What Does It Mean That Incumbents Are Embracing Crypto?

Has Crypto Gone Legit?

It might have been easy in recent years for incumbents, mass market investors and generally the mainstream to dismiss cryptocurrency for several reasons. It’s volatile. It exists virtually. It’s all about anonymity. It’s not regulated. It cuts out the middleman. It was created by a community of  developers. For years, the virtual currency seemed more an underground fad than a true and legit financial resource. But that finally appears to be changing.

Crypto Gets Institutionalized

With the recent announcement from Goldman Sachs that they’ve teamed with billionaire Michael Novogratz to invest in BitGo, a startup that aims to help institutional investors securely store their cryptocurrency, crypto may no longer be the red-headed step child of finance. Between them, Goldman and Galaxy Digital Ventures are investing about $16 million in BitGo. And while this amount is a drop in the bucket for Goldman and Novogratz, it certainly indicates the incumbents taking crypto seriously and realizing their customers are looking for the option to not only invest but have a safe place to keep these investments.

“Greater institutional participation in the digital asset markets requires secure and regulated custody solutions…We view our investment in BitGo as an exciting opportunity to contribute to the evolution of this critical market infrastructure.” – Rana Yared, MD of Goldman Sachs’ Principal Strategic Investments

Coming to Play

Beyond security, Fidelity is taking it a step further, rolling out their own standalone company, Fidelity Digital Asset Services (FDAS). The world’s 5th-largest asset manager has established FDAS for their clients, hedge funds, and FIs to trade and store cryptocurrency. With $7.2 trillion in assets under management, 27 million customers and 13,000+ institutional clients, Fidelity might seem an unlikely candidate to hop on the crypto bandwagon, but they do spend $2.5 billion per year on technology, partially through incubators that house its artificial intelligence and blockchain projects.

It’s also an accessibility play. According to Fidelity Investments chairman and CEO Abigail Johnson, “Our goal is to make digitally native assets, such as bitcoin, more accessible to investors.” Because of their established reputation, and much like Goldman, many clients will likely feel more safe trading and storing with an incumbent over a startup. This is most certainly what Fidelity is banking on.

Will There be an Incumbent Snowball?

Beyond a handful of major players, there’s been a severe shortage of big, incumbent banks actually making the leap. According to Morgan Stanley’s research division, in a new report “Bitcoin Decrypted: A Brief Teach-In and Implications,” they’ve dubbed bitcoin a “new institutional investment class.” The amount of crypto assets under management has been increasing since January 2016, with $7.11 billion currently being stored by hedge funds, venture capital firms and private equity firms. This means if they aren’t already, the other big dogs are surely strategizing their own entry into the space.

According to Digital assets and regulation news outlet, five of the US’ biggest banks are interested in trading Bitcoin, if not already doing it. These include JP Morgan, Bank of America, Citigroup, Goldman Sachs and Morgan Stanley. Morgan Stanley announced a soon-to-be Bitcoin swaps service tied to Bitcoin futures and it plans to have a dedicated trading desk for digital asset derivatives.

But what could be holding them all back from diving headfirst is investor demand.

Don’t Count Out the FinTechs

So, while the incumbents might have the clout, they are also waiting to pull the trigger. This opens the door for FinTechs, especially since the SEC just made it easier for Fintechs to launch ICOs. Their new division, called the Strategic Hub for Innovation and Financial Technology (FinHub) will act as a central point for the securities regulator to interact with entrepreneurs and developers in the fintech space with a particular focus on distributed ledger technology (DLT), automated investment advice, digital marketplace financing and artificial intelligence. It’s doubtful that FinHub will invite a deluge of startups to the crypto party, but it does lend more credence to the virtual currency. Combining the regulation with the incumbent interest, it appears that we are likely talking tip of the iceberg when it comes to the future of cryptocurrency.