Wall Street Creeps into Crypto, Backs DLT-Focused Outfits
The recent purchase of Poloniex by Goldman Sachs-backed mobile Bank Circle caused many to rejoice into a solid entrance by Wall Street into the Cryptocurrency space. But financial outfits have been entering the cryptocurrency and blockchain development space for some time now, from Mastercard and Visa to the New York Stock Exchange and NASDAQ since early 2015.
Goldman Sachs-funded Circle acquired cryptocurrency exchange Poloniex for $400Mn towards the end of February marking it the largest disclosed acquisition in the cryptocurrency space. Goldman Sachs invested in Circle in 2015 in a $50Mn funding round along with IDG Capital Partners stating that they recognize the need to invest in companies that have the promise to transform global markets through technical innovation. Goldman Sachs has also invested in blockchain companies Digital Asset Holdings and Axoni.
Despite being bullish about blockchain, Goldman Sachs has traditionally been a skeptic of cryptocurrencies stating multiple times that they are a bubble, which will eventually burst. In this year’s research letter to investors, Goldman Sachs said that they “think the concept of a digital currency that leverages blockchain technology is viable given the benefits it could provide: ease of execution globally, lower transaction costs, reduction of corruption since all transactions could be traced, safety of ownership, and so on. But Bitcoin does not provide any of these key advantages.”
Apart from venture capital firms, large financial institutions were the first corporate players to directly invest in blockchain focused companies. Many of the Wall Street firms have also backed a blockchain startup Axoni, which specializes in blockchain deployments and smart contract development. In November 2017, the company had successfully completed a six-month test of their blockchain solution for the equity swaps market, which could vastly decrease costs of back office operations and speed up clearing and settlement times. Axoni has been backed by Wells Fargo, Citigroup, JP Morgan, and Goldman Sachs, again.
Digital Asset, headed by former JP Morgan executive Blythe Masters, has raised more than $100Mn from her former employer as well as Citigroup, BNP Paribas, Accenture and IBM (see table). Digital Asset aims to build blockchain solutions for regulated financial institutions. The Australian Securities Exchange (ASX) has been working with Digital Asset to develop a blockchain clearing and settlement system since January 2016. In December of 2017, the ASX announced that it will replace its current system with Digital Asset’s blockchain solutions.
And R3, the largest blockchain financial consortium has nothing less to boast about with more than 100 financial institutions part of the group. The company is developing a new operating system for financial markets with blockchain platform Corda. In September, R3 has partnered with UK’s Financial Conduct Authority and the Royal Bank of Scotland to improve the regulatory reporting of mortgage transactions. The investment banks that contributed to R3 include Barclays, Wells Fargo, Deutsche Bank, Merrill Lynch, HSBC and others (see table).
Chain, another company that is building an enterprise-grade blockchain infrastructure claims its software can process tens of thousands of transactions per second. The company has been backed by Citi, Capital One, NASDAQ and Visa in 2015. The largest U.S.-based bitcoin exchange Coinbase has raised more than $200Mn from investors including the New York Stock Exchange (NYSE), BBVA and Bank of Tokyo Mitsubishi UFJ.
And while the participation of Wall Street is infact more than meets the eye, its non other that Digital Currency Group (DCG) led by Barry Silbert who has invested in the majority of these projects (Diar, 18 December 2017). In fact, it would be a challenge to find many important blockchain related projects that DCG hasn’t invested in. DCG raised money from Mastercard, New York Life Insurance Company and CIBC. By extension, these companies are getting an indirect exposure to the whole plethora of blockchain and crypto companies. In February, DCG also added notoriously crypto-friendly Silvergate Bank to their investment portfolio.
Wall Street has been enthusiastic about blockchain’s potential to cut its back office costs and the investment decisions reflect that (Diar, 30 October 2017). Most of the investments that are directly tied to financial firms have been in companies that are developing enterprise blockchain solutions to improve the efficiency and cut costs. The exception is Circle’s investment in Poloniex and involvement of NYSE, BBVA and Bank of Tokyo Mitsubishi UFJ in Coinbase. And major insurer AXA has a stake in Blockstream, which employs about ten of the core developers that are actively contributing to the development of Bitcoin.
Wall Street / Financial Institutions Investments in Blockchain, Cryto
|Cyrptocurrency / DLT Operation||Amount Raised (Mn)||Bank & Wall Street Investors||VC/ Other Investors|
|Digital Currency Group||-||Mastercard, New York Life Insurance Company, CIBC||OMERS Ventures, CME Ventures, Bain Capital|
|Coinbase/GDAX||225.3||NYSE, BBVA, Bank of Tokyo Mitsubishi UFJ||DCG, Blockchain Capital, Andreessen Horowitz, IVP, DFJ Venture Capital, Sozo Ventures|
|Blockstream||151||AXA||Digital Garage, Horizons Ventures, Real Ventures, Khosla Ventures, Reid Hoffman, DCG, Blockchain Capital|
|Circle||136||Goldman Sachs||IDG Capital, Breyer Capital, DCG, Pantera Capital|
|Digital Asset||107.2||Goldman Sachs, Australian Securities Exchange, JP Morgan, Santander, Deutsche Börse, DTCC, Citigroup, BNP Paribas, PNC, ABN AMRO||Jefferson River Capital, Accenture, IBM|
|R3||107||Barclays, Wells Fargo, ING, TD Bank, Deutsche Bank, Citi, Merrill Lynch, HSBC, SBI Capital Markets, BNP Paribas, UBS, BBVA, Commerzbank||Intel|
|Ripple||93||SBI Capital Markets. Santander||IDG Capital, Core Innovation Capital, DCG, Blockchain Capital, Pantera Capital, Accenture, Seagate, Google|
|Bitfury||90||Chong Sing Holdings FinTech Group||Bill Tai, Blockchain Capital|
|VEEM||44.3||SBI Capital Markets, Silicon Valley Bank||NAB Ventures, Pantera Capital, Kleiner Perkins Caufield Byers, DCG|
|Chain||43.7||Citi, NASDAQ, Visa, Capital One||RRE Ventures, Khosla Ventures, DCG, Blockchain Capital, Pantera Capital, Orange, Fiserv|
|SETL||39||Crédit Agricole CIB||Deloitte|
|bitFlyer||36.1||SBI Capital Markets, Sumitomo Mitsui, Mizuho Financial Group||DCG, Venture Labo Investment|
|Abra||30||American Express||Arbor Ventures, Pantera Capital, Blockchain Capital, DCG, Foxconn|
|Axoni||20||Wells Fargo, Goldman Sachs, Citigroup, JP Morgan, Thomson Reuters||NEX Opportunities, Andreessen Horowitz, DCG|
|Elliptic||7||Santander||Paladin Capital Group, DCG|
|Kraken||6.5||SBI Capital Markets, Money Partners Group||DCG, Blockchain Capital, Hummingbird Ventures|
|Bitwala||2.6||KfW Group||High-Tech Gründerfonds, DCG|
Coinbase, Grayscale Introduce New Institutional Investor Products
Major retail cryptocurrency exchange Coinbase announced that they have now introduced an index fund and asset management arm to their business. The fund compromises of what is currently tradable on Coinbase – Bitcoin, Ethereum, Litecoin and Bitcoin Cash. And Grayscale also introduced single asset trusts for the latter three cryptocurrencies last week, as well as a Ripple Investment Trust.
On the surface, the latest offering on the market for institutional investors interested in cryptocurrency exposure, the Coinbase Index Fund (CBI), would be a direct competitor to Grayscale’s Digital Large Cap Fund (DLC) that was launched earlier last month (Diar, 12 February). But there are a few key points which make the products quite different, giving potential investors a broader range of investment vehicles depending on market conditions and general outlook on the direction of the digital assets industry.
The CBI is comprised of all the assets that are currently traded on Coinbase/GDAX, which as of date are Bitcoin, Ethereum, Litecoin and Bitcoin Cash. Coinbase said that the CBI will be updated to include any additional assets that are added to their trading platform with a 5-day gap after the initial introduction to account for possible volatility from the listing on the popular exchange.
|| THE WEIGH-IN
The method of weighting of the index fund is what is the most notable difference between the CBI and the DLC. The assets under the DLC, Bitcoin, Ethereum, Ripple, Bitcoin Cash and Litecoin, are a representation target of 70% of the total traded cryptocurrencies on the digital assets market (see graph). Grayscale will add or remove assets to the DLC, every quarter, to rebalance that target mark. The CBI, however, will weigh the underlying assets in the fund by the total market capitalisation of the assets that are traded on Coinbase alone.
The difference may seem very subtle due to the overlap of the same digital assets, excluding Ripple’s XRP from the CBI, however, should markets become more diversified within the top 70% of the market capitalization, Grayscale’s DLC could potentially hold many more cryptocurrencies depending on the criteria for possible additions by the investment firm.
|| DOUBLE UP
Grayscale also announced the launch of four single asset cryptocurrency trusts for Ethereum, Litecoin, Bitcoin Cash and Ripple as previously expected back in January (Diar, 29 January). This has doubled the offerings from the institutional driven investment business in 2018 with the DLC. And its seems Grayscale is not stopping there by any means. The number of institutional products linked not only to Bitcoin, but to other cryptocurrencies continue to increase, and speaking to Bloomberg last week, Grayscale’s Managing Director Michael Sonnenshein, said that “there will be more offerings coming from the Grayscale family this year.”
FinCEN Reassures, Agency Will Hold Token Issuers Accountable
In a letter from the Financial Crimes Enforcement Network (FinCEN) addressed to Senator Ron Wyden, a ranking member on the US Senate’s Committee of Finance, the agency responded to the concerns regarding cryptocurrency activity. FinCEN, an arm of the US Department of Treasury that looks to combat domestic, as well as international illicit financial activity, reassured the Senator that the agency will hold anyone who administers or exchanges Initial Coin Offerings (ICOs) to US Residents accountable for Know-Your-Client (KYC) and Anti-Money Laundering (AML) compliance as they would effectively be viewed as a Money Services Business (MSB) and would therefore need to comply with the Bank Secrecy Act (BSA).
|| CLARIFICATION NEEDED
Coin Center, a Washington-based public policy advocacy for cryptocurrencies argues that there are good reasons developers should neither be held as administers, nor as exchangers as they are not transmitting value on behalf of someone else in an article following up to the recent letter.
Short of closing the door on the matter, FinCEN left room for interpretation. The letter from FinCEN said that "ICO arrangements vary. To the extent that an ICO is structured in a way that it involves an offering or sale of securities or derivatives, certain participants in the ICO could fall under the authority of the SEC, which regulates brokers and dealers in securities, or under the authority of the CFTC, which regulates merchants and brokers in commodities. In such a case, the AML/CFT requirements imposed by SEC or CFTC regulations would apply to such ICO participants. Treasury expects businesses involved in ICOs to meet the BSA obligations that apply to them."
SEC Calls on Token Exchanges to Register with Watchdog
The US Securities and Exchange Commission (SEC) continues to send out it's warnings, the latest of which targets cryptocurrency exchanges who are trading tokens that where issued from an Initial Coin Offering (ICO).
But the agency isn’t pulling out its shotgun just yet, and has taken what seems to be a more timid approach as proof from its very last paragraph from its latest warning urging market participants developing exchanges to contact the SEC staff.
What the SEC has made clear, however, is that “if a platform offers trading of digital assets that are securities and operates as an ‘exchange then the platform must register with the SEC as a national securities exchange or be exempt from registration.” The SEC cited concerns that, while on the surface some exchange may seem regulated, they are far from what meets the eye and directed cryptocurrency trading operations to register as an Alternative Trading System (ATS).
Currently, only two identifiable exchanges have registered with the SEC as Alternative Trading Systems – Templum and Overstock’s subsdiary, tZero. Neither have pubic access to trading as of date, while tZero is also in the middle of a pre-ICO token sale that has garnered the interest of over 1100 investor raising a whopping $114.6Mn.
Most cryptocurrency trading of tokens remains outside the US as token issuers have purposely circumvented US traders. However, there are some exchanges whose alarm bells have rung due to possible trading of ICO tokens - Kraken, Poloniex (who was recently purchased by Goldman-Sachs backed Mobile Bank Circle), Bittrex, as well as recent entrant into the crypto trading space, Cobinhood.
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