Proof of State is the Wednesday edition of Fortune Crypto where Leo Schwartz delivers insider insights on policy and regulation.
When I attended CoinDesk’s Consensus conference in late April, I had an intense experience of whiplash. On one hand, the convention halls echoed with the accusations of Operation Chokepoint 2.0, a theory rampant in crypto that U.S. federal agencies are coordinating to deny the industry of banking services—and a premise not without evidence. On the other hand, major players in the world of traditional finance, from asset manager Franklin Templeton to Mastercard, showed up en masse, seemingly unfazed by the perceived toxicity of crypto in our nation’s capital and endless reports of its imminent downfall.
How can both coexist—that the U.S. government is trying to kill off crypto, while some of the country’s most powerful financial players are streaming in? Over the past week, the answer has started to become more clear, with the investment giant BlackRock filing for a spot Bitcoin ETF and the market maker Citadel Securities backing a new crypto exchange.
Even though crypto began with Satoshi Nakamoto’s revolutionary Bitcoin white paper, a treatise against the global financial system, in the wake of the financial crisis, major corporations have long understood the advantages of entering the world of blockchain. The distributed ledger startup R3 attracted banking partners from BNY Mellon to Citi into its consortium since starting in 2014, and JPMorgan has experimented with DeFi protocols and launched its own stablecoin as CEO Jamie Dimon described cryptocurrency as a “pet rock.”
What’s different now is the degree of crackdown from state and federal agencies. While the Securities and Exchange Commission has shut down the industry’s follies throughout the years, like the initial coin offering boom of 2017, the government is undeniably taking a harder stance on compliance in the wake of FTX’s collapse last November.
While established crypto players like Coinbase fight for their very existence, it makes sense that TradFi firms from Citadel to BlackRock seem undeterred. As Alan Zibel, a research director at Public Citizen, wrote on Twitter, “They’re accustomed to being regulated.”
Looking through the announcements of BlackRock and EDX Markets, the new crypto exchange, this seems to be their sole value proposition. One of the SEC’s main concerns for spot Bitcoin ETFs has been market surveillance, which BlackRock says it can solve by putting the Nasdaq in charge of overseeing pricing data. The agency’s accusation against Coinbase has been the firm’s consolidation of functions—being an exchange, a broker, and a clearinghouse—which EDX has segregated.
“We deliberately built our business model in a way that avoids some of the problems that the other exchanges are facing right now,” EDX’s CEO, Jamil Nazarali, told my colleague, Marco Quiroz-Gutierrez.
Whether these gambits pay off is uncertain. The SEC has yet to approve a spot Bitcoin ETF, although Grayscale’s lawsuit could be settled any day now, and industry experts have criticized EDX’s model as “pants-on-head level stupid.”
The new reality, however, is clear: It’s TradFi’s turn at crypto.
Leo Schwartz
leo.schwartz@fortune.com
@leomschwartz
