Bitcoin is coming to Wall Street on Sunday, and some executives at the world's biggest banks aren't sleeping well.
With just a few days left until Cboe Global Markets Inc. debuts futures contracts on the cryptocurrency, many banks are still weighing whether to offer them to clients — and if so, how to handle the mechanics. Several of the largest firms, including JPMorgan Chase and Citigroup, aren't immediately offering clearing of the futures as they wait to see how it will work, according to people briefed on the plans.
In interviews, some executives and traders said their desks are eager to get in on the action — but most sounded cautionary notes, ticking off concerns and unanswered questions. Bitcoin's violent price swings this week have made the new market look all the more dangerous.
All of the people — speaking from a half-dozen major firms — asked not to be named, in some cases saying they're worried about contradicting their bosses' public statements. Others said it's still too early to take a position. These are a few of their top concerns:
Some bank CEOs and industry leaders have spent months deriding bitcoin publicly — "it's a fraud," "the very definition of a bubble" or an "index for money laundering" — and who knows what they've said privately. Now, what will it look like if firms help clients into investments that blow up? How might internal commentary over the futures sound if it ever spills into legal cases? One executive, for example, privately referred to the cryptocurrency as "sh*tcoin."
Enthusiasts say bitcoin is a currency. The Commodity Futures Trading Commission says it's a commodity. So does Goldman Sachs So it may seem natural for trading desks in those markets to handle the new contracts. But one executive said there's at least an argument to be made that equities desks (and delta one traders specifically) are used to the math: Bitcoin is like a volatile stock, and futures, at least in some ways, are like the options that track it.
When asset prices are steady, it's relatively straightforward for banks to make markets: Help a customer buy or sell an asset, and then take some time to find another client who wants to take an opposite position. But bitcoin is too radioactive for banks to hold — it swings wildly within minutes and there's no established model to account for it on the balance sheet. So banks will try to clear the new contracts, matching one investor with another. That can be tough. A few traders, for example, said many clients are only interested in shorting. That can make for a pretty hard day at the office: Without longs, the trades may be costly and hard to set up.
This was laid out in a letter this week from the Futures Industry Association, which said Cboe and larger exchange operator CME Group Inc. are rushing the futures to market without a proper consideration of the risks. The trade group, made up of some of the world's largest derivatives brokerages, said it was concerned that the cryptocurrency's extreme volatility could lead investors to default if prices swing. That could sting firms that clear the contracts.
It's going to be tough for big bureaucratic banks to figure out all of these mechanics — and their own stomach for the business — on a tight schedule. A person close to Goldman Sachs said on Thursday it will initially clear bitcoin contracts for certain clients on a case-by-case basis. Dutch lender ABN Amro Group NV said it will clear the futures for some clients who request specific approval, and said it has received fewer than 10 requests so far.
Bank of America, Morgan Stanley and Royal Bank of Canada are in the camp with JPMorgan and Citigroup, deciding not to offer clearing right away, people briefed on their plans said. At some other firms, executives said they may enter when ready. So if they do choose to wade in, it'll be smooth. But will a small presence from big players give an advantage to nimbler, risk-friendly firms that embrace the new market out of the gate?
