Major financial institutions are making significant new investments in the cryptocurrency space, injecting competition and momentum into the emerging sector amid increasing regulatory pressure in the United States.
BlackRock, the world’s largest asset management firm, has applied to launch a new exchange-traded fund (ETF) with Bitcoin as its underlying asset. At the same time, two other major asset managers—Fidelity Investments and Charles Schwab—are supporting a new cryptocurrency exchange established by Citadel Securities.
In addition, Deutsche Bank, one of the world’s largest lending institutions, has expressed interest in operating a cryptocurrency custody service to hold digital assets for its clients.
The backing of these established Wall Street players with proven track records is helping drive up the value of cryptocurrencies, especially Bitcoin. The world’s largest cryptocurrency reached a one-year high of $31,389 on Friday, surpassing the $30,000 mark for the first time since April. Year-to-date, Bitcoin has gained over 81%.
Other cryptocurrencies also saw significant rallies this week, including Ethereum and Avalanche’s AVAX token. The total market capitalization of crypto assets reached $1.2 trillion on Friday, a 14% increase from the previous week.
Growing Risks and Challenges
This renewed interest from mainstream financial institutions comes at a critical time for the crypto industry, which has been working to regain its footing since the collapse of the FTX exchange in 2022 and the subsequent regulatory crackdown.
Earlier this month, the U.S. Securities and Exchange Commission (SEC) filed lawsuits against two of the largest crypto exchanges globally—Coinbase and Binance—alleging that they allowed trading of unregistered digital assets on their platforms. This has raised new concerns that trading certain digital assets may become more difficult. Since the beginning of 2023, the SEC has charged 15 different crypto-related entities with violating securities laws.
A Shift in Sentiment
The mood within the industry shifted unexpectedly on June 15, when BlackRock—which manages over $9 trillion in assets—filed an application with the SEC to create a spot Bitcoin ETF. This type of fund would be tied directly to the value of the underlying digital asset, rather than simply tracking Bitcoin futures. Coinbase is slated to serve as the custodian of the Bitcoin holdings.
“We believe there is a role for institutional custodians to participate in the digital token economy,” said Joseph Chalom, BlackRock’s head of strategic partnerships, during a crypto summit hosted in collaboration with the Financial Times.
The value of Bitcoin surged following the announcement. Other institutional players, including Invesco and WisdomTree Investments, quickly refiled their own applications for spot Bitcoin ETFs with regulators.
Still, these efforts face significant hurdles. Since 2013, the SEC has rejected 27 applications to create a spot Bitcoin ETF, arguing that such products are susceptible to market manipulation. WisdomTree, for example, had its application denied in 2021. Grayscale Investments is currently suing the SEC after the agency blocked its attempt to convert its Grayscale Bitcoin Trust (GBTC) into a spot Bitcoin product.
Addressing Conflicts of Interest
Another positive development for the industry came this week with the launch of a new cryptocurrency exchange backed by Citadel, Fidelity, and Charles Schwab. The exchange, called EDX Markets, began trading operations after initially revealing its plans in late 2022.
EDX claims to eliminate “significant conflicts of interest present on many existing crypto exchanges.” It emphasizes a “non-custodial model” designed to reduce such conflicts. Rather than holding customers’ digital assets, EDX operates as a marketplace where buyers and sellers can transact directly with one another.
This model stands in contrast to the alleged misuse of customer funds that contributed to the collapse of FTX. The SEC has also accused Binance of misusing customer funds—allegations which Binance denies.
SEC Chairman Gary Gensler recently stated that the standard business model of crypto exchanges is “built on conflicts of interest, limited disclosure, and sometimes deception.”
Jamil Nazarali, CEO of EDX, noted in an interview, “FTX only confirmed our business model.” He added that EDX combines “the best of the digital world—24-hour trading, many of the innovations of blockchain—with the investor protections of traditional finance.”
EDX will initially support trading in four cryptocurrencies: Bitcoin, Ethereum, Litecoin, and Bitcoin Cash. None of these have been classified as securities by the SEC, which may help EDX avoid some of the regulatory challenges faced by Coinbase and Binance.
According to data from Cryptorank.io, the SEC has classified 55 cryptocurrencies as securities in various lawsuits. Both Coinbase and Binance allow trading of digital assets that the SEC considers securities, meaning those exchanges would need to register with the agency.
Coinbase is contesting the lawsuit and denies the SEC’s allegations. Speaking at a crypto conference in New York last week, CEO Brian Armstrong appeared confident about the company’s future. He suggested that within the next five to seven years, Coinbase could evolve into a “super app” similar to WeChat, which is used across Asia for everything from messaging and banking to food delivery.
“Despite some of the negative rhetoric and headlines, the industry is moving forward,” Armstrong said.
The Path Toward Clarity
Roger Balston, head of digital assets at Franklin Templeton, believes regulatory scrutiny is necessary for the industry’s long-term health. “Despite some bumps along the road, regulatory clarity is actually facilitating the adoption of standards and liquidity,” he told Yahoo Finance.
The involvement of major financial institutions signals a growing maturation of the crypto market and may help pave the way for broader acceptance and stability.
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Frequently Asked Questions
What is a spot Bitcoin ETF?
A spot Bitcoin ETF is an exchange-traded fund that holds Bitcoin directly. Its value reflects the real-time market price of Bitcoin, providing investors with exposure to the cryptocurrency without needing to hold it themselves.
Why are Wall Street firms entering the crypto market now?
Increased client interest, evolving regulatory frameworks, and the potential for long-term growth have encouraged major financial institutions to expand their crypto offerings. Many see current market conditions as an opportunity to establish a foothold in the emerging asset class.
How does EDX Markets reduce conflicts of interest?
EDX uses a non-custodial model, meaning it does not hold customer assets. Instead, it acts as a neutral marketplace where buyers and sellers transact directly, reducing the risk of misuse of funds.
What challenges do crypto ETFs still face?
The SEC has historically been hesitant to approve spot crypto ETFs due to concerns about market manipulation, custody issues, and investor protection. Each new application must address these concerns convincingly.
How does regulatory clarity help the crypto industry?
Clear regulations provide legal certainty, encourage institutional participation, enhance consumer protections, and help legitimize the cryptocurrency market as a whole.
Can traditional and crypto finance coexist?
Yes. Many institutions are working to integrate crypto services into traditional finance through custody, trading, and asset management products, bridging the gap between both worlds.