Yesterday JPMorgan JPM CEO Jamie Dimon found himself in the awkward position of having to admit that his clients are clamoring for bitcoin while in the same breath saying he was not a bitcoin supporter.“They want to be able to put it in statements, they want to buy and sell it, if we can help them do those things very very safely with all the proper disclosures,” said Dimon, speaking at the Wall Street Journal CEO Council. “Then that’s their job to decide what they’re going to do with their money.”
The reality is that for major banks to replicate what they have done in cash and derivatives markets they need scale which they woefully lack in crypto markets. Thanks to the steady crypto price increases the cost for banks to join the burgeoning cryptocurrency industry is now in the tens of billions of dollars.
For any bank to command a Bitcoin stash similar to that of New York-based Grayscale’s Bitcoin Trust (GBTC), it would require an investment of more than $33 billion. If New York-based venture capital firm Pantera Capital’s bitcoin forecast of $110,000 by the end of this year proves as accurate as past forecasts then that bank investment could soon rise to more than $70 billion. And that’s just for Bitcoin; banks presumably would want to make markets in multiple major cryptocurrencies.
As the global leader in US dollar trading, JPMorgan stands to lose prominence if a different set of currencies than the ones it dominates become popular. Even so, there’s little doubt that JPMorgan has the means to acquire a large name in the crypto world if and when it sees strategic value in doing so. Dimon’s reluctance to do much more than dabble in bitcoin is actually an opportunity for other banks.
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Some of the other Wall Street banks in the top-5 by investment banking fees earned (Goldman Sachs GS , Morgan Stanley MS , Citibank, and Bank of America BAC ) are giving clients access to crypto fund investing or are launching a trading desk. Other banks such as Bank of New York, State Street, and BNP Paribas are betting on crypto custody. The announcement last week that Boston-based custodian giant State Street is building the trading technology behind Pure Digital, a new multi-dealer trading platform, is a subtle but important cue that an unknown number of banks are finally taking one of the necessary steps to operate in crypto markets at scale.
Why do banks need a multi-dealer platform to trade crypto?
A multi-dealer platform (MDP) is a marketplace that lets multiple liquidity providers compete to give a ‘price taker’ the best price for the quantity requested. The simple reason banks might want such a platform is that they live in a hyper-regulated world where the usual palatable way to invest in something new is to share the risk with other banks. Another reason is that major market makers trade with each other on a bilateral basis and, like other institutional clients, are also accustomed to using MDPs for price discovery.
Why invest in a newcomer instead of trading at a regulated exchange?
The latest CME data shows that dealers banks held open bitcoin futures positions equivalent to 4,000 BTC – or 5% of all open interest outstanding compared to 45% held by hedge funds. Five percent is low compared to the 37% of euro-dollar futures that banks hold at the CME. The difference for this low bank participation in crypto futures is that asset managers – think pension funds – consume large quantities of euro-dollar futures but they don’t (yet) consume crypto derivatives the same way. Until that client-based demand ramps up, banks will continue to have a limited presence at the CME.
The reason is simple.
Banks don’t earn as much transactional revenue by trading at the CME as they do by trading with clients directly over-the-counter (OTC). Thus, MDPs such as Pure Digital or LMAX Digital, another regulated marketplace based in London, are some of the OTC venues that banks can use to satisfy clients who insist on getting multiple quotes before placing a larger trade.
One of the reasons why banks have survived as long as they have is because they adapt. They are typically not the first to develop cool technology, but as exemplified by Dimon’s candid remarks, banks know how to talk to clients and act pragmatically, always following the money.