Wall Street Banks Seen as Unlikely Saviors as Crypto Firms Struggle

It took years for the crypto industry to gain trust – and capital – from the major institutional players on Wall Street. But just as more big traditional players seemed on the cusp of making a move into fast-growing blockchain markets, the messy collapse of Sam Bankman-Fried’s crypto empire has renewed comparisons of the digital-asset industry to the Wild West.

As the Welsh poet Robert Williams said, “Trust is the easiest thing in the world to lose, and the hardest thing in the world to get back.”

But one question now is whether big banks might see the crypto industry’s latest troubles as an attractive opportunity to nose into blockchain-based markets.

In May of this year, U.S. banking giant JPMorgan Chase signed two popular crypto exchanges as clients, a sign that Wall Street is starting to accept cryptocurrencies, at least to the extent it sees value in them for its own future.

Might some major banks be looking to step in as savior in times when the industry is struggling, just as John Pierpont Morgan once rescued the banking industry in the early 20th century, prior to the creation of the Federal Reserve? (The Fed, which famously saved Wall Street from collapsing during the financial crisis of 2008, does not stand behind the less-regulated crypto industry.)

Experts say it’s unlikely.

“Banks are the natural enemy of the crypto industry because they both sell purportedly the same product line, so it’s unlikely that they would be willing to step in to assist the industry,” said Dick Bove, Odeon Capital Group chief financial strategist.

In a press statement following the collapse of crypto exchange FTX, the Bank Policy Institute, which represents big banks, said that “as FTX files for bankruptcy after failing to secure a bailout, policymakers should ensure they do not embed crypto firms in the heart of the financial system by giving them Fed accounts."

If they did, "the next crisis in the crypto-verse could threaten financial stability,” according to the statement.

Banks, however, have gotten increasingly interested and tried to get a foothold in the crypto industry. Besides JPMorgan, crypto-friendly banking institution Silvergate Bank signed over 850 digital currency customers, including 61 exchanges, 541 institutional investors and 248 other customers.

“The banks that are in this business are going to say, ‘It’s not going to cause a problem for us,’ and the ones who aren’t in it will say, ‘We told you so,’ but they’re not going to be of any help,” Bove said.

Silvergate’s stock is down 10% in November, after it announced that it had exposure to failed crypto exchange FTX. As of Sept. 30, the bank had a total of $11.9 billion in deposits from all digital asset customers, of which FTX's was less than 10%.

U.S. exchanges also might be out of the game.

“For heavily U.S.-regulated exchanges, I doubt that Wall Street would be interested,” said Jim Bianco, president and macro strategist at Bianco Research. “For offshore exchanges, their regulator would probably force them to resign if they touched any of them.”

He says traditional banks don’t understand the crypto business well enough to take the risk of jumping in.

Regulators might be reluctant to allow big Wall Street firms to swallow a big crypto firm, with so many officials at the state and federal levels so vocal on the risks from the digital-asset industry. However, Congress has been slow to create a broad regulatory framework that would embrace crypto as part of the existing financial system.

Wall Street banks probably don't mind too much watching the crypto industry founder, Bove said.

“Banks aren’t worried about the crypto industry breaking away” right now, he said. “Just about every major bank knows how to create its own tokens. If it wants into the industry it is not hard to get there. What the banks want is to avoid their core business from being cannibalized.”

CORRECTION (Nov. 18, 2022, 2:54 a.m. UTC): Notes Silvergate's aggregate deposits from digital asset customers and corrects FTX's share of this total.