Wall Street Seeks to Close the Gap in the Crypto Industry

The recent passage of the GENIUS Act and the growing momentum behind the CLARITY bills in Congress have brought regulatory clarity for digital assets within reach, providing the long-awaited legal framework for the crypto industry. However, this development raises questions about whether the traditional crypto players will emerge as the primary beneficiaries. For years, the lack of clear regulation hindered the growth of the crypto industry in the world's largest economy, leading to lawsuits, capital flight, and a brain drain. The over 3,300 US broker-dealers were particularly affected, as they were forced to sit on the sidelines due to federal laws, while billions of dollars flowed into crypto, which could have otherwise been theirs. Retail investors fueled the rapid expansion of fintech firms like Coinbase and Robinhood. Despite the challenges, the crypto industry experienced growth in four of the last five years, with the exception of 2022, which was marked by the FTX implosion. Meanwhile, the US brokerage industry remained idle, awaiting guidance on how to issue, trade, and custody digital assets. The lack of regulatory clarity inadvertently gave the crypto industry a head start in capturing market share and building brand loyalty. However, with regulatory clarity on the horizon, the question arises as to whether Wall Street can leverage its advantages to catch up. A significant development in this regard was the statement by SEC Commissioner Hester Peirce, who clarified that tokenized stocks are securities and must comply with federal securities laws. This statement sent a clear message that any tokenized securities products in the US must adhere to federal securities laws, effectively leveling the playing field for both traditional finance and crypto. Traditional finance has responded quickly, with over $170 billion in assets flowing into 105 crypto ETFs traded in US markets. Large banks, such as Citigroup and JPMorgan, are launching stablecoins to facilitate payments, while financial technology giant Fiserv is supplying regional banks with its new stablecoin, FIUSD. New avenues are emerging, providing both retail and institutional investors with opportunities to enter the market. Broker-dealers can now offer clients direct exposure to digital assets through a correspondent clearing special purpose broker-dealer, without requiring significant infrastructure overhauls or new licenses. This development opens the door for firms like E-Trade, Merrill Edge, and Fidelity to meet client demand for digital assets while staying within the boundaries of US law. Internationally, the trend is also clear, with Standard Chartered becoming the first global systemically important bank to launch a spot crypto trading desk, offering Bitcoin and Ether to institutional clients. Ironically, legacy crypto firms are now racing to adopt the regulated model they once sought to bypass, with many acquiring SEC-registered broker-dealers, seeking FINRA membership, and applying for bank charters to extend their offerings into brokerage and banking accounts. The SEC Chairman has emphasized the need for a rational regulatory framework for crypto asset markets, which will establish clear rules for the issuance, custody, and trading of crypto assets. This vision underscores the importance of upgrading existing market infrastructure rather than creating parallel systems, which favors firms with a strong compliance track record, operational expertise, and investor protections. US broker-dealers are well-positioned to benefit from this development, given the introduction of correspondent clearing, adherence to existing compliance structures, large customer base, and operational scale. The opportunity now exists for Wall Street to lead the development of digital markets in the US and cement the country's position as a global leader in capital formation, market integrity, and financial innovation.