Crypto boom attracts Wall Street banks

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Roula Khalaf, Editor of the FT, selects her favorite stories in this weekly newspaper.

The author is the former global head of capital markets at Bank of America and is now a managing director at Seda Experts.

Bitcoin’s spectacular rise this year has reignited a dilemma on Wall Street: how far should investment banks go to support cryptocurrency-related profits? Recent proposals reveal a profound shift in thinking.

Not too long ago, the big banks kept cryptocurrencies in balance. The sector was notorious, and bank executives spoke ill of them. JPMorgan CEO Jamie Dimon called bitcoin a “fraud” and a “Ponzi scheme”. The fear of control deepened the cold. Crypto transactions were left to small investment banks.

But times have changed. Securities and Exchange Commission consent of currency exchange bitcoin exchange in January 2024 mark the watershed. Plus, the election of Donald Trump maybe commentators moving to an SEC that is more tolerant of cryptos, unlike the skeptics under chairman Gary Gensler.

As the volume of sales has increased, so has the list of underwriters. Barclays and Citigroup have led multiple convertible bond offerings this year for bitcoin investor MicroStrategy. Goldman Sachs raised money for Applied Digital, a data center specialist that supports bitcoin miners. JPMorgan has written strong convertible bonds for bitcoin mining and infrastructure groups Core Scientific, Mara and Iren.

When banks are debating whether to dive into the space or stay away, the main question is: can you lawyer up these deals, put a prospectus on risk factors and call it good? Or is it too dangerous to be associated with what many consider an overly speculative field?

The answer is not binary. It is based on a number that reflects each bank’s risk tolerance and strategic outlook. It is also not clear that all crypto-related companies should be viewed equally. An established exchange like Coinbase may have a different level of risk from a bitcoin miner or an investment vehicle like MicroStrategy. Even in similar companies, reputation issues differ.

Consider MicroStrategy and its co-founder Michael Saylor. Without admitting wrongdoing, the two settled fraud charges from the SEC in 2000 and a tax fraud case with the District of Columbia attorney general in June 2024 for large sums of money. Such an approach often results in top management review of customer preferences. Clearly, Barclays and Citigroup enjoyed the friendship.

If this all sounds familiar, it should. Take special purpose acquisition companies, or Spacs. Once dismissed as fancy cars by the big banks, they were embraced by Wall Street during the 2019-2021 boom. But banks quickly bounced back in mid-2022, as reputational concerns surfaced. Crypto currency raising has a similar feel – an uncertain frontier where banks are chasing windfall fees and market share, while seeking to regain potential prestige.

The drivers of these decisions are multifaceted. Legal danger is imminent. General counsel is losing sleep over questions like, “will we be sued if these tanks?” Scrutinizing the media is equally terrifying; no one wants their company in bad headlines.

But risk alone does not dictate behavior. Fees are important. And in the bitcoin financial markets, there are already a lot of them. More than $13bn of crypto-related convertibles have been issued by 2024, and most of them will come in the latter part, according to IFR data. This translates to a fee pool that I estimate to be at least $200mm. And MicroStrategy’s $21bn equity offers 2 per cent interest on banks dealing with the deal. That kind of potential income makes the terms of fame feel like luxury.

There is still an unwritten code of honor in banking. Some businesses – such as adult entertainment – are avoided, even if they are legal. Cannabis companies have also struggled to convince big-name banks to underwrite their offerings. This reluctance is not due to moral outrage; it’s pure optics. Banks know that some businesses invite more heat than they deserve.

Yet once a few banks cheat, the pressure mounts on others to follow suit. It is safe to travel as a pack; If something goes wrong, no bank will be selected. Competitiveness also plays a role. No banker wants to explain to their bosses why they are missing their financial targets or have fallen down the league tables.

In short, participation is not a crypto decision, but instead provides a perspective on how investment banks weigh the three Rs of trading options: risk, reward and fame. In the process of continuous improvement, senior leaders balance legal exposure, media response, regulatory risk and competitive pressures to determine where the line of “respectability” lies. As bitcoin moves from the fringes to the mainstream, the big banks are stepping into the playing field, dealing at the same time.