Bank of America joins Bitcoin derivatives race with other FIs

The bank's wealth management division Merril Lynch is preparing a Bitcoin investment product that allows clients to trade based on the futures markets in aggregate. Morgan Stanley, Goldman Sachs, Citigroup and New York Stock Exchange are among the other major players stepping into the crypto space

Bank of America’s wealth management division Merrill Lynch is the latest Wall Street firm to join the crypto race by developing a Bitcoin trading product to compete with Goldman Sachs and Morgan Stanley.

Merril Lynch is preparing to launch a Bitcoin investment tool that can be traded by clients based on the futures markets in aggregate. The firm is essentially creating a BTC derivative linked to what are known as non-deliverable forwards or NDFs. These are outright future contracts by which counterparts settle the difference the contracted NDF price and the current spot price and the current spot price on an agreed notional amount.

The news follows a report last Friday that Morgan Stanley was following on the footsteps of other banking giants by preparing to offer its institutional investors Bitcoin-based products.

The news is not such a huge surprise as the firm took its first step into Bitcoin Futures early this year by hiring digital expert Andrew Peel. He joined from Credit Suisse where he specialised in crypto trading.

Gorman is fascinated by Bitcoin

Morgan Stanley CEO James Gorman is one of the few Wall Street executives who publicly expresses a positive view towards Bitcoin. “By definition speculative, but a fascinating development and more than a fad,” he says.

The investment bank has no plans for direct cryptocurrency trading. However, it is working on complex Bitcoin futures derivatives.

The new investment tool is known as “price return swaps” that allow investors to bet on the short or long-term of the Bitcoin products. Trading will be contingent on an internal approval process that includes proven institutional demand by clients. The trading derivative is aimed at providing opportunities to trade contracts that have exposure to Bitcoin’s performance.

Where it makes its profit

Morgan Stanley earns through a spread which is the difference between buy and sell for each Bitcoin derivatives operation.

“The US bank will deal in contracts that give investors synthetic exposure to the performance of Bitcoin,” a person close to the plans told Bloomberg. The source also told Bloomberg Morgan Stanley already has the technical expertise and infrastructure to offer the Bitcoin derivatives.

Morgan Stanley follows suit of other top firms

Goldman Sachs and Citigroup also have Bitcoin and crypto-related plans. However, Goldman Sachs denied it had plans to launch a crypto trading desk in the short-term. That news sent the crypto market on a downward trend. However, it did confirm it was exploring the possibility to offer Bitcoin derivatives to its clients.

Citigroup’s move into crypto involves what it calls a digital asset receipt (DAR), which the firm defines as an instrument the provides its clients with the most direct form to invest in Bitcoin and crypto without having to own the assets directly.

The Intercontinental Exchange (ICE), the owner of the New York Stock Exchange and tens of other major exchanges, has partnered with Microsoft and the Boston Consulting Group to launch in November Bakkt, a Bitcoin exchange. They are awaiting regulatory approval.

Jon Matonis praises crypto plans

Bitcoin Foundation and Visa Executive Jon Matonis comments: “I think it’s fabulous that they’re getting into it because it brings in new liquidity. They’re going to develop futures markets, options markets, I even think you’re going to start to see interest rate markets around Bitcoin. We’re used to hearing things about Libor, the index for Bitcoin interest rates is Bibor.”

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