Traditional Banking Is Poised To Take Bigger Stake In Crypto Space

Traditional banking, or “TradFi” in the cryptocurrency world’s vocabulary, is poised to take a bigger position in the cryptocurrency investing and trading infrastructure. For starters, the biggest funds will mostly come from traditional finance, even if some startups blazed the pathway, like Grayscale. They’ll either be bought out like BlackRock’s BLK purchase of Barclays’ iShares ETFs, or eventually dwarfed by a collection of newer cryptocurrency products run by brand named Wall Street firms.

The same will eventually be said about the exchanges. Some may survive. Coinbase seems to have the most going for it regarding household name recognition. That matters, of course. Kraken and even Atlanta-based BitPay are, in my mind, acquisition candidates.

Last year, Fidelity, Citadel Securities and Charles Schwab launched EDX Markets, a non-custodial cryptocurrency exchange going after Coinbase’s institutional client base. Non-custodial means that they do not hold the customer’s digital assets. Jamil Nazarali, CEO of EDX Markets, told CNBC in August that regulatory clarity on what an exchange can and cannot do is “getting closer”. Once that happens, traditional finance may make a move to offer more digital asset products, services and platforms to their retail investor base.

To those who run an exchange, the TradFi M&A lawyers have you marked.

“M&A lawyers, investors, and Wall Street investment funds often get in touch with these markets to see if they are interested in selling,” says Anurag Dixit, founder of Kunji, a digital assets manager and non-custodial exchange built on the Arbitrum ARB blockchain. He is in Mumbai. “I run a real exchange, so I can't tell you if big investment funds have reached out to me with offers to buy or take over parts of my business. But I know that big investment funds have talked to many of these crypto companies around the world in the past few years. This trend will likely continue in the future, as exchanges look for ways to grow and consolidate their positions in the market.”

As cryptocurrency investing gains mainstream acceptance, the infrastructure supporting it – from payment systems to exchanges – eventually intertwines with TradFi.

“This integration is driven by a desire for legitimacy, regulatory clarity and broader adoption. It's also fueled by the recognition that cryptocurrencies are emerging as investable assets,” says Zak Taher, CEO at MultiBank.io in Dubai. MultiBank.io is owned by the MultiBank Group, a traditional financial firm started in California in 2005 for commodities traders.

The United Arab Emirates is shaping up to be a hot spot for blockchain and fintech with trusted, brand-name traditional banks spinning off crypto projects. Investors and startups continue to overflow cryptocurrency events, which seem to get bigger yearly.

The consolidation process began in 2022, with traditional financial firms starting their own exchanges, or partnering with startups with a few years under their belt involved with crypto/fiat payment systems.

“The scene today is reminiscent of the survival of the fittest, where only those equipped with financial fortitude and regulatory acumen will endure,” says Antoni Trenchev, Co-founder and Managing Partner at Nexo, also in Dubai. “It’s going to be the regulatory climate that alters the landscape,” he says. “The global stage is vast, and different nations may allow large non-traditional finance exchanges to flourish. The blockchain finance space is not a monolith. It’s a diverse ecosystem with different regions that will nurture its champions.”

The region (like Asia), or nation (like the UAE), that adeptly formulates crypto regulations may be primed to witness the earliest and most fluid integration of traditional finance with crypto companies.

Like the dot-com boom brought us a lot of new companies with staying power, so will the cryptocurrency/blockchain boom. Others are getting bought out by companies with a longer history in the market.

Wall Street, Decentralized?

In 2021, Canada’s Nuvei Corporation bought the 2014 fintech startup Simplex for $250 million in cash. Simplex partners with BitPay for its payment services. The two officially teamed up seven months after the Nuvei acquisition.

Kraken might see this coming. The company said it would be expanding its universe beyond the cryptocurrency realm and into traditional securities. Kraken will initially offer trading in the US and UK through a service built by a new division called Kraken Securities, Bloomberg reported on Sept. 27.

“We’re looking to broaden and enhance our offerings," a company spokesperson told Reuters.

For cryptocurrency exchanges, selling to a traditional financial player “could be good,” says Dixit in India. “Traditional financial players know a lot about how the financial markets work and have a lot of business knowledge. They also have access to a lot of resources, which could help grow and expand this market.”

But he warns that the main risk of Wall Street firms taking over the pioneers who built this market might not share the same ideals and goals as the standard fare cryptocurrency enthusiast. “The traditional financial player may care more about short-term profits than long-term growth and innovation,” says Dixit.

That average cryptocurrency enthusiast, the ones who wear T-shirts about Satoshi and make pilgrimages to the Miami Bitcoin Conference will say that the entire reason for cryptocurrency is decentralization. Traditional finance is more centralization.

Poking holes in the tenants of decentralization is a valid concern, says Taher. “We've seen similar patterns in other industries, like the internet and cable television, where early pioneers were eventually absorbed by larger entities. We may see larger players emerge, but I would say that the crypto community's commitment to decentralization and its vigilance in preserving the core principles of the technology will still be influential factors.”

Trenchev agrees. He thinks decentralized hangs tough even as traditional financial giants muscle in.

“Decentralization is the soul of cryptocurrency. That resonates with a vast swath of enthusiasts, forming the bedrock of digital assets over the past decade,” he says. “It’s a deep-seated conviction bound to shape the industry. The seamless integration of decentralized ethos with traditional financial structures will position entities that skillfully balance these core principles at the forefront of market leadership.”