Open the door, Wall Street is knocking
Crypto is proud of being a relatively closed club — but letting traditional finance in could help speed up adoption
4Max/Shutterstock modified by Blockworks
Crypto is dead, long live crypto!
Just as the SEC’s crackdown on exchanges Binance and Coinbase cast a dark cloud over the crypto space, the announcement from BlackRock that it would file for a bitcoin ETF sparked hope in the markets for the heavily-scrutinized industry.
Following in the footsteps of the world’s largest asset manager, Fidelity, Charles Schwab and Citadel announced last week the launch of a new digital asset marketplace, EDX Markets. Together, these announcements were enough for bitcoin to rally, with the price hitting a new high for June as investors reacted to institutional adoption.
Not everyone is so excited about this rebound — large-scale investments in crypto by traditional finance giants have caused many to speculate on their motivations. Some wonder if this is a sinister attempt to steal the industry away from crypto-native firms that have been ravaged by numerous scandals and regulatory battles in the past year.
The voices of those vetted investment titans calling cryptocurrencies a scam just a few months ago — while simultaneously building core infrastructure to integrate cryptos in their portfolio — could also be seen as problematic.
But to be more optimistic, if even top-notch bankers turn from skeptics into believers, this could be the beginning of a budding relationship between the two sectors, together helping make crypto a more respected asset class.
On the one hand, crypto-native firms need the legitimacy of traditional finance institutions to appeal to regulators and mainstream investors. On the other hand, traditional finance needs the experience and cultural influence of crypto natives to guide their entry into the burgeoning industry.
It is in the interest of both parties to join forces as crypto looks to achieve mainstream adoption.
Traditional finance could drive the next bull run
The last bull run was bolstered by an influx of institutional interest in digital assets, with key players like JPMorgan introducing a digital token in 2019 and ‘Cryptocurrency Exposure Basket’ (similar to an ETF) in 2021, offering a gateway to crypto for mainstream investors. In the fourth quarter of 2022, following the collapse of FTX and other scandals, venture capital investment in crypto dropped to its lowest level in two years, coinciding with a major exodus of mainstream users.
This is important because institutional adoption continues to drive retail investment. A recent study by EY found that 90% of digital asset investors surveyed would be more confident having the backing of a traditional finance institution to manage their crypto investments, demonstrating users’ trust in these firms.
Investment from big banks and asset managers is particularly important in the current climate. The industry continues to recover from the most recent crypto winter, which brought about market uncertainty and regulatory scrutiny.
Projects that are backed by traditional finance institutions, which have more resources and a diverse portfolio of assets, are perceived as less risky and therefore more likely to attract venture capital.
Structures and procedures from the banking industry will sooner or later find their way anyway into the crypto space, be it by regulatory requirements or sheer necessity. Having established, trusted banks entering the sector will likely improve the effectiveness of the market.
A new home for crypto talent
Rather than usurping crypto-native firms, increased investment from traditional finance could give this industry the wings it needs to fly.
The crypto winter was characterized by widespread layoffs, which devastated a generation of developers and crypto talent. On the bright side, institutional adoption will (at the very minimum) drive demand for experienced professionals. The entry of mainstream players into the industry has already provided new career opportunities for this cohort, with Visa opening up a new crypto division, seeking developer talent, and Fidelity setting an ambitious goal of 500 new team members for their crypto unit.
This expansion of career opportunities will help drive innovation in the long term, keeping talent within the industry. Backed by venture capital and ample resources, this community is likely to flourish.
Maintaining first principles
While investment from traditional finance is definitely noteworthy, industry leaders need to keep in mind crypto’s roots, and why this asset class was created as an alternative to traditional finance — which can be characterized in many ways as inaccessible, undemocratic or even outright corrupt.
Born out of the ashes of the 2008 recession, early adopters of crypto sought to build user-centric platforms, encourage peer-to-peer transactions and make financial services available to historically underserved communities. Many crypto projects have adopted a democratic organizational approach, going as far as implementing an entirely new structural approach in the form of a DAO.
Read more from our opinion section: DeFi degens and finance bros: Let’s be friends
The importance of culture in the crypto industry will be a challenge for traditional finance players entering the space. Crypto natives still make up the majority of users, and these individuals have deeply held values that guide their decision-making. This is all the more reason why big institutions will need to partner with native projects in the space to gain trust from the crypto-savvy community and avoid a “clash of clans.”
With all this in mind, a partnership between crypto natives and Wall Street veterans could have a mutually beneficial influence, with traditional players rethinking their own systems and consumer approach — the result being greater financial freedom and accessibility for all.
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