Wall Street gets ready to compete with established crypto companies

Traditional financial institutions such as Standard Chartered, Nomura, and Charles Schwab are entering the cryptocurrency market by creating or supporting separate crypto companies that offer exchange and custody services. They believe that fund managers will prefer established and trusted brands over the opaque cryptocurrency exchanges that dominate the sector. Despite the price crashes and failures of companies like FTX, Celsius, and Voyager, these institutions are confident that fund managers still have an interest in trading cryptocurrencies.

Gautam Chhugani, senior analyst of global digital assets at Bernstein, stated, "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." The allure of cryptocurrencies has increased due to significant price increases in popular coins like bitcoin and ether.

Alexandre Birry, chief analytical officer for financial services at S&P Global Ratings, mentioned that many institutional players are testing different activities in the crypto market to gain experience and explore further growth avenues. These newcomers are competing with dominant players like Binance and Coinbase, banking on their finance industry expertise and untarnished reputations to attract users.

EDX Markets, backed by Charles Schwab, Citadel Securities, and Virtu Financial, aims to provide a trading platform that offers comfort and familiarity to traders. Similarly, Standard Chartered has supported Zodia Markets and Zodia Custody to facilitate exchange and custody services.

In contrast to the original structure of the crypto industry, these large institutions are building infrastructure that separates trading and custody functions. This separation aims to reduce risk and conflicts of interest, as demonstrated by the collapse of FTX and Alameda Research, which were closely linked. Custody has become a straightforward way for traditional finance groups to expand their presence in the crypto market, ensuring secure storage of assets to protect against hacks or theft.

Michael Safai, co-founder of Dexterity Capital, expressed concerns about the lack of separation between custody and exchange functions, stating that it is unappealing and unsettling. Companies like BNY Mellon and Fidelity already have their own digital asset custody arms, and Nasdaq is awaiting regulatory approval to launch its own service.

A recent survey by consultancy EY-Parthenon found that half of the asset managers surveyed would switch from crypto-native groups to traditional-backed companies offering similar services. Additionally, 90% expressed trust in traditional financial groups acting as custodians for their crypto tokens.

According to S&P's Birry, crypto custody is often the initial step for traditional institutions as it is safer and foundational. However, existing crypto exchanges remain a significant source of liquidity, and it will take time for new companies to gain market share. Some executives believe that two markets will emerge in the crypto industry: a shallow, retail-facing market with significant price discrepancies and a deep institutional market with more competitive prices.

The involvement of traditional institutions in crypto is expected to bring more transparency and convergence in pricing, addressing concerns about execution quality and pricing on certain exchanges. However, Bernstein's Chhugani emphasizes that existing crypto exchanges remain crucial for liquidity. The Wall Street-backed firms are adopting a more traditional approach to building their infrastructure, deliberately avoiding cloud computing technology used by many crypto exchanges due to concerns about speed, reliability, and risk for professional traders.

Usman Ahmad, chief executive of Zodia Markets, suggests that the development of the crypto industry may lead to different spreads between institutions and retail investors, with institutions paying tighter spreads in a more liquid market. Chhugani predicts a two-tier structure with Binance representing the face of retail in this evolving market.

By fLEXI tEAM