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The institutions are here

I’m pretty sure I’ve been saying this for a while, but Wall Street has figured out their play in the crypto markets. I can’t be sure because I can’t remember what we published last week, let alone something I should have written several times over the past year or so. It’s nice to have back up to my view, though, in the form of the most recent crypto adoption report from Chainalysis.

A key catalyst was the approval of exchange-traded funds based on spot Bitcoin and Ether earlier this year. And in that arena, BlackRock has dominated, as it dominates in other more-traditional ETF markets. Reading the Chainalysis report this week, though, something jumped out at me. The firm, the largest asset manager in the world with $11.5 trillion under its purview, began integrating Bitcoin and Ether into its Aladdin trading platform in 2022. So what?

Aladdin is probably the second-most important piece of financial-market infrastructure after the Bloomberg terminal. It ties together BlackRock’s thousands of customers across 100 countries, allowing them to trade any market – public or private. That means, in just one example, that BlackRock is de facto a whale in any market it trades in, therefore getting better pricing and doing things very few other investors can do. It doesn’t get more trad-fi than BlackRock and Aladdin.

I take this to mean that a substantial base is in place for crypto markets to move forward. What’s unclear is where the adoption is going to break through. For now, crypto is for the initiated. Decentralized finance projects are interesting but haven’t met a need. The most widespread crypto adoption has come from stablecoins, which are many times tied to national currencies like the U.S. dollar.  

At the most basic level, stablecoins serve as a substitute for, say, the dollar in blockchain-based transactions. While there is a lot of trading in crypto that’s between one coin and another, there’s just as much where one leg of the transaction needs to be a currency of some kind. In the absence of a digital U.S. dollar, a stablecoin like Tether is a great stand in. Another benefit is the lack of volatility in a digital asset.

Still another is how profitable stablecoins can be. Companies like Tether and Circle, which issues USDC, are basically sitting on enormous piles of cash – the cash that backs the digital stablecoin – which are there’s to invest in high-yield securities like U.S. Treasuries. It’s why both companies make billions in profit every year.

It should be no surprise to readers of this newsletter that the U.S. regulatory framework for crypto is a dumpster fire. Chainalysis noted this in its report in a section about stablecoins.

“Regulatory uncertainty in the U.S. is threatening the country’s leadership in the stablecoin space,” Chainalysis wrote. The European Union, the United Arab Emirates, Hong Kong and Singapore all have the jump on the U.S. when it comes to a crypto regulatory framework, the firm said, and legislators could take a lesson from one of my favorite old financial products, the Eurodollar.

That’s what’s referred to as U.S. dollars held outside the country, and was turned into a nifty and very popular futures contract by the Chicago Mercantile Exchange back in the day.

There are hopes for stablecoin legislation that is making its way through Congress. Let’s hope politicians in the U.S. take note of what bankers in the U.S. now know. Crypto is here and needs to be given a proper set of rules. – Matthew Leising, editor in chief, Decential Media

Have you read the definitive history of Ethereum? No? Well then get your copy of Out of the Ether while you can.