TradFi firms wading deeper into crypto waters despite regulatory uncertainty

Despite the Securities and Exchange Commission’s crackdown on prominent participants in the industry, many traditional finance giants remain undeterred in their pursuit of crypto-related opportunities.

Though regulatory clarity will be key for such companies, industry watchers said, financial heavyweights look to utilize their regulatory muscle and large client bases to move deeper into crypto in a bid to help shape the future of finance.

Since the SEC sued Binance and Coinbase, competing exchanges have delisted tokens that the SEC deemed securities, including Robinhood, eToro, and Bakkt.

The SEC kicked off 2023 with a lawsuit against Gemini and Genesis for allegedly mishandling customer funds. It telegraphed its lawsuit against Coinbase by slapping the company with a Wells notice in March.

Despite the SEC’s ramp-up of enforcement actions in the space, certain TradFi firms are staying the course — seemingly viewing the space as a long-term play.

BlackRock, Deutsche Bank, Citadel Securities continue crypto journeys

BlackRock, a fund group with $9 trillion in assets under management, filed with the SEC to create a spot bitcoin ETF last week.

EDX Markets, a crypto exchange designed for institutional investors, launched on Tuesday with the backing of Citadel Securities, Fidelity Digital Assets and Charles Schwab. Noticeably compliant with the SEC, it only offers four assets on its trading platform: bitcoin (BTC), ether (ETH), litecoin (LTC) and bitcoin cash (BCH).

Newsletter

Subscribe to The Breakdown

Also this week, Deutsche Bank applied to Germany’s financial regulator to provide crypto custody services, joining more crypto-native companies including Berlin-based Finoa and Bitpanda.

Spokespeople for Deutsche Bank and Citadel did not immediately return requests for comment about potential future offerings. BlackRock declined to comment.

CK Zheng, former head of valuation risk at Credit Suisse and co-founder of crypto hedge fund ZX Squared Capital, said that traditional industry players are increasingly recognizing the enduring presence of bitcoin. He went on to argue that the asset has already entered a new bull market cycle.

Bitcoin’s price is up nearly 16% from seven days ago — leading to a brief breakthrough Wednesday at $30,000. The asset peaked at nearly $70,000 in November 2021.

TradFi confident despite regulatory challenges

But traditional finance players such as BlackRock, Deutsche Bank and the backers of EDX Markets aren’t venturing into crypto on a whim, according to Jeff Feng, co-founder of Sei Labs.

Feng noted these companies have spent time understanding the long-term benefits of blockchain and digital assets — such as faster and cheaper cross-border transactions, financial inclusivity, and greater transparency.

BlackRock CEO Larry Fink said last year he believes the tokenization of securities is “the next generation for markets” — adding in a March letter that such offerings could drive efficiencies, shorten value chains, and improve cost and access for investors.

Roger Bayston, head of digital assets at Franklin Templeton, said blockchain technology is set to be “transformational” for capital markets. The firm has a mutual fund that utilizes the Stellar and Polygon blockchains and is exploring other ways to utilize such tech.

Others such as Fidelity and State Street have business units dedicated to the crypto space — with the former launching crypto-related ETFs and creating metaverse experiences.

“Their movements in this space signify a proactive approach toward innovation, aimed at shaping the future of finance while leveraging their resources and institutional strength to comply with regulatory standards,” Feng told Blockworks.

He added the finance giants have decades of experience operating in heavily regulated environments and are likely confident in their ability to manage potential regulatory risk.

But as large financial institutions look to move further into the crypto segment “to fill the voids created by the last bust,” he added, regulatory uncertainty in the US remains a hurdle.

A clear definition of which crypto assets are securities, commodities — or if they constitute as something else — will be key. The moment a regulatory framework is established, TradFi companies will bring financial products and services to crypto “in full force,” Zheng said.

Such intentions set up the opportunity for traditional companies to use their wide institutional client bases to snag opportunities from crypto-native firms, according to industry watchers.

They might also look to partner with or buy promising crypto companies as a way to fast-track crypto-related offerings. These could range from trading platforms to digital asset management and custody solutions.

“Many of these firms saw that Robinhood was able to disrupt the brokerage industry with zero-commission trading this decade and want to be in a position to benefit from the global adoption of cryptocurrencies,” Feng said.

Get the news in your inbox. Explore Blockworks newsletters:

The Breakdown: Decoding crypto and the markets. Daily.
Empire: Crypto news and analysis to start your day.
Forward Guidance: The intersection of crypto, macro and policy.
0xResearch: Alpha directly in your inbox.
Lightspeed: All things Solana.
The Drop: Apps, games, memes and more.
Supply Shock: Bitcoin, bitcoin, bitcoin.