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Crypto finance and traditional finance

The last month saw a remarkable number of operations aiming to connect the traditional financial system with the crypto industry. Indeed, it seems that the separation between the two worlds becomes every day more blurred.

Some operations regards traditional financial firms investing in or providing services connected to the cryptocurrency sector. New York-based investment bank Cowen has unveiled a digital asset division which will offer full-service trade execution and custody solutions for institutional clients, while Goldman Sachs completed its first over-the-counter cryptocurrency-related trade with the digital-asset financial company Galaxy Digital. In the same vein, the investment firm Bain Capital announced a $560 million fund focused exclusively on the crypto ecosystem and the asset management firm BlackRock confirmed that it is exploring how to serve its clients with digital assets in a letter to shareholders, while the world’s largest hedge fund Bridgewater Associates is preparing to back an external vehicle investing in cryptocurrencies. All these moves seek to bridge the gap between traditional capital markets and the growing institutional crypto demand.

But the operations connecting the two worlds are also going the other way round: crypto firms are seeking to invest in or partner with traditional financial firms. The world’s biggest crypto exchange, Binance, is planning to acquire businesses that operate in traditional markets: “We want to identify and invest in one or two targets in every economic sector and try to bring them into crypto,” the chief executive Changpeng Zhao said. The same Binance signed a Memorandum of Understanding (MoU) to acquire Brazilian securities brokerage Sim;paul Investimentos, a traditional brokerage operator authorized by both the Central Bank of Brazil and the Brazilian Securities and Exchange Commission. This move has been made necessary by the Brazilian pending legislation requiring crypto exchanges to have proper licensing, obtained either opening of a local office or acquiring an existing operator. These operations have also the effect of taking back crypto firms inside the perimeter of traditional financial regulation: for example, the software cryptocurrency wallet Exodus started trading on the digital asset securities firm Securitize Markets, which is a SEC-registered trading venue; Coincheck, a Japanese wallet and crypto exchange, has announced its intention to list on the Nasdaq stock exchange through a special purpose acquisition with Thunder Bridge Capital; the US crypto exchange FTX made a strategic partnership with Dave, a banking app, to introduce digital asset payments onto Dave’s platform; and the digital asset company Kraken recently obtained from the American Banker Association a routing number, bringing it close to receiving a Federal Reserve master accounts, which would allow it to deposit funds with the Fed and access the global payments system.

Given this closer and closer connection between crypto finance and traditional finance, it is not surprising that the 90-day correlation between bitcoin and the Standard & Poor’s 500 index has risen to its highest level since October 2020. Bitcoin, similarly to other cryptocurrencies, and contrary to what has appeared until now, seems to be less segmented away (that is, driven by alternative economic forces and factors) from other traditional asset classes (see also this article for an analysis on this point).

Regulators are monitoring these developments in the financial system. To understand the central bankers attitude towards them, we suggest you to read this article.