TL;DR: Uncover the evolving relationship between traditional finance ("TradFi") and its once-scorned successor: cryptocurrency. Once laughed out of boardrooms, crypto is now beginning to gain reluctant respect from finance's heavyweights. Discover why industry giants like BlackRock and JP Morgan are now dipping their toes into the crypto pool. Learn about the role public interest, clearer regulations, and internal benefits are playing in this shift. But remember, not all that glitters is digital gold. The transition is sure to be slow and calculated, driven by profit rather than an altruistic love for the technology. Dive into this riveting analysis of the intriguing intersection of conservatism and innovation in the finance world.
The Great Awakening?
Up until recently, anyone proclaiming that the traditional finance world—or "TradFi" as it's known—would soon embrace cryptocurrencies would've been met with incredulous laughter. Historically, the relationship between TradFi and its potential successor, crypto, has been rather contentious, with the level of mutual respect hovering around the lower end. High-profile financial figures such as Jamie Dimon (CEO of JP Morgan) and Larry Fink (CEO of BlackRock) have historically gone as far as to label crypto a scam, sham, and "an index of money laundering." Not exactly encouraging words.
However, we've started to witness a shift in this viewpoint. The initial signs were at several conferences where the finance community appeared less antagonistic. Then, influential leaders of financial firms began to alter their perspectives, with Fink being the most notable and influential. Currently, we're seeing a wave of firms entering the crypto space, partnering with existing crypto heavyweights like Coinbase, and developing Bitcoin ETFs (Exchange Traded Funds), heralding cryptocurrencies as a "Revolution." In a recent interview, Fink stated that "The role of bitcoin is digitizing gold." He elaborated by suggesting that Bitcoin could serve as a new digital gold-standard hedge against inflation for nations worldwide.
Yet, before the crypto-enthusiasts among you start firing off triumphant "I told you so" tweets to all the skeptics who dismissed crypto as a fad, or calling TradFi firms “Bullish of Crypto” as has become common, it's crucial to step back and ask "why?" Why is the finance industry changing its tune now, and just how pro-crypto are they?
Why Is This Happening?
In essence, what we're observing is evolution not revolution, plain and straightforward. Don't mistake this for a sweeping endorsement of the crypto industry by TradFi. Firms like BlackRock are tiptoeing into these unfamiliar waters, crafting ETFs and other traditional financial instruments that encapsulate this innovative technology. If they were genuinely "converted" to the Decentralized Finance (DeFi) philosophy, we'd see these firms making significant internal shifts to decentralize their own custody systems (the mechanisms used to safeguard and manage your assets). Moreover, they would be launching products on crypto exchanges rather than traditional ones. Neither of these things are happening in any meaningful way by any meaningful firms (yet).
The TradFi sector is hardly renowned for its adventurous spirit when it comes to new technology. This conservatism is partly due to regulatory constraints and partly ingrained in the industry's culture. Therefore, the cautious wading-in approach adopted by BlackRock and its peers indicates the furthest they can venture given the nascent stage of this technology and the uncertainty surrounding its near future.
But the fact remains that TradFi firms are starting to engage with crypto, and they are starting to significantly change their tune both in terms of outward discussion on the subject and in terms of internal investments into the technology / associated products. For a detailed understanding of why this is happening now, we must consider several factors:
Reason 1. An Uptick in Public Interest.
The public are becoming more aware of, and interested in crypto. A study from the University of Chicago indicated a significant rise in American crypto ownership, jumping from 2% to 12% of the population from 2018 to 2022. In the institutional arena (meaning large money managers), a survey by Fidelity revealed that 70% of managers anticipate having crypto as part of their portfolios in the near future. Additionally, The Medici Project's own dialogues with financial advisors have revealed a gradual surge in client inquiries about cryptocurrencies over the past few years. This signals growing interest within traditional financial circles, not just among the GenZ and Millennial denizens of Twitter spaces.
In the realm of social media, records are being set for mentions and searches related to cryptocurrency news and discussions. BitInfoCharts, the crypto statistics aggregator, found that today's number of tweets referencing Bitcoin and Ethereum surpasses any count from their histories, including previous bull markets.
Several factors are driving this trend:
It's in the News: A deluge of crypto-related stories over the past year, whether positive or negative, has piqued public curiosity, leading more people to investigate the underlying technology.
Maturing Landscape: We're witnessing a surge in sound analyses of various crypto assets, and the crypto landscape is appearing far less "wild west" than just a year ago.
Traditional Economy Struggles: The current unsure financial climate and investment conditions in traditional markets are pushing people to explore alternatives, and crypto provides just that.
Even Larry Fink has attributed BlackRock's decision to launch crypto products to the uptick in public interest. As he said, “More and more of our global investors are asking us about crypto.”
Reason 2. The Regulatory Space is Getting Clearer.
TradFi, by nature, is conservative. While crypto remained in a nebulous "other" space, teetering between regulated and unregulated, traditional firms shied away due to the risk outweighing the potential reward. However, that has since changed.
Internationally, crypto regulations have become incredibly clear-cut. The EU has been swift to lay down crypto regulatory frameworks and legal standards across the bloc. Similarly, numerous other countries such as Singapore, Australia, and Japan have established their own legal, regulatory, and tax standards for dealing with crypto. El Salvador even took the plunge, legalizing bitcoin as a national currency.
In the USA, despite many regulations being somewhat outdated, the SEC has largely maintained a consistent stance towards crypto. It upholds the Howey Test and pursues companies that fail to comply with its laws. While legal discussions continue, the regulatory landscape in the US has become clear enough for traditional firms to navigate without fear of a lack of precedent (keep in mind also that US financial regulations are where these firms find their homes today).
Reason 3. FOMO (but a slow and thoughtful version).
TradFi firms aren't oblivious. These are entities brimming with talented analysts, each compensated well to monitor and comprehend industry trends, and to invest accordingly. In much the same way TradFi invested in digital infrastructure to launch traditional investment platforms globally, we're now seeing these same firms gradually embracing decentralized technology and assets that show no signs of disappearing. As I mentioned earlier, although today we are not seeing TradFi jump onto DeFi technology and processes, it won't be long before we see them adopting decentralized technology internally, simply because it's an improved version of what they're already doing.
There have even been some speculative claims within industry circles suggesting that the regulatory and governmental shift towards crypto is a result of financial firms buying time to get their affairs in order before jumping on the bandwagon. It's somewhat akin to how Big Tobacco has historically lobbied against cannabis as a smoking alternative until they could acquire some cannabis companies, and then abruptly switched their lobbying efforts. Whether there's any truth to these speculations, we may never know, but it's clear that the finance industry recognizes the crypto wave is coming. They're jumping aboard swiftly, and despite their previous vocal opposition, they've likely been preparing internally for quite some time.
Plodding towards Decentralization.
Despite the encouraging trend towards industry-wide acceptance of crypto, I'd advise the crypto-enthusiasts among you not to get overly excited just yet; this shift from TradFi will be a slow and meticulous process.
TradFi firms are fundamentally conservative and typically reactive rather than proactive. They are more influenced by regulation than by public demand or general good. Their consideration of DeFi is primarily because it can A) generate profit through increased services, B) save money by enhancing internal technology, or a combination of the two. There is no altruistic admiration for the technology here, nor is there an impassioned drive towards a future of digital money from the “newly converted” Larry Fink. This is merely a slow response to public demand, regulatory changes, and technological advancement.