Wall Street Prepares to Take on Established Crypto Firms

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Some of the best-known names in the financial industry are building their own digital markets trading platforms, betting that fund managers will prefer familiar, trusted brands to the opaque cryptocurrency exchanges that dominate the industry.

Standard Chartered, Nomura and Charles Schwab are among the mainstream financial institutions creating or supporting new, distinct crypto companies, including exchange and custodial groups that can handle digital tokens such as bitcoin and ether.

Established companies are betting that fund managers are still eager to trade crypto even after prices plummeted last year and a series of companies went bankrupt, including crypto exchange FTX and lenders Celsius and To travel.

For asset managers, the meltdowns have underscored the risks of investing money in companies that are largely unregulated and facing questions about their transparency. Many require assurances that their money is safe before they start trading crypto.

Large, long-time traditional institutional investors definitely prefer dealing with counterparties that have been around for years and have been regulated in the traditional sense, said Gautam Chhugani, senior analyst for global digital assets at Bernstein.

The allure of cryptos comes after the price of popular coins bitcoin and ether have risen around 68% and 56% respectively so far this year, against an 8.8% rise in the MSCI World Index.

Many institutional players are testing different businesses to test the waters, gain some experience in the market but also…ensure they have an option for new paths of growth, said Alexandre Birry, Director Financial Services Analytics at S&P Global Ratings.

The newcomers are breaking into a market dominated by companies such as Binance and Coinbase, which have their own institutional clients.

But they are betting that their expertise in the financial sector and reputation, unsullied by the wave of crypto scandals and enforcement actions by US regulators, will prove convincing.

Broker Charles Schwab and market makers Citadel Securities and Virtu Financial are among the groups backing EDX Markets, while UK lender Standard Chartered has backed stock exchange Zodia Markets and custody house Zodia Custody.

They wanted to create an exchange they felt comfortable on, said Jamil Nazarali, head of EDX Markets and former Citadel Securities executive.

The infrastructure built by large institutions is markedly different from the original structure of the crypto industry. Wall Street executives are keen to separate business units such as custody trading, to reduce risk and potential conflicts of interest.

The collapse of the exchange and trading company Sam Bankman-Frieds FTX Alameda Research, which were closely linked, brought these concerns to the fore.

Custody, where assets are securely stored to protect funds from hacking or theft, has become the easiest way for traditional financial groups to grow their crypto presence.

I don’t want my custody handled by the same person as my exchange, said Michael Safai, co-founder of trading firm Dexterity Capital, adding that the extent to which some companies have not separated these duties is not unattractive, and it’s even a little disturbing.

BNY Mellon and Fidelity already have their own digital asset custody services, and US stock exchange Nasdaq is awaiting approval from US regulators to launch its own service.

A survey of 250 asset managers published this month by consultancy firm EY-Parthenon found that half of them would switch from a crypto-native group to a traditional company offering the same services. Additionally, 90% said they would trust a traditional financial group to act as the custodian of their crypto tokens.

S&Ps Birry said crypto custody is often the first step because it is more secure and fundamental. It’s a low-margin business, you have to do two or three tasks and you have to do it well.

If Wall Street-backed crypto companies are successful in attracting institutional asset managers, it could pose a challenge to the dominance of incumbent crypto exchanges like Binance or Coinbase.

Jez Mohideen, managing director of Laser Digital, a crypto trading and venture capital firm owned by Nomura, said that some exchanges do not provide the best execution or the best prices and that increased involvement of traditional institutions in the crypto would lead to more transparency and greater price convergence. .

However, Bernsteins Chhugani said existing crypto exchanges remain a key source of liquidity. Trading desks draw liquidity from these exchanges, he said, adding that it would take time for new companies to gain market share.

Companies backed by Wall Street are building their infrastructure along more traditional lines. Nazarali said EDX deliberately did not build its site on cloud computing technology, as other crypto exchanges have. He said the cloud had helped established crypto exchanges scale very, very quickly, but was too slow and unreliable for professional traders.

Market makers hate this, it creates a lot of risk for them, they can’t quote tight prices, he added.

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As the smoke clears, some executives see two markets developing; a less deep, retail-oriented, with large spreads between buying and selling prices, and a deep institutional, where prices are more competitive.

Usman Ahmad, Managing Director of Zodia Markets, said that as the crypto industry grows, this could lead to a disparity in spreads between institutions and retail. [and lead to] institutions paying a tighter spread in a more liquid market.

It will be a two-tier structure, with Binance being the face of retail, Chhugani said.

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