Banks Are Adding Crypto Trading to Their Resumes

This post originally appeared in Money Stuff.

The job of a bank's trading desks is to help their clients trade the financial stuff that they want to trade. There's no especially coherent conceptual definition of what counts as "financial stuff." Part of the definition is regulatory -- if regulators say that banks can't own physical commodities or Venezuelan bonds, then banks will have trouble facilitating trading in those things, and they'll essentially fall out of the "financial" system -- but mostly it is loose and conventional. If the sorts of customers who are banks' customers want to trade a thing, then that thing becomes a financial thing, and so the banks had better start helping them trade it.

Exactly what that help comprises also varies: It can mean financing (lending the customers money to buy the thing), or broking (connecting buyers and sellers to broker trades in the thing), or market-making (buying or selling the thing directly from or to customers for the bank's own account), or custody (holding on to the customers' thing for safekeeping and regulatory purposes), or derivatives (taking more complicated bets on the thing from customers), or research (writing reports about the thing). For things that are only on the fringes of "financial stuff" -- art, say -- the banks might do some financing or advising without actually setting up a trading desk or getting into the custody business. But usually it's all of those things: Clients expect banks to provide a certain customary set of services for trading whatever the customary set of financial stuff is, and once there is a critical mass of client expectation that a kind of stuff is financial stuff, then the banks had better start providing those services for it.

Is cryptocurrency financial stuff? Ugh I don't know come on:

Barclays Plc has been gauging clients’ interest in the British bank starting a cryptocurrency trading desk, potentially joining Goldman Sachs Group Inc. in pioneering a new business on Wall Street, according to people with knowledge of the matter. ...
Demand for such services is plentiful. Hedge funds that deal with Bitcoin and other virtual currencies have been eager to find banks to handle transactions -- much like prime brokers do with securities -- and potentially serve as custodians of digital assets. Some money managers have struggled to expand into crypto, in part because of rules that prevent them from using unregulated exchanges to trade and hold investments.

It is a pain for asset managers to hold Bitcoins, as we sometimes discuss around here. But that's not unique to cryptocurrencies. It's not obvious why it should be easy for a hedge fund to hold, like, aluminum either. Aluminum is ... bulky. If you are running a small hedge fund out of one room, and you buy 100 tons of aluminum, where do you put it? And the answer is that the financial system has mostly domesticated aluminum, so you don't have to actually go to the aluminum store and buy 100 tons of it and put it on a bunch of trucks and store it in your garage. Banks and exchanges have built financial products -- and, also, actual warehouses -- that let you trade aluminum without worrying about dropping it on your toe.

Cryptocurrency is not there yet, but it's getting there. Futures exchanges have Bitcoin contracts that let asset managers get exposure to the price of Bitcoin without having to worry about owning Bitcoins and losing their password. But that's just a start, and if there's enough demand from clients to domesticate cryptocurrency, then it's going to be in the banks' interest to do more.

By the way, the fact that banks, and bank clients, think that a thing is a financial thing doesn't mean anyone else has to like it. Beer-can producers sometimes get pretty unhappy that financial firms trade aluminum. And cryptocurrency true believers, who thought that crypto would usher in the end of the traditional incumbent financial system and the beginning of a new more democratic form of money, may be disappointed if cryptocurrency trading ends up being dominated by the likes of Barclays and Goldman Sachs.

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This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Matt Levine at mlevine51@bloomberg.net

To contact the editor responsible for this story:
James Greiff at jgreiff@bloomberg.net

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