Wall Street Heavies Boost Crypto Sector Amid Regulatory Challenges

Updated: 28 June 2023

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Despite escalating regulatory scrutiny in the U.S., major financial players are stepping up their engagement with cryptocurrencies, thus injecting a fresh wave of competition and energy into a burgeoning industry.

Companies such as BlackRock (BLK), the world’s premier money manager, have plans underway to launch an Exchange-Traded Fund with bitcoin as its underlying asset. Alongside this, Charles Schwab (SCHW) and Fidelity Investments, both substantial money management firms, are backing a novel cryptocurrency exchange with the support of Citadel Securities.

Furthermore, Deutsche Bank, a global lending giant, has expressed interest in operating a crypto custody enterprise that would maintain digital assets on behalf of its clientele.

The active participation of these Wall Street veterans in the crypto market has had a positive impact on the value of cryptocurrencies, notably Bitcoin (BTC).

Bitcoin, the leading cryptocurrency globally, reached its peak price in a year, hitting $31,389 on Friday, after surpassing the $30,000 mark for the first time since April. Bitcoin experienced an 81% surge in value year-to-date by Friday. Other digital currencies such as Avalanche’s AVAX (AVAX-USD) token and ether (ETH-USD) have also seen significant growth this week. The total market capitalization for cryptocurrencies increased to $1.2 trillion on Friday, marking a 14% rise from the previous week.

Challenges Still Remain

Despite the upswing, the crypto industry is encountering mounting challenges, especially in the wake of the 2022 collapse of the cryptocurrency exchange FTX and the subsequent regulatory onslaught. Coinbase (COIN) and Binance, two of the world’s largest crypto exchanges, have recently faced lawsuits filed by the U.S. Securities and Exchange Commission (SEC).

The SEC alleges that these platforms enabled trading of digital currencies that should have been registered with the commission, raising concerns about potential difficulties in trading specific digital assets. Since the onset of 2023, the SEC has taken action against 15 crypto-related entities for violations of securities laws.

BlackRock Gets Involved

On a brighter note, the industry experienced a shift in sentiment on June 15 when BlackRock, an entity managing over $9 trillion in assets, submitted a proposal to the SEC for the creation of a spot bitcoin exchange-traded fund. This fund would tie directly to the original digital asset’s value, rather than merely tracking bitcoin futures, with Coinbase acting as the custodian for the bitcoin assets.

Joseph Chalom, BlackRock’s Head of Strategic Partnerships, during the Coinbase State of Crypto Summit, underscored the need for institutional custodians to participate in digital token economies. This announcement sparked a surge in bitcoin’s value, with other institutional entities such as Wisdom Tree Investments and Invesco revising their prior spot bitcoin ETF applications.

However, the SEC has historically rejected 27 applications for spot bitcoin ETFs since 2013, citing vulnerability to market manipulation. Wisdom Tree’s application was declined in 2021, and Grayscale Investments is currently suing the SEC over the denial of its application to transition its Grayscale Bitcoin Trust (GBTC) into a spot bitcoin offering.

EDX Markets Begins Treading

Simultaneously, a new cryptocurrency exchange backed by Citadel, Fidelity, and Charles Schwab, known as EDX Markets, has begun trading, thereby boosting the sector. Conceived in late 2022, EDX aims to eliminate significant conflicts of interest impacting existing cryptocurrency exchanges through a non-custodial model designed to mitigate such conflicts.

The exchange will not handle customer-owned digital assets, instead offering a platform where buyers and sellers can engage directly. EDX proposes to trade just four cryptocurrencies – bitcoin, ether, litecoin, and bitcoin cash – none of which have been labeled as securities by the SEC, thus potentially avoiding the issues experienced by Coinbase and Binance.

Both of these exchanges facilitate the trading of 19 digital currencies that the SEC has categorized as securities, requiring them to register with the agency. According to Cryptorank.io data, 55 cryptocurrencies have been designated as securities in various lawsuits. Coinbase, which denies the SEC’s allegations, is contesting the lawsuit.

Despite the negative attention, Brian Armstrong, Coinbase’s CEO, remains optimistic about the future of the industry. During a recent crypto conference in New York, he suggested that the Coinbase platform could evolve into a ‘superapp’ like WeChat within the next five to seven years.

Roger Balston, Franklin Templeton’s head of digital assets, argued that regulatory scrutiny is a necessary step for the industry. He believes that, despite the turbulence, the regulatory clarity paves the way for the establishment of standards that would facilitate capital flow.

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