Wall Street banks 'shelved' crypto plans after 2018 crash, but insiders say they're gearing up for the next boom

Don't underestimate the banks' interest in crypto; that's the message from sources at Morgan Stanley, one of the richest institutions in the world.

It's almost difficult to believe after last year, when Bloomberg revealed four major banks had "quietly shelved" their bitcoin dreams. The banks planned to offer their giant clients a taste of crypto-derivatives trading - a safer way to get exposed to the asset class - but demand lapsed, and the banks retreated.

The interesting thing about "shelving" a product however, is that it's never too far from where you left it. 

“Morgan Stanley is completely ready. It could do [bitcoin swaps] tomorrow," said one source close to the firm, whose derivatives-offering has reportedly sat stagnant since last September.

The only thing they're waiting for now, they explained, is for just one large client to ask for the service. Then the final step would just be getting the brokers online and getting the launch signed off from the powers at be, normally decided at quarterly board reunions. 

"Believe you me, several banks could trade crypto or a derivative form [immediately] if they wanted," said another source close to the financial world, explaining that the infrastructure is built. "It's the same API. They have the same connectivity and price discoverability [offered on nearly all other futures].”

They added that in the meantime, "there's plenty going on behind the scenes," including building the necessary technology and partnerships with regulated exchanges, clients and brokerages, as well as solving questions around access, security, and future use-cases.

It's worth highlighting that while derivatives are on the horizon, sources at Goldman say the bank remains incredibly wary of trading "'physical' crypto." But insiders elsewhere say if demand were deemed sufficient, they would find a way to meet it, with the rise of Fidelity for instance offering new possibilities for custodianship.

"It just takes a major existing [high profile] client to say 'we want exposure to this product, why don’t you offer it," said one bank source, noting price action would likely renew interest. "We certainly don't want to be pushing it, we're not actively promoting it. But it's important to get the message to the right people [in the bank] and the right type of clients."

"Imagine one of the biggest hedge funds in the world saying they want 1% of their portfolio to be in bitcoin. The banks will be jostling to get in," says David Mercer, operator of institutional crypto exchange LMAX Digital, noting that most firms have privately overcome their initial scepticism around the asset-class itself.

"I'd be amazed if 3 to 5 banks don't start trading in the next 12 months," he added, noting that Q2 2019 had shown a promising resurgence in demand.

The bank role; who's doing what?

With so much supposed activity around digital assets, it's worth giving an overview on what each of the banks has up their sleeves. According to sources, "almost every player has something going on," but here are a handful of the biggest names we've caught up with.

The banks' focuses can be broken into three areas:

For now, the main appeal is for crypto derivatives products, as they do not involve storing the asset but rather just betting on its price.

That's currently led by Goldman. It already offers clearing of bitcoin CME futures and has launched non-deliverable forwards (NDF) tied to bitcoin; the first for a major bank.

Nonetheless, a spokesman told The Block this month that demand from clients has been rather low, with one source saying Goldman knows the product "isn't the one the market needs," and is back to the drawing board, led by Justin Schmidt in New York.

Meanwhile, Morgan Stanley has prepared to launch swaps tracking Bitcoin futures, as reported by Bloomberg. As noted above, it is yet-to-launch, but plans to allow clients to trade more varied swaps than current market-leader CME, which currently offers a one-size-fits-all futures contract of five bitcoins. But unlike Goldman, MS isn't planning on offering clearing of the futures, according to a person familiar with the matter.

The source also warned not to get overexcited about the firm's swaps offering: "I'm not sure it’s massively going to change the market. An ETF would be more significant.”

As for launching a full-blown trading operation tied to bitcoin, Goldman's CEO recently denied rumours they were ever in the works. Still, he didn't rule out launching one in the future and is likely to beat Morgan Stanley to the mark if it does happen, insiders admit.

"Morgan Stanley probably won't be the one to pull the trigger first," a person familiar with the matter said, explaining that the bank won't want to rock the boat until others go ahead. "It's normally 'wait and see what the others do'...If a major competitor starts to offer this sort of thing and does very well from that, it would be a big variable."

They added: “You don’t want to be left behind - no one wants to be last. Everyone wants to be second.”

These two banks are also looking beyond crypto trading. In December, Morgan Stanley's Andrew Peel told Bloomberg they were looking closely at tokenised securities, although adoption was still likely "years off." Goldman has also been vocal about extending outside of trading, writing in a job description it is looking to go “further than ever before” in the space, researching stablecoins and asset tokenization to improve settlement and clearing.

 2. Custody

The clear frontrunner in crypto custody is currently State Street. The 2nd largest custodian bank in the world currently has nearly a dozen people working on its digital assets team and is focusing on being a "fully-fledged, official banking [crypto] custodian", according to insiders. The aim is to allow large clients to rely on State Street to safeguard their assets (rather than an exchange), as well as offering other banks a secure and trusted avenue to purchase crypto from on their clients' behalf.

Indeed, sources at Morgan Stanley say the firm is more likely to be a client of State Street or Fidelity than to pursue its own crypto-custody solution. Goldman insiders shared similar sentiments, although the bank held talks with BitGo last year to white-label its bitcoin custody product.

A State Street spokesperson delivered the following (rather upbeat) statement:

"Institutional interest in crypto-currencies and related digital assets increased over the course of 2017 and continues today. In alignment with market demand, we are considering all appropriate service offerings that may be developed around the emerging crypto-asset class," they said. "We will continue to work closely with our clients to ensure we are aligned and ready to meet their needs as the market evolves."

3. Other

Barclays was rumoured to be setting up a crypto trading project last year, after two employees Chris Tyrer and Matthieu Jobbe Duval updated their LinkedIn profiles to mention a ‘digital assets project’. However, a source told The Block that the bank was unlikely to have officially signed off on Tyrer's and Duval's job titles, meaning they may have used a little "creative license" to change their online profiles without the bank's explicit permission.

"I believe what happened is they presented something [about crypto] to senior management and investigated it...rather than [the bank] actively recruiting someone for that role," a person familiar with the matter said.

In the meantime, Barclays seems to be focusing on offering banking services to the biggest crypto companies in the business, like Coinbase.

Elsewhere, Credit Suisse is focusing on blockchain, backing a DLT-based fund transaction processing system. Sources confirm it's steering well clear of trading crypto for now, allegedly resulting in an exodus of several traders for more crypto-focused roles - including Morgan Stanley's Andrew Peel. Still, in January, Credit Suisse's Emmanuel Aidoo changed his title Head of Blockchain to Head of Digital Assets and began reporting to the trading department; two subtle shifts that could prove insightful. 

Finally, JPMorgan insists it's still Bitcoin-phobic, with a spokesperson telling The Block last month:

"It would be completely inaccurate to say or report that we are possibly exploring or considering doing any work with bitcoin or other public crypto currencies."

In the meantime, JPMorgan is focused on its numerous blockchain projects, including the Interbank Information Network and its flagship JPM Coin stablecoin, which it is set to start trialling. The firm is also on a giant blockchain recruitment push, overseen by Oliver Harris, who became the firm's first "Head of Quorum & Crypto-Assets Strategy" in April last year.

But don't rule JPMorgan out when it comes to crypto trading, says one source. 

"Where Goldman goes, JPMorgan is never far behind. And the rest have to follow."