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Roula Khalaf, Editor of the FT, selects her favorite tales on this weekly e-newsletter.
The author is a former world head of fairness capital markets at Financial institution of America and is now a managing director at Seda Consultants
Bitcoin’s spectacular surge this yr has reignited a dilemma on Wall Road: how far ought to funding banks go in supporting cryptocurrency-related capital raisings? Latest choices reveal a profound shift in considering.
Not way back, large banks saved crypto at arm’s size. The sector had a racy status, and financial institution leaders have been vocal of their disdain. JPMorgan’s chief Jamie Dimon branded bitcoin a “fraud” and a “Ponzi scheme”. Regulatory fears deepened the nippiness. Crypto offers have been left to smaller funding banks.
However occasions have modified. The Securities and Change Fee’s approval of bitcoin change traded funds in January 2024 marked a watershed. Furthermore, Donald Trump’s election in all probability heralds a transfer to a extra crypto-tolerant SEC, in distinction to the scepticism beneath 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, a knowledge 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 threat components and name it good? Or is it too dangerous being related to what many see as a wildly speculative sector?
The reply just isn’t binary. It lies on a spectrum that displays every financial institution’s threat tolerance and strategic outlook. And it’s not clear that every one crypto-related corporations must be seen equally. A longtime change reminiscent of Coinbase might have a special threat profile from a bitcoin miner or an funding car like MicroStrategy. Even throughout comparable corporations, reputational points range.
Think about 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 evaluation round consumer choice. Evidently, Barclays and Citigroup received snug with the affiliation.
If all this sounds acquainted, it ought to. Take special-purpose acquisition corporations, or Spacs. As soon as shunned as gimmicky automobiles by some bulge-bracket banks, they have been embraced by Wall Road in the course of the 2019-2021 increase. However banks swiftly retreated by mid-2022, as reputational issues 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 choices are multi-faceted. Authorized threat looms massive. Basic counsels lose sleep over questions reminiscent of, “will we get sued if this tanks?” Media scrutiny is equally daunting; nobody desires their firm in detrimental headlines.
However threat 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 information. This interprets right into a charge pool that I estimate to be no less than $200mm. And MicroStrategy’s $21bn fairness providing is paying charges of two per cent to the banks dealing with the gross sales. That form of potential income makes reputational reservations really feel like a luxurious.
There stays an unwritten code of respectability in banking. Sure companies — reminiscent of grownup leisure — are shunned, even when completely authorized. Hashish corporations, 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 value.
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 unsuitable, nobody financial institution will get singled out. The aggressive intuition additionally performs a task. No banker desires to elucidate to their bosses why they missed their finances objectives or dropped down the league tables.
Briefly, participation just isn’t a verdict on crypto, however quite affords a glimpse into how funding banks weigh the three Rs of deal choice: threat, reward and status. In a technique of steady recalibration, senior leaders are balancing authorized publicity, media response, regulatory threat and aggressive pressures to find out the place the boundary of “respectable” lies. As bitcoin strikes from the perimeter to the mainstream, large banks are inching additional into the sector, one deal at a time.
