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BlackRock & Bitcoin

Introduction

The largest asset manager in the world, BlackRock, made the official announcement on August 4th that it has teamed up with Coinbase to give its institutional clients access to cryptocurrencies.

Clients of BlackRock will be able to use Coinbase Prime for crypto trading, custody, prime brokerage, and reporting. This will initially be limited to Bitcoin only.

This article will concentrate on the specifics of the partnership, its significance, and what it implies for the future adoption of cryptocurrencies such as Bitcoin.

The Overview

This partnership will provide institutional clients of Aladdin, BlackRock’s end-to-end investment management platform, with a direct access to crypto trading through connectivity with Coinbase Prime.

Joseph Chalom, BlackRock’s global head of strategic ecosystem partnership, said in the release, “This connectivity with Aladdin will allow clients to manage their Bitcoin exposures directly in their existing portfolio management and trading workflows for a whole portfolio view of risks across asset classes.”

Ultimately it will be about connecting the two systems to create new access points for institutional crypto adoption. BlackRock and Coinbase will continue to progress the platform integration and will roll out functionality in phases to interested clients.

BlackRock and Aladdin

BlackRock is the world’s largest investment manager, with $10 trillion in assets under management. It’s an industry leader that has become an increasingly influential Wall Street player in Washington, DC. BlackRock operates globally with 70 offices in 30 countries and clients in 100 countries. To fully grasp the significance of BlackRock’s partnership with Coinbase for Bitcoin and cryptocurrencies, we must first delve deeper and ascertain how much power BlackRock truly holds.

Blackrock.com

Aladdin (Asset, Liability and Debt and Derivative Investment Network) is a comprehensive investment management and trading platform built by BlackRock solutions in 1988.

Originally built to manage BlackRock’s assets, Aladdin was made accessible to BlackRock’s clients in 1999, allowing them to manage their own investments on a daily basis.

It has been reported by the Financial Times, that Aladdin oversees at least $21.6 Trillion in global assets, helping 55,000 investment professionals to analyze and track portfolios as well as manage risks. Although BlackRock remains the single largest user of Aladdin, it’s still a juggernaut that’s widely used in the money management industry and beyond.

Who Are the Aladdin Customers?

Apps Run the World

Companies that use BlackRock’s Aladdin for portfolio and investment management include the world’s largest fund managers, such as Vanguard, State Street and Credit Suisse, half of the world’s top ten largest insurers, such as MetLife, AXA and Swiss Re, over 170 pension funds, including Japan’s $1.5 trillion pension fund, banks such as HSBC, Santander, and UBS, endowment funds, and the world’s largest publicity listed companies, such as Apple, Microsoft and Google. All of whom rely on the system to steward hundreds of billions of dollars in their corporate treasury investment portfolios.

BlackRock’s proprietary software has become indispensable to many. Anthony Malloy, CEO of New York Life Investors, which has $238 billion in assets under management, told Forbes Magazine that “Aladdin is like oxygen. Without it we wouldn’t be able to function.”

According to a news statement from BlackRock, the agreement will allow its clients to track their crypto assets alongside the rest of their portfolios.

NYtimes.com

Former BlackRock Executives in the Government Roles

BlackRock isn’t just the largest money manager in the world, but also a financial leviathan that bears down on political decisions. The firm has hired notable policy-makers over the years, and at least three former BlackRock executives now hold prominent roles in President Joe Biden’s cabinet.

NYtimes, Politico, Yahoo Finance

Adewale Adeyemo, a former chief of staff to BlackRock’s CEO Larry Fink, serves as a top official at the Treasury Department, former BlackRock investment executive Brian Deese leads Biden’s National Economic Council, and Michael Pyle, BlackRock’s former global chief investment strategist serves as chief economic advisor to Vice President Kamala Harris.

Former Government Officials in the Senior Executive Roles at BlackRock

Politico, Investment News, The Mirror

Vice-versa, BlackRock has hired many notable former policy-makers, regulators and high ranking politicians. Thomas Donilon, who is now a chairman of the asset manager’s research arm, previously served as national security advisor to Obama. Dalia Blass, a longtime former SEC official who most recently ran the SEC’s investment management division, joined BlackRock in June 2021 to lead external affairs. George Osbourne, a former British politician who served as Chancellor of the Exchequer, was paid £650,000 a year to work four days a month at BlackRock as a senior adviser to the US conglomerate’s research arm, the Investment Institute, according to the register of MPs’ interests.

Aiding the Federal Reserve

Wikimedia.commons

The consulting branch of BlackRock, FMA, played a crucial role in the US government’s COVID response. FMA was chosen by the Federal Reserve to manage an emergency asset-purchasing program and according to the Wall Street Journal, there was no process where other asset managers could have bid for the job.

This was not the first time the Fed entrusted major crisis management to BlackRock’s FMA subsidiary. During the 2007–2009 global financial crisis, the Fed asked BlackRock’s FMA division to handle assets of Bear Stearns and AIG, both on the verge of collapsing.

The CEO — Larry Fink

Harvard Business Review

Larry Fink is one of the most powerful figures in the world of finance. The 69-year-old former securities trader co-founded and still runs the world’s biggest money-management firm, BlackRock or as Bloomberg called it recently, the “fourth branch of the government” following the role of Larry Fink’s dealing with the coronavirus crisis.

Today, through an array of government contracts, Larry Fink via BlackRock has effectively become the leading manager of Washington’s bailout of US economy. The fact that BlackRock was handed significant contracts without competitive bidding in a secretive procedure has also raised eyebrows in Congress and sparked questions about Fink’s long-standing contacts with senior government officials.

Understanding Relationship Between BlackRock and Bitcoin

CNBC, Financial News, Forbes

It didn’t get off to a good start. Initially, BlackRock had no interest in Bitcoin and was publicly opposed to it. Larry Fink termed Bitcoin an index of money laundering at an Institute of International Finance meeting on October 13, 2017, saying “Bitcoin just shows you how much demand for money laundering there is in the world. That’s all it is.”

At the time, BlackRock and Larry Fink considered Bitcoin and cryptocurrencies to be a waste of time. However, over the next few years, this viewpoint steadily shifted.

In April 2019, BlackRock hired Robert Mitchnick, former Product Marketer for Ripple, who is now the head of distributed ledger technology and digital assets at BlackRock.

In January 2021, BlackRock filed documents with the Securities and Exchange Commission showing that it wants to include cash-settled Bitcoin futures as eligible investments for two of its funds.

In June 2021, SEC filing revealed that BlackRock has taken significant stakes in two Bitcoin miners, 6.71% in Marathon Digital Holdings and 6.61% in Riot Blockchain. The total capital commitment amounted to $382.9 mil between both miners. Few days before the filing Larry Fink stated in an interview on Bloomberg that Bitcoin might become a store of value but had to prove itself.

In April 2022, BlackRock launches iShares Blockchain and Tech ETF, which seeks to track the investment results of an index composed of U.S. and non-U.S. companies that are involved in the development, innovation, and utilization of blockchain and crypto technologies.

In August 2022, BlackRock partners with Coinbase to give institutional clients access to Bitcoin. The partnership will allow the firm’s institutional clients to have access to crypto trading. Although this is limited to Bitcoin only, more crypto assets are likely be added in the future.

In addition to that, a week later BlackRock launches a private Bitcoin trust. BlackRock’s trust is comparable to the Grayscale’s Bitcoin Trust, an open-ended grantor trust that is invested exclusively in Bitcoin. The trust will be offered to BlackRock’s institutional clients in the United States.

What Does It All Mean For Bitcoin?

news.bitcoin.com

There are two fundamental factors at play here. First and foremost — demand for Bitcoin as an asset class. The significant demand from institutional clients forced BlackRock and Larry Fink to change their tune, not the other way around. The decision to partner with Coinbase and to launch a private Bitcoin trust in 2022, and not any time earlier, was largely due to the spike in interest in Bitcoin as an asset class this year.

This is further validated from the comments Larry Fink made during an interview on CNBC in April 2021, stating “we’re not seeing broad-based interest by institutions worldwide, and I like to say that most of what we do is the reflection of what we are hearing from our clients.”

Furthermore, in a blog post about the private Bitcoin trust, BlackRock stated: “Despite the steep downturn in the digital asset market, we are still seeing substantial interest from some institutional clients.”

Blackrock.com

Second, there is the likelihood of favorable regulatory clarity for crypto assets, and specifically for Bitcoin. It’s doubtful, given Larry Fink’s close ties with senior government officials, that BlackRock would expose itself and their clients without receiving a ‘nod of approval’ on what the future holds for Bitcoin and digital assets in terms of the US regulatory environment.

Given these reasons, as well as BlackRock’s prominence and influence in the industry, other large asset managers who have previously disregarded Bitcoin are likely to reconsider and follow suit.

What Does It All Mean for Other Crypto Assets?

More crypto assets will likely be added to the Aladdin platform via Coinbase Prime in the future. However, not all cryptocurrencies are created equal, and certain digital assets have piqued the interest of institutions in recent years.

Data on institutional capital flowing into cryptocurrency is the strongest indicator of this. To put it another way, follow the money.

CoinShares

As of August 12th, Ethereum saw the second greatest institutional funds flow into it, according to CoinShares, a digital asset management and analytics firm. Besides Ethereum, institutional funds have been allocated to Binance, Solana, Litecoin, Tron, Cardano and XRP. However, there is a significant difference between the amount of capital invested into Ethereum by institutions, which stands at $9.1 billion to date, and the rest of the crypto assets.

In addition, given that Ethereum is the second-largest cryptocurrency and with its highly anticipated merge in September, when it will transition to proof-of-stake, thus reducing its energy consumption by 99.95%, effectively making it “green” and deflationary, would likely mean that Ethereum’s ETH will be made available to BlackRock clients very soon after.

This is especially relevant given that Coinbase’s institutional platform, Coinbase Prime, offers ETH staking, which is a great way to earn a passive income of up to 10% per annum by providing useful work in the form of security to the underlying blockchain. According to Coinbase, Ethereum is the most-staked asset on its platform.

coinbase prime

As a result of this partnership, BlackRock clients will be able to access Coinbase Prime, the exchange’s institutional platform, and start staking Ether.

Regarding the other crypto assets, it’s anyone’s guess, but it’s probable other digital assets such as Solana, Binance or Cardano will follow suit based on institutional demand for each one of them.

Summary

Overall, the world’s largest asset manager characterizing Bitcoin as the oldest, largest, and most liquid digital asset is a clear indication of how large the sector is growing and heading towards more traditional Wall Street investment portfolios. This news will be a further catalyst for other large asset managers to either initiate or speed up their crypto plans.

The partnership with Coinbase could put pressure on lawmakers to push pro-innovation regulation given BlackRock’s influence, which will determine the speed at which other major asset managers will enter the space.

Ultimately, with the growing adoption necessitating a regulatory framework for crypto, global asset managers are likely to follow suit and offer Bitcoin as well as several other key digital assets to their clients in order to meet institutional demand and avoid missing out.

DISCLAIMER: The information contained in this article is for educational purposes only and does not constitute any form of advice or recommendation by Wheatstones, and is not intended to be relied upon by users in making (or refraining from making) any investment decisions.

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Wheatstones

Digital Asset Management | Cryptocurrency & Blockchain | Cayman — London