TradFi Giants Are Getting Into Crypto: This is How

Updated: 04 June 2023

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As established names in the financial sector begin building their personal digital markets trading platforms, they are confident that fund managers will choose reputable brands over current, more ambiguous cryptocurrency exchanges. Companies like Charles Schwab, Standard Chartered, and Nomura are spearheading this change by constructing or endorsing new crypto organizations, including exchange and custody groups proficient in handling digital tokens like bitcoin and ether.

These financial powerhouses are gambling on fund managers’ continued interest in cryptocurrency trading. Despite last year’s significant price drop and a series of company failures, including crypto exchange FTX and lenders Voyager and Celsius, these companies remain optimistic about the future of digital currency. These unfortunate incidents highlighted the inherent risks and uncertainty in investing in mostly unregulated businesses. Asset managers are now demanding safety assurances for their investments before they start trading crypto.

The big players with long histories and traditional regulations are the preferred trading partners for significant institutional investors, according to Gautam Chhugani, senior analyst of global digital assets at Bernstein. This shift towards cryptocurrencies has been influenced by a significant increase in the value of prominent coins such as bitcoin and ether, with rises of approximately 68% and 56% respectively in the current year, contrasting with an 8.8% rise in the MSCI World Index.

Alexandre Birry, chief analytical officer for financial services at S&P Global Ratings, noted that many institutional players are exploring various aspects of the market to gauge the water’s temperature, develop market experience, and position themselves for future growth.

The new entrants, however, face competition from established companies like Coinbase and Binance that already have their institutional customers. Yet, the new entrants bank on their finance industry experience and untarnished reputation, unlike the slew of crypto scandals and regulatory actions from US authorities that have marred the sector.

Charles Schwab, Citadel Securities, and Virtu Financial are backing EDX Markets, while Standard Chartered supports Zodia Markets and Zodia Custody. Jamil Nazarali, head of EDX Markets and former Citadel Securities executive, said that these groups aimed to create an exchange they felt comfortable trading on.

The strategy pursued by these larger institutions differs from the original crypto industry model. Executives on Wall Street are eager to distinguish between business units like trading and custody, aiming to minimize risk and potential conflicts of interest. The intertwined downfall of FTX exchange and Alameda Research, both controlled by Sam Bankman-Fried, has heightened these concerns.

BNY Mellon, Fidelity, and Nasdaq (awaiting US regulator approval) have their own digital asset custody branches. According to an EY-Parthenon survey of 250 asset managers, half would transition from a crypto-native organization to a traditional-backed company providing the same services. Additionally, 90% expressed their trust in traditional financial groups acting as their crypto token custodians.

Disrupting the Existing Players

The presence of Wall Street-backed crypto companies could potentially disrupt the dominance of existing crypto exchanges like Binance and Coinbase if they manage to lure institutional asset managers.

Jez Mohideen, CEO of Laser Digital, a Nomura-owned crypto trading and venture capital firm, pointed out that some exchanges weren’t offering the best execution or prices. He suggested that an increased traditional institution footprint in crypto could result in “more transparency and more convergence in pricing”. However, Bernstein’s Chhugani maintains that existing crypto exchanges remain a vital source of liquidity.

This new breed of firms backed by Wall Street is adopting a more traditional infrastructure approach. EDX, for instance, deliberately avoided building its platform on cloud computing technology, which other crypto exchanges have utilized, because it was too slow and unreliable for professional traders.

Looking forward, some executives envisage the emergence of two separate markets: a shallower, retail-oriented one with large discrepancies between buying and selling prices, and a deeper, institutional one with more competitive pricing. Usman Ahmad, CEO of Zodia Markets, expects that as the crypto industry evolves, a disparity of spreads between institutions and retail could surface, resulting in institutions benefiting from tighter spreads in a more liquid market.

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