Institutional Investors and Fintech: Will Wall Street Go Head-First Into Crypto?
Are mainstream financial institutions laying the necessary foundations to fully enter the cryptocurrency space?
Following a breakout year for cryptocurrencies, 2018 has been extremely challenging — to say the least.
There have been many reasons for the cryptocurrency markets being battered by bearish sentiments across the board.
However, having passed the midway mark of the year, there are increasingly encouraging signs that institutional investors are changing their tune once again — hinting that mainstream adoption is around the corner.
Furthermore, Bitcoin has reached market cap levels last seen in December, with 46 percent of the total market dominated by the preeminent cryptocurrency. With its price holding steady around $7,500, there are signs that a bearish market may be coming to an end.
Let’s take a look at the biggest Wall Street players that seem to be laying the foundation needed to enter the crypto markets on a grand scale.
Blackrock puts feelers out
The cross-industry working group is exploring a number of investment options, but it’s understood that Bitcoin futures are on the agenda. It marks a change in sentiment from Blackrock in particular, considering that CEO Larry Fink had described Bitcoin as ‘an index of money laundering’ in October.
Blackrock’s move could be described as a preemptive strike to avoid missing the crypto bus. Goldman Sachs is making headway with cryptocurrency involvement and Blackrock is following suit.
While Blackrock is understood to have launched a blockchain working group in 2015, the latest move is examining what its competitors are doing in the space. Clearly, everyone is trying to suss out what their peers are doing in terms of cryptocurrency adoption.
Goldman Sachs — forging ahead
Since late 2017, there had been murmurs of the investment and banking firm launching a cryptocurrency trading desk. This was later refuted by CEO Lloyd Blankfein, although he revealed the company had invested in a crypto trading desk back in 2015.
Nevertheless, Goldman Sachs has been making inroads toward crypto adoption throughout the year. Thus, in April, cryptocurrency trader Justin Schmidt was hired by the firm in response to client interest in the space.
The following month, Goldman Sachs executive Rana Yared confirmed that the company intends to buy and sell Bitcoin — after concluding the preeminent cryptocurrency was “not a fraud.” Yared said the company ‘resonated’ with clients wishes to hold Bitcoin or Bitcoin futures:
“It resonates with us when a client says, ‘I want to hold Bitcoin or Bitcoin futures because I think it is an alternate store of value.’”
What is more, a couple of former Goldman Sachs executives have moved into the cryptocurrency space.
Former executive director Priyanka Lilaramani joined Maltese crypto startup HOLD as its new CEO in May, following 10 years of service as a director at the firm. Prior to that, former Goldman Sachs executive Breanne Madigan joined crypto wallet Blockchain.com in April.
Galaxy Digital founder Mike Novogratz also lured a former executive of Goldman Sachs, Richard Kim, to take over as CEO of the cryptocurrency merchant bank in April. It’s understood that Kim had been working on the firm’s crypto trading desk before he left.
Despite the apparent drain of crypto-inclined talent from Goldman Sachs, the company is forging ahead with its own plans in the sector.
In June, the company confirmed that it was planning the launch of a cryptocurrency derivatives trading desk. Goldman Sachs is already helping customers clear Bitcoin futures, according to COO David Solomon.
The move followed some positive comments from Blankfein in an interview with Bloomberg in June. The CEO postulated that Bitcoin and cryptocurrencies could well be adopted by mainstream institutions, just like paper money replaced gold and silver coins:
“I look at the evolution of money, we started out with gold as money. A gold coin was worth $5, if you had $5 of gold. Eventually they would give you a piece of paper with the promise that there was $5 of gold to back it, and you could go and redeem it.
“Then they gave you a piece of paper and said there is $5 worth of gold, but you can’t redeem it. And then at some point they gave you $5, they’re not going to redeem it and they don’t even have the $5 even if you wanted to. We’re still doing that today and I see that morphing.
“If you could go through that fiat currency, where they say this is worth what its worth because the government says it is, why couldn’t you have a consensus currency.”
JPMorgan Chase — forgetting tulips
U.S. banking group and financial services firm JPMorgan Chase has had a love-hate relationship with cryptocurrency for the past few years.
CEO Jamie Dimon infamously slammed Bitcoin in 2017, comparing the cryptocurrency to the tulip mania while labelling it a fraud. He went as far as threatening to fire any company traders who were selling BTC on behalf of clients.
What ensued in the months after can only be described as bipolar, as the company announced that it would consider offering clients access to the Chicago Mercantile Exchange's Bitcoin futures market, which was launched in December.
Dimon seemed to change his tune early in 2018, saying he regretted his comments in 2017 while maintaining that he had a “lack of interest” in the space. A few weeks later, the CEO refused to answer questions posed by Cointelegraph at the World Economic Forum, saying he is not a “skeptic” of cryptocurrencies.
In February, the company then delivered its annual report to the SEC, in which it labelled cryptocurrencies as competition and a risk to its business.
“Both financial institutions and their non-banking competitors face the risk that payment processing and other services could be disrupted by technologies, such as cryptocurrencies, that require no intermediation.”
The company said it could be forced to adapt its products to retain customers, while stressing that it could eventually lose market share.
This apathy seems to be slowly changing, as the company began to make moves that seemed to hint it would begin to embrace that blockchain technology was here to stay.
A long-standing blockchain-based project, Quorum, was formed in 2017 in partnership with the Ethereum Enterprise Alliance. It has a number of global conglomerates involved, and is essentially an Ethereum platform aimed at serving the needs of larger enterprise businesses looking to make use of distributed ledgers and smart contract technology.
As a private blockchain project, Quorum’s success shows that the benefits of blockchain technology have not gone unnoticed by the heavyweights of the financial world. Quorum’s popularity eventually led JPMorgan Chash to consider making it a separate business entity, to attract more partners and drive the development of further blockchain-based business solutions.
In May, the company also filed a patent for a peer-to-peer (p2p) payment system using blockchain technology for intra and inter-bank settlements. At the same time, the firm created and filled the role of head of crypto-assets strategy.
It’s understood that Oliver Harrris, the man chosen for the role, will pioneer new crypto projects at the bank — as opposed to setting up active trading of cryptocurrencies. The company will look into crypto custody services and blockchain applications for JPMorgan Chase’s payments services.
All in all, the company has kept cryptocurrencies at an arm's length while embracing the benefits of distributed ledger systems to improve its own services.
That attitude toward cryptocurrency was evident in the fact that the bank banned customers from using its credit card facilities to buy crypto. The company even faced a class action lawsuit after customers complained that they were being charged exorbitant fees for buying crypto with credit cards.
While this could leave a lot to be desired, the company seems to be grappling with conflicting views on the industry. It sees the value in blockchain technology, but seems to be staying well clear of actively trading or facilitating such services for its clients.
Morgan Stanley has also had an interesting journey in tandem with blockchain technology and cryptocurrencies.
The company has seemingly begun weighing in more heavily on the subject in June 2017 — Bitcoin, in particular. Amid the steadily rising price of the cryptocurrency, Morgan Stanley released a statement suggesting more regulatory clarity was needed amid an influx of interest from clients.
“Governmental acceptance would be required for this to further accelerate, the price of which is regulation.”
Around the same time, it emerged that Morgan Stanley had been using blockchain-based platforms to process transactions and backup records as early as March 2016.
As things heated up into the tailend of 2017, Morgan Stanley CEO James Gorman lent an optimistic voice in October, countering the likes of Dimon, calling Bitcoin ‘more than just a fad’:
“I haven’t invested in it. I’ve talked to a lot of people who have. It’s obviously highly speculative, but it’s not something that’s inherently bad. It’s a natural consequence of the whole blockchain technology.”
He did change his tune a few weeks later, warning investors that the massive spike in value was nothing but “speculative.”
"Something that goes up 700 percent in a year — it's, by definition, speculative. So anybody who thinks they're buying something that it's a stable investment is deluding themselves."
The company was somewhat quiet over the next couple of months. Following a spiralling bull run that ended in a humbling market correction, Morgan Stanley then announced that it was helping clients clear Bitcoin Futures contracts.
In March, the company told clients that Bitcoin was similar to the Nasdaq, but moving ‘15x’ faster. Furthermore, Morgan Stanley speculated that financial markets would move toward the use of crypto in the future:
“Over the coming years, we think that the market focus could turn increasingly toward cross trades between cryptocurrencies/tokens, which would transact via distributed ledgers only and not via the banking system.”
As recently as August, Morgan Stanley hired a cryptocurrency trading expert to head up its digital assets department.
It is also worth noting that auditing firms have taken a keen interest in blockchain over the last 12 months.
This goes to show the diverse applications of blockchain technology — not only for payments, but for auditing, storing value and an almost limitless list of possibilities.
While these mainstream firms clearly have different plans for their involvement in the cryptocurrency markets, there seems to be an overarching feeling that most are moving toward adoption.
Therefore, it becomes a question of when — not if — we will see institutional investors climbing into the markets on a grand scale.
Having previously worked at Goldman Sachs for 10 years, Novogratz has an intimate knowledge of the investment banking world. In an interview on July 19 at a blockchain conference in South Korea, Novogratz suggested that full-on mainstream adoption on a grand scale is still more than five years away. However, people could expect to see many more financial institutions gradually enter the markets in the next few years.
According to Novogratz, big money investors are still skeptical of putting large sums of money into the space due to a perceived lack of trust:
“Think about how institutional investors operate. It’s hard to tell your boss ‘I have money in places you have never heard of.’ You need a trusted, name custodian — a Japanese bank or HSBC or ICE or Goldman Sachs — to allow institutional investors to feel comfortable.”
Blockchain.com founder and CEO Peter Smith told Bloomberg in an interview in July that the most recent moves in the cryptocurrency markets indicate a “consolidation” of the markets:
“I think now in the market, you have a lot of regulatory clarity that didn’t exist even a year ago. You have different types of order flow — you have retail and institutional. As that institutional flow increases critically with the roll out of new institutional products, you’ll see more of a level off and consolidation in the market.”
Smith went on to say that institutional investors are currently entering the market, which could have an influence on the recent resurgence in the price of Bitcoin. However he also cautioned that people would only notice the full effect of this midway through 2019.
Anthony Pompliano, founder and partner at Morgan Creek Digital Assets, told Cointelegraph that mainstream financial institutions are naturally drawn to areas of interest, especially when it concerns the client’s wants and needs.
“Large financial institutions are capitalistic in nature. They are interested in serving their customers — who want to make money — while driving better financial performance for themselves. As more customers look for Bitcoin, cryptocurrency and digital asset products, these financial institutions will be forced to participate.”
However, Pompliano also believes that the cryptocurrency space will continue to develop at its own pace over the next few years:
“Bitcoin and cryptocurrency will continue to grow with or without the support of the legacy financial players. With that said, the markets benefit from the sophistication and size of their participation.”
What of ETFs?
The approval of a Bitcoin exchange traded fund (ETF) has been chased by a number of industry players over the past few years.
That hasn’t ruled out the possibility of ETFs being approved for other financial institutions in America.
Investment firm Direxion had the review of it’s ETF application pushed out until Sept. 21. The SEC will deliver it’s ruling on that date, giving itself more time to consider that application more closely.
Nevertheless, the move keeps everyone guessing as to what could happen once the market has its first Bitcoin ETF. As Pompliano suggests, the potential approval could have a marked effect on the cryptocurrency markets:
“The approval of a Bitcoin ETF would have a very positive impact on the crypto industry. The main advantage is less friction for the mass retail consumer to purchase Bitcoin, without having to deal with the complexities of digital wallets and exchanges. If the introduction of Gold ETFs to the gold market is any indication, we should anticipate a large inflection point post-Bitcoin ETF.”
Once again, the crypto world will wait for this latest development to get a full understanding of the possibilities and implications. Until then, the current resurgence of Bitcoin seems to be a sum of all of these different factors, following a difficult six months in 2018.