Published: July 26th, 2021
JP Morgan, one of the world’s biggest investment banks, has given its seal of approval to bitcoin- and ethereum backed cryptocurrency funds, another sure sign that one of the most vocal crypto-sceptic institutions on Wall Street is finally warming to digital assets.
A memo leaked to the financial press says the firm’s wealth management clients can now place buy and sell orders for five cryptocurrency products through the bank’s advisory arm. Advisors have access to one Osprey Funds product and four Grayscale Investments products.
Starting in late July, JPM clients can gain exposure to ethereum, bitcoin cash, bitcoin, and ethereum classic through Osprey Fund’s Bitcoin Trust. They can also buy into Grayscale's Ethereum Trust, Ethereum Classic, Bitcoin Trust, and Bitcoin Cash Trust products.
Any such investments won’t mean JP Morgan own cryptocurrencies themselves, but they will have exposure to price movements and a stake in the crypto market. The trust products named above let investors buy shares that track the price of assets like BTC and ETH. Osprey and Grayscale handle the transactional logistics, including the actual buying and holding of cryptocurrencies.
Grayscale is arguably the biggest pure player in crypto finance, with USD 27.5 billion worth of digital assets under management. At the moment, JP Morgan advisors can only handle crypto trades on request. They aren’t allowed to proactively recommend crypto products.
In March, Morgan Stanley, another stalwart of traditional finance, enabled its wealth management clients to gain exposure to BTC via the Galaxy Institutional Bitcoin Fund LP, Galaxy Bitcoin Fund LP, and the FS NYDIG Select Fund. Access was only open to clients with at least USD 2 million in assets with the bank.
JP Morgan is taking things a step further and signalling a more open approach to the crypto world. This comes after years where the bank wouldn't touch crypto investments with a bargepole, and the company’s CEO Jamie Dimon was on record calling bitcoin a “fraud”.
In May, it started providing banking services to top crypto exchanges Coinbase and Gemini. It was widely seen as a sure sign of Wall Street’s growing confidence in the cryptocurrency industry, even if banking requirements were stricter than normal for crypto businesses trying to acquire accounts.
Coinbase and Gemini had to jump multiple hurdles to become JP Morgan clients. The fact they were finally given the green light reflects the degree to which big crypto exchanges have become regulated entities.
Gemini founders Tyler and Cameron Winklevoss told the Wall Street Journal that the fact that the exchange is regulated by multiple agencies ‘played a big part in winning approval’.
Both Gemini and Coinbase have money transmitter licenses in several US states. Gemini secured a trust charter from the New York State Department of Financial Services in 2015. Coinbase, for its part, was the first exchange to secure a BitLicense under the federal Financial Crimes Enforcement Network's (FinCEN) new regulatory regime for crypto businesses.
JP Morgan’s decision to open up access to crypto funds is widely believed to be driven by mainstream investors and traders' intensifying interest in crypto assets.
Trading volumes in March and April reached record highs as investors sought refuge from volatile traditional markets at every level. Crypto investment platforms targeting institutional investors like Grayscale have done a thumping trade as a result. At the same time, more funds have opened up to bitcoin as a viable alternative asset, especially as a response to concerns about fiat devaluation caused by extensive, pandemic-inspired quantitive easing.
JP Morgan has gone so far as experimenting with blockchain and has even developed its own digital currency, JPM Coin, to accommodate clients' large digital transactions.
In another sign that the bank is carving out a position as a crypto industry player, earlier this month, JP Morgan analysts went on record saying the bank supports staking as a more energy-efficient mechanism for creating and distributing cryptocurrencies.
In a report called A Primer on Staking — The Fast-Growing Opportunity for Cryptocurrency Intermediaries and Their Clients, the bank said cryptocurrency staking has the potential to make ‘the wider crypto ecosystem more attractive as an asset class.’ Staking, analysts say, could become a significant source of income for institutional investors.
In cryptocurrency, staking is a system where users agree to deposit money in a coin’s underlying blockchain network to help it validate transactions. This type of crypto network operates on the ‘proof of stake' principle, different from the 'proof of work’ validation system used by bitcoin and ethereum.
Proof of work is the approach that underpins cryptocurrency ‘mining,’ whereby powerful computers solve complex math riddles to prove that any given crypto transaction is legitimate. It also helps control congestion and keeps crypto networks running smoothly.
The downside to proof-of-work is the massive amount of electricity it consumes, meaning it has an outsized carbon footprint. The energy consumed by bitcoin mining alone is a hot topic at the moment. Still, mining’s proponents argue that much of the energy used to maintain the network already comes from renewable sources, and, that the upsides in terms of security, privacy, and network functionality make proof-of-work worth keeping.
Despite that, several cryptocurrencies are moving to the more environmentally-friendly proof-of-stake system since it doesn’t rely on miners to keep the network operating effectively. Ethereum, the world's second-biggest cryptocurrency by market cap, is currently going through an upgrade process that will see it use proof of stake instead of proof of work. That will bring the current sub-industry around Ethereum mining to a sudden halt and give ETH a marketing edge regarding sustainability and green credentials.
As ESG (environmental, social, and governance) concerns become a bigger item on boardroom agendas, JP Morgan’s support for proof of stake could well give ethereum a boost once its network upgrade is complete. JP Morgan's report says the service and enabling technologies required to make proof-of-stake work could become a USD 40 billion industry by 2030.