TradFi Players Launch Their Own Crypto Platforms
Acknowledging the investment risks associated with largely unregulated crypto companies, titans of the traditional finance (TradFi) industry have made the strategic decision to enter the crypto market, launching their own platforms for digital assets.
Despite the volatility in the cryptocurrency sector and the bankruptcy of several companies, traditional financial institutions believe that there is a strong investor interest in crypto trading. The appeal of cryptocurrencies has been particularly evident since the beginning of 2023, with Bitcoin (BTC) and Ethereum (ETH) registering increases of 68% and 56% respectively (as of end-May 2023). Now, clients of investment firms are demanding more stringent security guarantees before they start trading in cryptocurrency.
In response, institutional players are carefully exploring various crypto activities, gaining market experience, and identifying opportunities for future growth. For instance, Charles Schwab, a banking and brokerage firm from Texas, Citadel Securities (one of the world's largest market-makers operating in 50 countries), and other leaders in the financial industry, have launched a highly liquid cryptocurrency ecosystem named EDX Markets.
Standard Chartered, a British bank, holds the majority stakes in its offspring - Zodia Markets exchange and Zodia Custody depository. At the end of April, Zodia Custody raised $36 million in a Series A funding round. The fund was led by the Japanese financial group, SBI Holdings, which subsequently became one of the depository's owners.
BNY Mellon, an industry titan, also operates its own division for digital asset custody. This holding company was created through the merger of The Bank of New York and Mellon Financial Corporation. BNY Mellon has depository assets totaling $41.1 trillion, and it manages $2.2 trillion.
In the United States, Fidelity Investments, one of the world's largest asset management firms, has created its own cryptocurrency custodian. In a similar move, Nasdaq is in the process of launching a project and is currently awaiting regulatory approval.
The large, pedigreed, traditional institutional investors definitely prefer dealing with counterparties who they know have been in existence for years and have been regulated in the traditional sense,says Gautam Chhugani, a senior global digital assets analyst at AB Bernstein, a New York-based financial services firm.
Custodial services, safeguarding crypto assets, have emerged as a strategic tool for conventional financial institutions to broaden their footprint in the crypto industry. While this activity may not be a significant revenue driver, its simplicity offers a robust point of entry into the nascent sector. It has also become increasingly apparent that many institutional entities are keen to segregate their crypto trading businesses from their custodial operations. This may well be due to lessons learned from the mishaps encountered by FTX and Alameda Research, two entities closely affiliated with Sam Bankman-Fried.
Naturally, newcomers to the traditional finance realm find themselves up against substantial competition from established crypto exchanges, which also cater to institutional clients.
Cryptocurrency exchange trade volume since the year's commencement, in trillion USD Source: Financial Times
Still, long-standing experience in traditional finance, a sterling reputation, and a lack of regulatory scrutiny are seen as significant advantages by crypto platforms backed by Wall Street. A case in point is a recent survey by EY, revealing that no less than half of the asset managers surveyed would readily switch from native crypto platforms to traditional firms providing comparable services. Moreover, the overwhelming majority of these respondents would entrust the storage of their tokens to a traditional finance entity.
Should Wall Street-backed crypto firms succeed in drawing institutional asset managers, it could pose a substantial challenge to the prevailing dominance of current exchanges.
