Wall Street Reluctantly Embraces Crypto

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

America’s largest banks, securities firms and custodians, many of whom once greeted the rise of digital assets with skepticism, are now presenting their forays into the market.

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

Their recent conversion, industry executives said, has less to do with a revelation about crypto’s usefulness and more to do with the simple reality: they don’t want to lose the company to rivals.

Hedge funds and other professional investors were already trading cryptocurrencies, but many fund managers — from mutual fund giants to pension funds — are increasingly looking to find a way to access the cryptocurrency markets, executives said. Inflation and rising interest rates have dampened return expectations for stocks and bonds, making cryptocurrencies more attractive.

Now fund managers, the biggest clients of banks, want to pay them to trade and lend crypto, to structure and protect it. They do not rely on crypto startups for transactions involving other people’s money and want traditional financial firms to settle into their traditional role as intermediaries. Wall Street’s involvement could bring stability to emerging markets, investors say.

“It’s gotten to the point where everyone is at some point in the journey,” said Mike Demissie, chief of digital assets and advanced solutions at Bank of New York Mellon Corp.

“If they don’t actively invest [in crypto]so they investigate.

In response, most banks and custodians are working on plans to move forward with crypto management, at varying speeds.

Companies such as Fidelity Investments and Cowen Inc

have begun to store and trade cryptocurrencies, either alone or through companies with digital asset startups. Last week, Fidelity announced plans to add bitcoin to individual savers to their 401(k). The US Department of Labor argued that the offer would jeopardize Americans’ pension security.

BNY Mellon and rivals such as State Street Corp

are developing capabilities to store and exchange bitcoin and other digital assets pending approvals from US and state regulatory bodies that will allow them to go live with these services for institutional clients. They expect it to happen this year.

WSJ’s Dion Rabouin explains why Wall Street is now betting big on crypto and what that means for the new asset class and its future. Photo composition: Elizabeth Smelolov

Investment banks, including Goldman Sachs Group Inc

, said they also needed more regulation before they could handle cryptocurrencies directly. In the meantime, Goldman has begun executing trades in over-the-counter bitcoin options and futures contracts listed with the CME Group. Inc.,

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

Regulatory uncertainty isn’t the only reason many traditional financial firms have cautiously entered the crypto world. Within these companies, there may still be more cryptoskeptics than the cryptocurrencies. In recent years, bitcoin has been called both “worthless” by Jamie Dimon, CEO of America’s largest bank, JPMorgan Chase & Co., and “square rat poison” by the CEO of Berkshire Hathaway. Inc., Warren Buffett, arguably the best on Wall Street. – well-known investor.

Some companies don’t feel compelled to enter a new market, choosing 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 impact parts of their business model,” said Damien Vanderwilt, co-president of Galaxy Digital Holdings. ltd.

, a company that provides trading and advisory services to digital asset companies and runs its own crypto investment business. “If they stop and think, ‘What are we going to do about it,’ the answer for most banks is that today is not a good enough opportunity to take the reputational risks of being early.”

Jeffrey Solomon, chairman and CEO of Cowen, said institutional investors were moving along the same path they were more than 50 years ago, when stocks were largely held in personal accounts and the market struggled to manage the increase in trading volume.

Advances in computing power have changed that, leading to massive growth in professionally managed equity investment products, he said. Major investors — and the banks and brokers that serve them — are at a similar crossroads, he said.

At the recent Futures Industry Association annual conference, crypto was everywhere. Crypto companies sponsored the event and their executives sat on panels. Their presence has not gone unnoticed by the industry’s old guard. As crowds gathered in the lobby of the Boca Raton Resort & Club in mid-March, CME President Terry Duffy approached founder of FTX crypto exchange 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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