TradFi Will Push The Next Leg Of Crypto Adoption

Even as the Securities and Exchange Commission continues to fine, sue and crackdown on crypto exchanges, stablecoin issuers and many crypto-native firms, a silver lining for crypto adoption has emerged. With bitcoin (BTC) cracking $30,000 for the first time since April, and although this is still significantly down from all time highs, market sentiment and interest in crypto assets continues to shift in a positive manner. Something that might be overlooked, however, is that a cause for this recent rally is not connected to crypto firms or crypto-native firms.

Ironically enough this recent rally in the price of bitcoin and other crypto assets is being caused in large part by the traditional financial institutions that crypto was originally designed to disrupt. Recent efforts include the filing for a bitcoin ETF by Wall Street heavyweights such as Blackrock, Invesco and WisdomTree, and the continuing rollout of enterprise blockchain solutions and deposit tokens by the largest U.S. bank, J.P. Morgan.

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Outside of the bitcoin maximalists, whose vision for a bitcoin-only world looks less likely for the time being, this news should be celebrated by investors, developers and entrepreneurs in the crypto assets. Even while under the barrage of near constant regulatory pressures from U.S. regulators and a negative environment from U.S. policymakers, the adoption and integration of crypto assets into financial markets continues to move ahead. Specifics of these endeavors vary from institution to institution, but the underlying trend is same; traditional finance is embracing crypto in a big way.

Let’s take a look at a few of the reasons why, despite the ongoing regulatory crackdowns, TradFi holds the key to the next leg up for crypto assets.

Institutional Access And Clients

Financial markets, especially traditional equity and debt but increasingly including crypto, are dominated by institutional traders, large pools of capital and the products and services that are developed by these firms. For example, Larry Fink, the CEO of Blackrock, has long been a proponent and supporter of the tokenization of financial assets, calling them a trillion-dollar opportunity going forward. Admittedly, the total number of clients anticipated to invest in these initial products—assuming they are successfully approved—is limited. The institutional investment and expertise brought to these conversations will only assist in these efforts.

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Building on this last point, the long list of proposed bitcoin and crypto ETFs that have been denied by the SEC have one thing in common—they were all proposed by crypto-native firms. Given the ongoing crackdown by the SEC on these crypto-native exchanges and organizations, it seems like the best approach for the sector would be to embrace this TradFi interest in crypto. Even though these organizations might have been perceived as the enemy of crypto innovation by some, the access and experience such institutions bring to the table will prove invaluable.

Better Centralized Exchanges

Centralized exchanges in the crypto space do not have a good track record, to put it mildly; the collapse of FTX continues to 1) cast a long shadow over the crypto sector at large and 2) influence the regulatory decision making process in both the United States and abroad. Addressing these concerns will be a multi-year process, and launching a new centralized crypto exchange would most likely only lead to new questions and scrutiny from regulators. Yet again, this has provided an opportunity for traditional financial institutions to get into the crypto asset sector in a major way.

In addition seeing the submission of application for bitcoin ETFs by some of the largest financial firms in the world, also saw the launch a new centralized crypto trading exchange. EDX Markets, backed by Fidelity Digital Assets, Charles Schwab and Citadel Securities. A question that is reasonable to ask is how such a centralized exchange would operate differently from exchanges that have failed (like FTX), or are actively being sued by the SEC (like Coinbase).

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Addressing these concerns, EDX Markets CEO Jamil Nazarali has stated that the company will be different from other crypto exchanges by not offering custody services for customer assets. Instead, reflecting the TradFi influence over this exchange, users will have to go through other financial intermediaries to buy and sell crypto assets. Separating the exchange and broker dealer function—the thinking seems to be—will lead to a more receptive regulatory environment.

More Transparency And Consistency

Perhaps the biggest benefit and upside of increasing the interest and investment of TradFi in the crypto space is the benefits that will come from working with large incumbent institutions in a collaborative manner. Even though incumbent banks and other financial institutions are routinely fined for any number of activities, the reality is that bringing these firms into the crypto space will bring transparency and consistency to how data is reported and managed.

Regulation and more compliance requirements might not be in complete alignment with the original idea of crypto, nor align directly with the idea of moving fast and breaking things, but when handling customer hands, safeguards are difficult to overdo. Especially in the aftermath of FTX—and the issues that other exchanges are having—looping in established and entrenched firms will most likely prove a stabilizing presence in the market.

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TradFi is coming for crypto and that might be the best thing for long-term market development.