Institutional investors and developers in the Bitcoin space are increasingly looking to the exit after 2017’s crypto-mania is coming to a halt in terms of price. Once lauded to usher in the next wave of crypto products, financial heavyweights are stalling efforts to build infrastructure around the pioneer cryptocurrency, reported Bloomberg on December 23, 2018.
Bitcoin’s Down Ride
In early-2018, news about Goldman Sachs launching its bitcoin futures trading desk made the rounds and resulted in brief speculation for the upcoming institutional embrace of the volatile asset class. Similar reactions were observed among the broader cryptocurrency community when Morgan Stanley, Citigroup, and Barclays announced their interest in the space.
However, progress has been far from noticeable from all quarters, with most banks shunning questions on the subject and a few stating low-client interest has yet been shown. Some believe the bare-minimum interest in crypto-finance was assumed as a full-blown Wall Street offering, and the 2017 crypto-frenzy is all to blame.
Goldman remains the king of offering bitcoin products among its peers. The bank launched “non-deliverable forwards” on bitcoin, a type of derivative product, and was the first to clear bitcoin futures. It briefly considered setting up a custodial service for the top cryptocurrencies but ended up investing $15 million in bitcoin-focused custodian BitGo.
The bank has gained little interest from institutional clients on its derivative offerings and has only garnered interest from 20 investors. While most of the unpopularity can be attributed to falling crypto-prices and low investor sentiment, Justin Schmidt, head of Goldman’s digital asset trading business, blames regulatory scrutiny as a significant factor.
Schmidt’s concern is particularly telling. Regulators have been going back and forth to the drawing board with little revelations about possible policies, regulations, and advancements with regards to bitcoin trading. Such decisions may well be far-off, as lawmakers are still stuck on debating whether to define cryptocurrencies as a security or a commodity.
As a result, banks and traditional investment funds are highly cautious about their efforts in the industry, as crackdowns and criminal lawsuits are particularly unhelpful for either case.
Joining Goldman in its slowing quest for crypto-trading is Barclays, which announced client interest in cryptocurrency trading but has since been quiet on the topic. The bank had appointed two traders earlier in 2018 to head its digital asset trading business, but both individuals – Chris Tyrer and Matthieu Jobbe Duval – exited the project in September and November 2018 respectively.
The Bullish Case
On the bullish end, however, some institutions are simply putting their plans on hold, until there’s more demand for crypto-focused trading and investment products.
Morgan Stanley’s bitcoin swap tracking indices have been active since September 2018, as per sources close to the matter. Reportedly, contracts would be launched once there was “proven” client demand from institutional investors.
Citigroup, which has designed and launched crypto-finance products to fit within the U.S. regulatory structure, is still waiting on its first client. The bank offers the so-called “digital asset receipts” to enable trading of digital assets without direct ownership of the underlying currencies, in a move popularly referred to as trading “by proxy.”
As Ben Sebley, head of trading at crypto hedge fund NKB Group puts it:
“The more important story is all the infrastructure that’s being built now to enable institutional trading.”
Sebley is presumably referring to the efforts of financial powerhouses like Intercontinental Exchange and Fidelity Investments, which are scheduled to offer same-day physically delivered bitcoin futures and investment services for the burgeoning asset class respectively.
Another glimmer of hope is Yale University’s endowment fund which announced investments in crypto funds a16z and Paradigm in October 2018. The fund handles $30 billion worth of traditional assets and is said to be among the most influential in the trading world.