Bitcoin and cryptocurrency interest among Wall Street banks has exploded in recent months—climbing along with the surging bitcoin price.
However, the bitcoin and cryptocurrency market remains relatively immature, with traders having to deposit funds with over-the-counter (OTC) trading desks and exchanges before they can make a trade—adding risk for traders and forcing OTC desks to shoulder the responsibility of cryptocurrency custody.
Now, Wall Street giant JPMorgan, after ramping up its cryptocurrency services over the last year, is exploring bitcoin and cryptocurrency clearinghouse options, looking for a middleman to sit between OTC desks and traders to guarantee the enforcement of a trade and create liquidity in the market.
“We will fundamentally need a crypto clearinghouse to see that liquidity,” says a senior JPMorgan JPM executive, speaking on background. “Once that exists, banks will move their liquidity to it.”
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Clearinghouses, designed to sit in between trades in order to guarantee payment in the event either counter party defaults, ensure trading desks are able to handle orders.
“Cryptocurrency brokers and exchanges need to avoid the kind of liquidity problems that trading app Robinhood ran into,” the JPMorgan executive adds. Last month, Robinhood was forced to temporarily halt users from buying so-called meme-stocks such as GameStop GME due to cash flow issues.
A JPMorgan spokesperson declined to comment when asked about the bank’s cryptocurrency clearinghouse plans.
“All the banks that are starting bitcoin and cryptocurrency trading desks, none of them have a clearinghouse behind them,” says Rob Rosenthal, chief executive of blockchain project RevPop and a former Goldman Sachs GS veteran who specializes in clearinghouses, speaking over the phone.
Earlier this month, Goldman Sachs said it would relaunch its bitcoin and cryptocurrency trading desk after a three-year hiatus, reviving support for bitcoin futures trading.
RevPop, which is currently looking to raise funds to build out a blockchain-based real-time clearinghouse, has recently added JPMorgan managing director Gary Chan to its team as “clearing house advisor.”