering would risk Americans’ retirement security.

BNY Mellon and rivals such as State Street Corp. are building capabilities to store and trade bitcoin and other digital assets while they await U.S. and state regulatory approvals that they say will allow them to go live with those services for institutional clients. They expect that to happen as soon as this year.

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Investment banks, including Goldman Sachs Group Inc. , have said they also need more regulatory input before they can handle cryptocurrencies directly. In the meantime, Goldman has started executing trades on both over-the-counter bitcoin options as well as futures listed with CME Group Inc., operator of the world’s biggest derivatives exchange. The bank also recently made a loan that was secured by the borrower’s bitcoin holdings.

Regulatory uncertainty is not the only reason many mainstream financial firms have waded gingerly into the crypto world. Inside these firms, the crypto skeptics can still outnumber the crypto curious. In recent years, bitcoin has been derided as both "worthless" by Jamie Dimon, CEO of the largest U.S. bank, JPMorgan Chase & Co., and "rat-poison squared" by Berkshire Hathaway Inc. CEO Warren Buffett, perhaps Wall Street’s best-known investor.  

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Some firms don’t feel compelled to lead the charge into a new market, opting instead to wait for the moment when there are enough fees to justify the risks.

"They all understand something revolutionary is taking place that will impact parts of their business model," said Damien Vanderwilt, co-president of Galaxy Digital Holdings Ltd. , a firm that provides trading and advisory services to digital-asset companies and runs its own crypto investing business. "When they stop and think, `What do we do about it,’ the answer for most banks is that the opportunity today is not big enough to take the reputational risks of being early."

Jeffrey Solomon, Cowen’s chairman and chief executive, said institutional investors are taking the same path they did more than 50 years ago, when stocks were largely held in personal accounts and the market struggled to handle surges in trading volume.

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Advancements in computer power helped change all of that, leading to huge growth in stock-investing products managed by professionals, he said.  Big-money investors—and the banks and brokers who serve them—find themselves at a similar crossroads, he said.  

At the Futures Industry Association’s recent annual conference, crypto was everywhere. Crypto firms sponsored the event, and their executives sat on panels. Their presence didn’t go unacknowledged by the industry’s old guard. While many attendees congregated in the lobby of the Boca Raton Resort & Club in mid-March, CME Chairman Terry Duffy approached FTX crypto exchange founder Sam Bankman-Fried for a quiet chat. "All eyes were on them," one attendee said.