After years of on-and-off enthusiasm about cryptocurrencies, Wall Street is again aflutter now that the SEC has approved the creation of exchange-traded funds tied to bitcoin. The move, which will make bitcoin even more accessible to Main Street investors, puts fresh pressure on Wall Street firms to communicate with retail clients about the benefits and risks associated with the often-misunderstood financial instrument.
Recent history is replete with financial-services leaders dismissing digital assets even though big banks were never completely turned off from the idea of decentralized finance. In 2014, a consortium of nine financial institutions including the likes JPMorgan, Goldman Sachs and Credit Suisse pledged to find ways of leveraging distributed ledger technology in everyday finance. While some of those big names have since departed, the group known as R3 now consists of more than 100 of the world’s top banks, insurers, and infrastructure providers. Moreover, former Wall Street traders and quants currently populate many of the industry’s largest crypto exchanges.
Although the SEC had already previously approved ETFs tied to bitcoin futures contracts, this new ruling allows Wall Street firms to develop exchange-traded funds that invest directly in the cryptocurrency. It paves the way for an entirely new group of investors to add crypto exposure, just as they would for stocks or bonds. For financial-services firms, the move carries the promise of big trading fees. For example, Standard Chartered has said it expects more than $100 billion in bitcoin ETF inflows by the end of the year.
Yet the SEC’s decision also carries communications challenges for both the agency and the Wall Street firms. For one, there’s the newfound need to provide public assurances that they are proactively policing the market and the privacy concerns that come along with it. Additionally, the enhanced mainstream access to bitcoin will require financial-services companies to double down on investor education to ensure consumers are aware of the upsides and risks to holding crypto in their 401(k).
Wall Street firms may also find themselves defending their decision to create these new ETFs, which are somewhat antithetical to the idea of decentralized currency. Bitcoin purists may scoff that that a sizeable volume of bitcoin will soon be locked away in buy-and-hold accounts instead of being used in peer-to-peer transactions.
Despite the potential challenges, the SEC ruling is undoubtedly a milestone for crypto enthusiasts and the industry they seek to disrupt. The SEC’s decision to give a green light to bitcoin ETFs, combined with the enthusiasm of Wall Street banks to attract these new investors, shows the promise of crypto is once again back in the spotlight.
Kevin Sajdak, Vice President, (kevin.sajdak@edelmansmithfield.com)