Mainstream Financial Giants and Their Handshake with Encryption Exchanges: The Beginning of a New Era?

JPMorgan recently made a remarkable decision. Although the bank still does not recommend that investors include Bitcoin or other encryption currencies in their portfolios, it has taken a milestone step into the crypto world.

Recently, reports have indicated that one of America's largest financial institutions, JPMorgan Chase, will begin providing banking services to cryptocurrency exchanges Coinbase and Gemini. The bank accounts for these two exchanges were approved for opening with JPMorgan in April. In the initial phase of the collaboration, JPMorgan will offer cash management services to the U.S. customers of the aforementioned exchanges, including wire transfers and deposit/withdrawal services, but will not be directly involved in the settlement of cryptocurrencies.

This news has attracted widespread attention on Wall Street. A banking industry insider believes that JPMorgan's move, in addition to direct revenue considerations, may also bring it future opportunities to underwrite the IPOs of Coinbase and Gemini, as well as potentially consider listing JPM Coin on these platforms.

Brian Brooks, former Chief Legal Officer of Coinbase and current Senior Deputy Comptroller of the Office of the Comptroller of the Currency, commented: "As the cryptocurrency market matures, there will be more and more blockchain companies with good risk control systems and compliance standards, and such companies should not be impeded in banking."

Undoubtedly, this cooperation is another important milestone for the integration of the encryption world into the mainstream. It is crucial to understand the logic behind it, but it should not be overlooked that there is still a long way to go before the entire encryption world achieves long-term stable cooperation with traditional financial institutions.

Both parties have a "mutual understanding" cooperation

The handshake between JPMorgan and Coinbase, Gemini, is clearly the result of mutual "affection". The former needs to secure the rich mines in emerging fields as early as possible under compliance, while the latter two need support from traditional financial institutions that are friendly to the encryption world, aiming to become more specialized financial service platforms and to assist their deeper entry into a broader, institutionalized market.

High compliance and the primary settlement in fiat currency are common strong attributes of Coinbase and Gemini exchanges, which perfectly align with the banking industry's demand for regulatory compliance.

In terms of finance, Gemini has passed an audit by Deloitte, one of the Big Four accounting firms, while Coinbase has passed an audit by another major accounting firm, Grant Thornton.

As early as 2018, Coinbase, valued at $8 billion, was rumored to be preparing for an IPO, and industry insiders generally believe that its investment in compliance is the reason for its high valuation.

Based on the capital flow situation of the two exchanges, fiat currency occupies an absolute dominant position, which clearly provides a considerable profit margin for banks such as JPMorgan Chase. According to statistics from the data platform, in the past 24 hours, there was approximately $5.7 billion in trading volume on Coinbase Pro, of which 91.8% of the trading volume was completed using US dollars, euros, and British pounds. During the same period, Gemini had a trading volume of about $47 million, with 99.2% of the trading volume completed using US dollars.

It is worth noting that Coinbase and Gemini have a rich range of services. In addition to exchange services, there is a strong demand for fiat services in custody, stablecoins, wallets, and other areas.

Taking stablecoins as an example, USDC launched by Coinbase and Circle, as well as GUSD from Gemini, are both issued using a fiat-collateralized model. According to statistics, the current combined market capitalization of the two is approximately $800 million, and the corresponding funds custody and fiat deposit/withdrawal fees also generate a considerable income.

From JPMorgan's perspective, although its CEO has held negative views on Bitcoin for a long time, the institution's exploration of the blockchain field has been quite in-depth and early, and its actual actions show curiosity and enthusiasm for encryption.

• In 2016, JPMorgan Chase launched the open-source blockchain protocol Quorum to serve the funding interaction needs of enterprises and financial institutions.
• In 2017, JPMorgan launched the Interbank Information Network (IIN) based on Quorum, aiming to address the long-standing challenges of information sharing between banks. Currently, the network has attracted 397 banking institutions, including JPMorgan, the National Bank of Canada, and China CITIC Bank.
• In 2019, JPMorgan Chase announced the launch of JPM Coin(, becoming the world's first large bank to "issue currency".
• In 2018, JPMorgan tokenized a 1-year floating-rate bond worth $150 million based on blockchain.

However, before this significant cooperation takes place, the encryption world has long been navigating "trembling with fear" among banks, maintaining a highly uncertain cooperative relationship with them.

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The Difficult Cooperation Between the Encryption World and Banks

Even as cautious as Coinbase, it has experienced several setbacks: in August of last year, it was reported that its collaboration with a certain bank was interrupted, possibly due to compliance issues, preventing access to the UK Faster Payments framework; in the same month, it also delisted Zcash, reportedly due to compliance requirements from Coinbase's UK partner bank.

Among all the fluctuating stories, the stablecoin issuer and its associated exchange are the most compelling.

It is well known that this stablecoin issuer has a mutually dependent relationship with its affiliated exchange, and it is an open secret that the stablecoins are overstated in the case of insufficient reserves: after being involved in a lawsuit with the Attorney General's office in a certain region last year, the stablecoin issuer admitted that each stablecoin is backed by an average of only about 0.74 dollars, and the lawsuit also pointed out that its 860 million dollars in reserves had been misappropriated by the affiliated exchange.

Before the initiation of this lawsuit, this stablecoin issuer and its affiliated exchange have long tried to collaborate with mainstream banks, but the results have always been "difficult to sustain". They have contacted several mainstream banks, but without exception, all collaborations have been interrupted. Currently, it is unknown whether they have received support from mainstream orthodox banks and what the status of their cooperation is.

This bumpy experience is actually a microcosm of the cooperation between the encryption world and traditional banks: although banks covet the small gold mine of the encryption world, many compliance uncertainties of native enterprises in the encryption world make it difficult for both parties to reach cooperation, often resulting in a tug-of-war state with extremely high uncertainty.

However, at the same time, the tumultuous fate has not prevented this stablecoin from becoming increasingly prominent in the world of encryption. As of May 15, data shows that it holds a market value of about $9 billion and a daily trading volume of $59 billion, firmly sitting in the third position in global cryptocurrency market value and first in trading volume. The issuance of this stablecoin still significantly impacts the prices of encryption assets, but this logic of abrupt price changes often leaves people filled with doubt.

If we examine further, perhaps Coinbase and Gemini have successfully established themselves within mainstream financial institutions, while certain entities are still "running away into the wilderness" yet "feasting happily"; this represents a divide in the crypto world: industry-native institutions striving to align with mainstream narratives will eventually succeed in "landing ashore", competing alongside the giants of the financial industry, while the latter may continue to express themselves freely in the "bizarre" crypto world. However, the question remains: can their story continue to be told?

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