The democratic, decentralized setup of digital currencies has kept brokers at bay. While Wall Street has been skeptical of the potential of digital currencies, a telltale sign of newfound interest could be the advent of brokerage services. The high barriers to entry and potential security risks have deferred institutional and traditional investors from dabbling in the crypto markets. As intermediaries help structure the industry, it could lower the bar for entry and lessen these risks, helping to attract billions of dollars of new money and giving a much-needed push to digital currencies, which have been experiencing falling valuations for almost six months now.
Brokers Help Lower Barriers to Entry
Middlemen are essential in traditional finance, acting as intermediaries between exchanges, hedge funds and other entities operating in the market. In the crypto business, generally, a user works directly with an exchange, where he or she must maintain a balance to operate. The head of Genesis Global Trading, an over-the-counter trader, Michael Moro, believes that this requirement by the exchanges creates price disparities and eats away profits.
He commented to Frank Chaparro of Business Insider:
“The better option from a market-structure perspective is to have a prime broker sitting in the middle where all you have to do is wire one account, and you can trade across all of them simultaneously.”
Companies are waking up to the fact that crypto brokerage provides a considerable opportunity for gains, helping hundreds of new investors enter the markets and create a billion-dollar opportunity for the crypto sector. The most prominent move comes from Goldman Sachs, the Wall Street firm that initially avoided the crypto markets like the plague. The bank could be looking into designing a brokerage service that matches its existing infrastructure and safeguards. For now, it has a crypto trading setup in play.
Mike Belshe from BitGo has expressed interest in brokerage, according to Business Insider, saying his firm might enter the brokerage market at some point.
However, the most impactful presence in the market could be of Coinbase. The largest crypto exchange in the US is also interested in providing brokerage service to its user base. It even posted a job for a sales trading manager for the Coinbase prime service.
Are Brokerages Fundamentally Opposite of Decentralization?
Bitcoin, the first and largest cryptocurrency in the world, was designed after the financial crisis of 2008 broke the American economy. The blockchain ecosystem was designed to create an alternative peer to peer solution that would make Wall Street and its middlemen outdated.
However, as the crypto economy is maturing and mainstream interest in the market is still strong, the introduction of intermediaries could be critical to its sustenance.
CMT Digital’s head of crypto ventures, Colleen Sullivan, calls the lack of brokers the “biggest pain point” in the rapidly evolving crypto sector. She said to Frank Chaparro of Business Insider:
“Without a prime broker, trading firms are directly subject to events that an exchange may suffer like hacks, regulatory issues, operational issues, technology issues— all of which may lead to loss of the trading firm’s cash and coin.”
Prime brokers arrived in the traditional markets almost at the same time as the hedge fund industry took off in the early ‘90s. As hedge funds have started arriving in the crypto markets, a prime broker may not be far away.