The crypto industry took years to earn the trust – and capital – of major institutional players on Wall Street. And just as larger traditional players appear on the cusp of moving into the booming blockchain market, the collapse of Sam Bankman-Fried’s crypto empire has renewed comparisons of the digital asset industry to the Wild West.
As the Welsh poet Robert Williams said, “Faith is the easiest thing in the world to lose, and the hardest thing in the world to regain.”
But one question now is whether big banks might see the crypto industry’s recent troubles as an attractive opportunity to enter the blockchain-based market.
In May of this year, US banking giant JPMorgan Chase signed two popular crypto exchanges as clients, in a sign that Wall Street is beginning to embrace cryptocurrencies until it sees its value for their own future.
Could it be that some of the major banks want to step in as rescuers at times when the industry is struggling, just as John Pierpont Morgan himself once rescued the banking industry in the early 20th century, before the creation of the Federal Reserve? (The Fed, which famously saved Wall Street from collapse during the 2008 financial crisis, is not standing behind the deregulated crypto industry.)
Experts say it’s unlikely.
“Banks are the natural enemy of the crypto industry because they both supposedly sell the same product line, so there’s no way they’re willing to help the industry,” said Odeon Capital Group chief financial strategist Dick Bove.
In a press release following the fall of crypto exchange FTX, the Bank Policy Institute, which represents the big banks, said in a statement that “as FTX files for bankruptcy after failing to secure a bailout, policymakers should ensure they do not embed crypto firms at the heart of the financial system by giving them Fed account.”
If they do, “the next crisis in the cryptoverse could threaten financial stability,” according to the statement.
Not a problem
Banks, however, have become increasingly interested and trying to gain a foothold in the industry. In addition to JPMorgan, crypto-friendly banking institution Silvergate Bank signed up more than 850 digital currency clients, including 61 exchanges, 541 institutional investors and 248 other clients.
“Banks that are in this business will say, ‘It won’t cause us any problems,’ and those that aren’t involved will say, ‘We told you so,’ but they won’t go away. to help,” said Bove.
Silvergate shares fell 10% in November, after it announced it had exposure to the failed FTX crypto exchange. As of September 30, the bank had a total of $11.9 billion in deposits from all digital asset clients, of which FTX was less than 10%.
US exchanges may also be out of the game.
“For a US-regulated exchange, I doubt that Wall Street will be interested,” said Jim Bianco, president and macro strategist at Bianco Research. “For offshore exchanges, their regulators will probably force them to resign if they touch any of them.”
He said traditional banks don’t understand the crypto business well enough to take the risk of jumping in.
It goes without saying that regulators may be reluctant to let big Wall Street firms swallow big crypto firms, with so many officials outspoken about the risks from the digital asset industry. They are slow to create a broad regulatory framework that will accept crypto as part of the existing financial system.
Wall Street banks may not mind too much seeing the crypto industry flounder, Bove said.
“Banks aren’t worried about a fragmented crypto industry” right now, he said. “Almost every major bank knows how to create its own token. If it wants to enter the industry, it is not difficult to get there. What banks want is to prevent their core business from being eaten away.”
CORRECTION (Nov. 18, 2022, 2:54 am UTC): Note Silvergate’s aggregate deposits from digital asset clients and correct the FTX portion of this amount.