Wall Street gives crypto a chance

This is an audio transcript of the FT News Briefing podcast episode: ‘Wall Street gives crypto a chance’

Marc Filippino
Good morning from the Financial Times. Today is Wednesday, May 31st, and this is your FT News Briefing. 

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Wall Street is taking on the crypto industry. And Elon Musk is in China to strengthen ties with the government. Plus, in the US, investment funds have become the new insider trading risk for lawmakers. I’m Marc Filippino, and here’s the news you need to start your day. 

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Elon Musk met with China’s foreign minister yesterday as political tensions between Washington and Beijing are hurting economic ties. Beijing is crucial to Musk’s car company, Tesla. China is its biggest market outside the US and the country is critical to Tesla’s supply chain. Here’s the FT’s Ed White. 

Edward White
As we record this, we only have had a statement from the Chinese foreign ministry. They said that Elon Musk stressed that he disagrees with the decoupling that’s been happening between the world’s two biggest economies and that supply chains shouldn’t be broken. And so that’s the kind of message that China is very happy to hear. 

Marc Filippino
This is Musk’s first visit since the Covid-19 pandemic started more than three years ago. 

Edward White
He has a lot at stake. And so he wants to see China be successful and he wants to not be constrained by geopolitical tensions — things like export controls, controls over sensitive technologies that have got in the way of other companies in other sectors doing business. So he doesn’t wanna see that applied to Tesla. 

Marc Filippino
But Ed says China has mixed views of Elon Musk and his businesses. 

Edward White
They have great concerns over Elon Musk and SpaceX and the links to the US military. There are also rising concerns in Beijing around data security generally, but that applies in very particular detail to Tesla. If Tesla starts to roll out smart driving functions on its EVs, if they are capturing, you know, sensitive geographical details, sensitive consumer details from China, and then sending that data back to the US or to elsewhere, there is a real problem and crosses a red line for Beijing. So certainly he is seen as someone who is potentially helpful from the Chinese point of view, but not necessarily someone who has a total kind of clean bill of health from Beijing’s side. 

Marc Filippino
Ed White covers China for the FT. 

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Some of the biggest names in investment banking are jumping into the ring with Coinbase and other cryptocurrency companies. Standard Chartered, Nomura and Charles Schwab are among the brokerages building their own crypto platforms. The FT’s Nikou Asgari says traditional financial institutions are moving in after a year of bankruptcy and scandal for crypto-native companies. 

Nikou Asgari
Think of FTX, the lenders Genesis and Celsius and Voyager last year, or other companies that haven’t collapsed but have run into pretty serious regulatory problems, especially in the US. And so Wall Street executives are looking at this and people working at the banks and the brokerages that you mentioned are looking at this and thinking, we’re interested in crypto. The asset managers that we work with, the hedge funds and the pension funds that we work with want to trade crypto or understand it a bit more. But they’re very wary of the companies that are out there already. No one wants to end up in a headline next to FTX, for example. And so they think that the best way to get into the industry is to build their own companies and take the best bits of what they know already in traditional finance, traditionally from Wall Street, and sort of superimpose that on to the crypto industry and get involved. 

Marc Filippino
Nikou says as big established financial firms move into crypto, it could shake up many of the companies that created the industry. 

Nikou Asgari
If you’ve got all of these big-name companies with big-name guys working inside them now moving over to crypto, a lot of the trust of the asset managers and the traditional, you know, hedge funds and pension funds sits there. They’re comfortable with these names. So what happens to Coinbase and Binance and other crypto exchanges that have been around and currently dominate the industry? That’s where all of, almost all of the trading takes place on these big crypto platforms. Whether they’ll see their market share get eaten into by these newer players because the asset managers, the people who are trading are more comfortable trading there instead.

Marc Filippino
But Wall Street hasn’t fully embraced crypto yet. 

Nikou Asgari
At the moment, you know, all of these companies, they’re jumping in, but they’re still, the trading volumes are low. They aren’t really eating into the market share of the Binances and the Coinbases of the world. And for the asset managers, a lot of them are very wary of if they can trade crypto, how they can trade crypto. You’ve got regulations in Europe, you’ve got US regulators clamping down over there and there’s no full embrace yet because until there’s clear regulation of what you can trade and how you can trade it, it’s still, for asset managers, they’re not ready to jump in wholeheartedly yet.

Marc Filippino
That’s the FT’s digital markets correspondent, Nikou Asgari. 

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For about a half a century, there’s been strict reporting rules for US lawmakers and their personal investments. Members of Congress who buy or sell stocks have to report the transaction within 45 days. But there’s a huge loophole. The reporting requirements are looser for investments in stock funds, things like mutual funds and exchange traded funds or ETFs. I’m joined now by the FT’s Nick Megaw, who’s been writing about this loophole. So, Nick, what’s the fundamental concern surrounding lawmakers and their investing? 

Nicholas Megaw
Yeah, so there’s always been a concern about lawmakers using the info they get from their jobs for their own benefit. But then at the same time, there’s this view that you shouldn’t have to give up all of your financial opportunities just to become a public servant. You don’t wanna only attract people who are already rich. So when they introduced financial reporting rules in the wake of the Watergate crisis, there were broad exemptions for investment funds. The idea being that if a portfolio manager is making all the decisions and investing in, like, a diversified mix of stocks and other assets, then that at least minimises the potential for conflicts of interest. 

Marc Filippino
That makes sense. So then why are people raising flags over ETFs now? What are the issues? 

Nicholas Megaw
So the problem is the industry has just changed massively since these rules were introduced. Like, in 1978 there were about 500 mutual funds in the US. ETFs hadn’t even been invented yet. And now, 50 years later, there are seven and a half thousand mutual funds and over two and a half thousand ETFs. And a lot of them are not a diversified mix of stocks and other assets. You get very specialised, very focused funds, which ethics experts say are as effective as stocks or in some cases even more effective for insider trading. I mean, generally speaking, the majority of rules you work on as a member of Congress don’t focus on an individual company. They’ll affect like a whole industrial sector. So if you’re working on an infrastructure bill, you can buy a fund that focuses on infrastructure with much lighter reporting requirements than if you were buying a regular stock. 

Marc Filippino
So is there a specific example of someone that you can think of that comes to mind? 

Nicholas Megaw
Yeah, I mean, there are a couple of examples that were particularly ironic since they came from people who’ve been vocal supporters of banning trading in individual companies. So John Hickenlooper, the Democratic senator for Colorado, for example, had more than $100,000 invested in Chevron, the big oil company, and he sold that stock after he joined the Senate energy committee. On the same day he invested over $100,000 in an ETF that is designed, in their own words, to provide precise exposure to oil companies. Nearly half of its assets are in just two companies, one of which is Chevron. And so he still stands to directly benefit from decisions that could be made by that committee. 

Marc Filippino
Is there an effort to change the rule? 

Nicholas Megaw
There are some, although frankly, there’s not been much so far just focused on the funds. Congress kind of regulates itself on this. So it’s difficult and slow to force change. There’s been a lot of attention in the last couple of years on updating rules on trading in individual stocks. There’s been more than a dozen various proposals put forward, although none of them have actually made it to a vote yet, and most of them wouldn’t affect trading and investment funds. So this issue is probably gonna be around for a while. 

Marc Filippino
Nick Megaw is a US capital markets correspondent for the FT. Thanks, Nick. 

Nicholas Megaw
Thanks.

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Marc Filippino
You can read more on all of these stories at FT.com. This has been your daily FT News Briefing. Make sure you check back tomorrow for the latest business news. 

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