Coinbase, Genesis and BitGo are all talking to Wall Street's biggest banks about crypto custody

Crypto's emerging prime brokers are starting to get the attention of Wall Street's largest banks. 

During a webinar hosted by The Block, representatives of BitGo, Coinbase, and Digital Currency Group's Genesis Global Trading discussed the nascent market for crypto prime brokerage, which spans custody, trading, and lending services. All three firms officially jumped into the market this spring. 

There's still a lot of work to be done by all the firms aiming to develop and participate in a mature crypto prime brokerage market, Genesis Global Trading CEO Michael Moro said during the panel.

"There's a roadmap, there's a path, but it'll probably take a good couple of years for everyone to figure out how everything kind of works," he said. "And we are all at different stages because we all started at different places."  

At the moment, all three companies are looking to expand their offerings beyond their core competencies. Each panelist — Genesis' Moro, Greg Tusar of Coinbase, and Nick Carmi of BitGo — confirmed that they have held conversations with bulge bracket banks about serving as sub-custodians.

Spokespeople for Coinbase, Genesis, and BitGo all declined to comment further on these conversations. But the fact that they are happening shouldn't come as a surprise. The Block recently reported that JPMorgan has held conversations with a number of crypto firms — including Paxos and Fidelity Digital Assets — about crypto sub-custody. The arrangement would allow banks to offer crypto to their clients without having to purchase a custody provider or build their own in-house technology. 

Coinbase's Tusar said some of the firm's clients want custody and some want financing. "The recent OCC announcement also brought the potential for banks to come to play," he added. In July the U.S. bank regulator opened the door for national banks and federal savings associations to custody crypto.

Coinbase's prime business recently won the business of publicly traded business intelligence firm MicroStrategy, which it helped purchase $425 million in bitcoin through its execution services. Publicly traded companies looking to follow MicroStrategy's lead and allocate a portion of their balance sheet to bitcoin represent one category of clients now showing up at crypto prime brokerage desks, according to Tusar. 

"There are a number of very cash-rich companies that are interested in diversifying their treasury holdings, have a fundamental macro view on the dollar and are investigating bitcoin," he said. 

A Coinbase spokesperson declined to comment on what the pipeline of such deals looks like. But Genesis's Moro predicted during the webinar that more than 250 public companies could follow in MicroStrategy's footprint over the next year. 

Off the starting blocks

Meanwhile, as Moro noted: Genesis, Coinbase, and BitGo are starting the prime brokerage race from different places.

BitGo is one of the largest and longest-operating custodians in the digital asset market. Genesis Global Trading is one of the largest over-the-counter trading desk. Coinbase, one of the largest cryptocurrency exchanges, entered the prime brokerage market in earnest via the acquisition of New York startup Tagomi.

Now, in many respects, the firms are heading in the same direction: All three are looking to lure large investors, hedge funds, and corporates in need of certain parts of the prime brokerage bundle. 

Still, there is one key aspect of traditional prime-brokerage that the crypto firms are missing: cross-margin finance. The service, which is offered by prime brokerages to hedge funds, allows an investor to leverage margin across several different trading accounts.

Tusar said cross-margin finance will take some time to enter the market and will require more advanced risk-management tools. "I think it is going to take some time before someone is in the position in having the right risk management, the right derivatives expertise, in place together with custody all packaged together."

Moro added that the lack of sufficient capital and credit in the crypto market is contributing to the hurdles in launching cross-margin. "The number one thing is the availability of capital: It's how much liquidity and capital can be injected to support a cross-margining ability to support a prime brokerage model."

"At the end of the day, these problems can't be solved by one firm," said BitGo's Carmi. He stressed collaboration throughout the discussion, noting that although each firm is in the business to make money, it's also because they "believe in this market and want to make it more adaptable and more streamlined." 

"The three of us can't solve this problem," Carmi said. "You need the exchanges. You need the single dealer platforms."

Carmi thinks the market might develop similar to the way the fixed-income prime brokerage market, in which he worked during the late 1990s, emerged.

"When we were looking to launch prime brokerage at Credit Suisse, everyone [was] doing equity prime brokerage and we got together with Bear Stearns and Morgan Stanley. And we sat down and 'OK, what do we do here? How do we replicate equity prime brokerage?'"

Back then, "there was collaboration between the banks," Carmi said. "But there was fierce competition on the sales side."

Watch the webinar here: