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Roula Khalaf, Editor of the FT, selects her favorite tales on this weekly publication.
The author is a former international head of fairness capital markets at Financial institution of America and is now a managing director at Seda Specialists
Bitcoin’s spectacular surge this yr has reignited a dilemma on Wall Avenue: how far ought to funding banks go in supporting cryptocurrency-related capital raisings? Latest choices reveal a profound shift in pondering.
Not way back, massive banks stored crypto at arm’s size. The sector had a racy fame, and financial institution leaders had been vocal of their disdain. JPMorgan’s chief Jamie Dimon branded bitcoin a “fraud” and a “Ponzi scheme”. Regulatory fears deepened the chilliness. Crypto offers had been left to smaller funding banks.
However instances have modified. The Securities and Alternate Fee’s approval of bitcoin alternate traded funds in January 2024 marked a watershed. Furthermore, Donald Trump’s election most likely heralds a transfer to a extra crypto-tolerant SEC, in distinction to the scepticism underneath chair Gary Gensler.
As deal sizes have swelled, so too has the roster of underwriters. Barclays and Citigroup have led a number of convertible bond choices this yr for bitcoin investor MicroStrategy. Goldman Sachs raised cash for Utilized Digital, an information centre operator that caters to bitcoin miners. JPMorgan has underwritten hefty convertible bonds for bitcoin mining and infrastructure teams Core Scientific, Mara and Iren.
As banks debate whether or not to dive headlong into the house or maintain again, the central query is: are you able to lawyer these offers to the hilt, stack the prospectus with danger elements and name it good? Or is it too dangerous being related to what many see as a wildly speculative sector?
The reply shouldn’t be binary. It lies on a spectrum that displays every financial institution’s danger tolerance and strategic outlook. And it’s not clear that every one crypto-related firms must be seen equally. A longtime alternate akin to Coinbase might have a distinct danger profile from a bitcoin miner or an funding car like MicroStrategy. Even throughout related firms, reputational points range.
Contemplate MicroStrategy and its co-founder Michael Saylor. With out admitting wrongdoing, each settled accounting fraud allegations from the SEC in 2000 and a tax fraud lawsuit with the District of Columbia’s attorney-general in June 2024 for substantial financial sums. Such a sample sometimes triggers senior administration evaluate round shopper choice. Evidently, Barclays and Citigroup obtained comfy with the affiliation.
If all this sounds acquainted, it ought to. Take special-purpose acquisition firms, or Spacs. As soon as shunned as gimmicky automobiles by some bulge-bracket banks, they had been embraced by Wall Avenue through the 2019-2021 increase. However banks swiftly retreated by mid-2022, as reputational considerations surfaced. Crypto capital-raising has an analogous really feel — a unstable frontier the place banks chase windfall charges and market share, whereas bracing for potential reputational blowback.
The drivers of those selections are multi-faceted. Authorized danger looms massive. Basic counsels lose sleep over questions akin to, “will we get sued if this tanks?” Media scrutiny is equally daunting; nobody needs their firm in unfavorable headlines.
However danger alone doesn’t dictate behaviour. Charges matter. And in bitcoin capital markets, they’re now substantial. Greater than $13bn of crypto-related convertibles have been issued in 2024, with most coming within the final quarter, in line with IFR knowledge. This interprets right into a payment pool that I estimate to be at the very least $200mm. And MicroStrategy’s $21bn fairness providing is paying charges of two per cent to the banks dealing with the gross sales. That type of potential income makes reputational reservations really feel like a luxurious.
There stays an unwritten code of respectability in banking. Sure companies — akin to grownup leisure — are shunned, even when completely authorized. Hashish firms, too, have struggled to persuade big-name banks to underwrite their choices. The reluctance isn’t rooted in ethical outrage; it’s pure optics. Bankers know that sure companies invite extra public warmth than they’re price.
But as soon as a couple of banks break ranks, the strain mounts on others to observe. It’s safer to maneuver as a pack; if something goes incorrect, nobody financial institution will get singled out. The aggressive intuition additionally performs a job. No banker needs to elucidate to their bosses why they missed their funds objectives or dropped down the league tables.
In brief, participation shouldn’t be a verdict on crypto, however moderately provides a glimpse into how funding banks weigh the three Rs of deal choice: danger, reward and fame. In a technique of steady recalibration, senior leaders are balancing authorized publicity, media response, regulatory danger and aggressive pressures to find out the place the boundary of “respectable” lies. As bitcoin strikes from the perimeter to the mainstream, massive banks are inching additional into the sector, one deal at a time.
