Wall Street reluctantly embraces Crypto

Wall Street has a message for its many customers who want to invest in cryptocurrencies: OK, OK, we hear you.

America’s largest banks, investment firms and custodian banks, many of which once met the emergence of digital assets with skepticism, are now showing their entry into the market.

“This is a time when mainstream industry has woken up and more broadly accepted what’s going on,” said Walt Lukken, president and CEO of the Futures Industry Association, a major trading group for derivatives markets.

Their latest conversion, industry leaders said, has less to do with a revelation about the usefulness of crypto and more with simple reality: They do not want to lose the company to rivals.

Hedge funds and other professional investors already traded in cryptocurrencies, but many fund managers – from mutual fund giants to pension funds – are increasingly eager to find a way to access the cryptocurrency markets. cryptography, executives said. Inflation and rising interest rates have dampened returns on equities and bonds, making cryptocurrencies more attractive.

Now fund managers, the banks’ biggest customers, want to pay them to trade and lend, structure and protect crypto. They are not confident in relying on crypto startups for transactions involving other people’s money, and they want traditional financial firms to settle into their traditional roles as intermediaries. Wall Street’s involvement, investors say, could bring stability to emerging markets.

“It’s got 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 do not invest actively [in crypto]so they explore it.

In response, most banks and custodian banks are working on plans to move forward with cryptocurrency management at a different pace.

Companies like Fidelity Investments and Cowen Inc.

has started storing and trading cryptocurrencies, either on its own or through start-ups of digital assets. Last week, Fidelity announced plans to allow individual savers to add bitcoin to their 401 (k). The U.S. Department of Labor argued that the offer would jeopardize Americans’ pension security.

BNY Mellon and rivals like State Street Corp.

develops capabilities to store and exchange bitcoin and other digital assets pending U.S. and government regulatory approvals, which they say will allow them to go live with these services to institutional customers. They expect it to happen as early as this year.

WSJ’s Dion Rabouin explains why Wall Street is now investing heavily in crypto and what it means for the new asset class and its future. Photo composition: Elizabeth Smelov

Investment banks, including Goldman Sachs Group Inc.

, said they also needed more regulation before they could directly handle cryptocurrencies. Meanwhile, Goldman has started trading over-the-counter bitcoin options as well as futures contracts listed with CME Group. Inc.,

operator of the largest derivatives exchange in the world. The bank also recently issued a loan secured by the borrower’s bitcoin holdings.

Regulatory uncertainty is not the only reason why many traditional financial companies have cautiously waded into the crypto world. Within these companies, cryptocurrencies can still outperform the cryptocurrencies. In recent years, bitcoin has been called both “worthless” by Jamie Dimon, CEO of the largest US bank, JPMorgan Chase & Co., and “square rat poison” by the CEO of Berkshire Hathaway. Inc., Warren Buffett, perhaps the best on Wall Street. known investor.

Some companies do not feel compelled to bring the tax into a new market, but instead choose to wait until there are enough fees to justify the risks.

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“They all understand that something groundbreaking is happening that will affect parts of their business model,” said Damien Vanderwilt, co-president of Galaxy Digital Holdings. Ltd.

, a company that provides trading and advisory services to companies with digital assets and operates its own crypto-investment business. “When they stop and think, ‘What do we do about it,’ the answer for most banks today is that the opportunity today is not great enough to take the reputational risks of being early.”

Jeffrey Solomon, chairman and CEO of Cowen, said institutional investors went the same way as more than 50 years ago, when stocks were largely held in personal accounts and the market struggled to cope with increases in trading volume.

Advances in computing power have helped change all of this, which has driven tremendous growth in professionally managed equity investment products, he said. Large investors – and the banks and brokerage firms that serve them – are at a similar crossroads, he said.

At the recent annual conference of the Futures Industry Association, crypto was everywhere. Cryptocompanies sponsored the event and their executives sat in panels. Their presence has not gone unnoticed by the industry’s old guard. As many attendees gathered in the lobby of Boca Raton Resort & Club in mid-March, CME President Terry Duffy approached FTX cryptocurrency founder Sam Bankman-Fried for a chat. “All eyes were on them,” said one participant.

Write to Justin Baer at justin.baer@wsj.com

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