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Why the SEC's green light for Bitcoin ETFs failed to convince Charles Schwab & Co. to make crypto trading available to its 32.5 million retail accounts

The $7.6 trillion in administered assets giant sees mixed signals from regulators who are drawing lines as it goes along -- treacherous regulatory conditions for a big company not built to shift course at a whim.

Thursday, October 28, 2021 – 1:21 AM by Oisin Breen
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Walt Bettinger: If and when there is greater regulatory clarity for firms under our regulatory regime we would look forward to being able to offer direct trading.

Brooke's Note: Cryptocurrency is surely having it's moment in the sun but it's still all immersed in an air of radical unreality. It would sure seem more grounded if Schwab and Fidelity (which is far more advanced in Bitcoin investing) offered it matter of factly on their trading platforms. Yet, of the two, Charles Schwab & Co. stands out because it is publicly traded. The Securities and Exchange Commission (SEC) can make an example of it like no other pigeon, should crypto suddenly go south. Its share price is there for all to see. See: Charles Schwab Corp. stock finally blasts past $80 starring the RIA custody unit's record $81 billion in net new assets. Much of the industry might be pleased to have Schwab enter the market to normalize the abnormal but also to serve as a giant lightning rod for regulators. Schwab is not so sure it is ready to provide that particular public service despite crypto trading all but certainly providing it a giant new source of revenue. It can afford to let others test the waters and still come out a winner. 

Charles Schwab & Co. is still reluctant to jump deeper into the cryptocurrency pool -- likely to avoid becoming a regulatory target -- despite an apparent federal regulatory thaw on Bitcoin ETFs.

David Lindenbaum
David Lindenbaum: Schwab has more to lose than many other firms if things go wrong.

The Westlake, Texas, broker-dealer informed Wall Street analysts that the Securities and Exchange Commission's (SEC) recent approval of Bitcoin ETFs still falls short of the "greater regulatory clarity" it seeks.

"Some issues need to be resolved there for firms like us to consider offering direct trading in terms of crypto as an investment," Schwab CEO Walt Bettinger said on the call last Thursday.

His remarks may have dampened expectations raised by proclamations he made in an April analysts' call.

Bettinger said at the time that Schwab was readying to move into the cryptocurrency market in a "highly competitive" and "disruptive" way -- just as soon as federal regulators figure out how to more clearly define how they intend to regulate it. See: Charles Schwab & Co. is a budding cryptocurrency convert and will enter the market in a big, 'disruptive' way, says its CEO--but not before the SEC says it barks or quacks

"We believe that future SEC approval of a cryptocurrency ETF will be a key step in the market’s development, and an attractive, low-cost option for clients interested in this space," the company also stated in a research memo.

Wild West

Schwab is wise to look before it leaps, because the SEC is using a sacrificial-lamb approach to set the parameters of compliance in this Wild West asset category, says Lex Sokolin, global fintech co-head at New York City blockchain software company ConsenSys, via email.

Lex Sokolin
Lex Sokolin: Schwab is trying to avoid being a target given its size.

"The regulatory posture right now is fairly aggressive, with the SEC attempting to assert a variety of positions yet [to be fully] defined," he says.

"It has previously done this by targeting firms that are overstepping its perceived rules, and so perhaps Schwab is trying to avoid being a target given its size." 

Yet Schwab's continued caution doesn't mean it moved the goalposts internally, according to the firm.

"We're looking closely and cautiously at this space, and additional clarity from regulators will be important before we consider offering a retail crypto experience," says spokeswoman Mayura Hooper, via email.

Schwab hardly needs more on its $7.6-trillion AUA plate, with IT staff busy integrating TD Amertrade's (TDA) system and its stretched staff handling exploding demand for service after COVID triggered a surge in new investing accounts.

"The planning alone [of the TDA integration] is probably very demanding.  They won’t get a second chance to get this massive movement done correctly," says David Lindenbaum, strategic advisor to full service crypto TAMP, BlockChange, and former head of managed accounts, structured products and alternative investments at Schwab.

Conservative approach

For Schwab, to launch retail access to crypto is also a vastly larger task than for a startup, Lindenbaum continues.

"It's not a trivial endeavor to comply with traditional broker-dealer oversight rules and customer services within the crypto space [with] 24/7 trading

"I don’t think Schwab’s major shareholders or board members are pounding the table for crypto. They like Schwab’s conservative approach to growing revenue," he adds.

The digital currency market also remains hugely volatile.

Bitcoin was trading at $59,200.30 today, more than double the $29,388.30 price on Jan. 1. The currency has already lost half its value once this year, before roaring back in recent weeks.

It rallied to a record $66,000 for the first time last week following the successful launch of the first exchange-traded fund for U.S. investors.

Direct trading nixed

Schwab has also made clear that it has no interest in dabbling.

"If and when there is greater regulatory clarity for firms under our regulatory regime, we would look forward to being able to offer direct trading ... [and] we would look to do so in a Schwab manner, which would be great service, great experience, and disruptive value," Walt Bettinger said, in the company's recent winter business update.

Schwab already allows RIAs and retail investors to trade third-party funds, including Grayscale's Bitcoin, Ethereum, and Litecoin trusts, as well as Bitcoin futures contracts and the publicly traded ProShares Bitcoin Strategy ETF (BITO), which debuted Oct. 20. on the NYSE Arca.

That's enough for most investors, according to Bettinger.

"What we don't offer at this point is direct trading," he says.

"And I think if you look at the firms that are offering direct trading and those that are not, there is consistency in terms of the regulatory oversight of the firms that are not. You can take the cue from that that some issues need to be resolved there for firms like us to consider offering direct trading."

Volatility concerns

Schwab's caution over cryptocurrency market maturity also looks prudent in light of recent events.

The newly released BITO is now the fastest growing ETF ever. It reached $1.1 billion in AUM in just two days, beating the 2004 three day record set by the SPDR Gold Trust (GLD) in 2004.

But the ETF faces a potential futures contract crunch, due to regulatory capacity limits.

Indeed, BITO risks being unable to meet demand if it tops $1.7 billion in AUM too fast, because of regulatory limits on the number of futures contracts it can buy, Bloomberg reports.

An imminent price war will add to uncertainty in the Bitcoin Futures ETF market, too.

New York City asset manager VanEck, for instance, just announced its forthcoming Bitcoin Strategy ETF will undercut BITO by 30 basis points.

Earlier this month, Interactive Brokers announced its launch of cryptocurrency trading for RIAs in the United States. See: Small RIA custodian launches dream crypto trading and custody-- cheap, broad and on one screen-- but will supply drive profitable demand?

Crypto explosion

Analysts have also sounded the alarm over potential tracking errors that could see Bitcoin futures ETFs over- or under-value the digital currency.

The vast number of digital assets available to trade is another issue for Schwab to consider, says Lindenbaum.

"The regulatory picture isn’t that straightforward," he adds. 

"[SEC Chair Gary] Gensler has been clear Bitcoin isn’t a security, but there’s limited clarity on the other thousands of tokens, [so] for Schwab to enter the space they’d like clarity across the spectrum and not just Bitcoin," he explains.

Today, more than 13,015 cryptocurrencies trade on the open market, according to CoinMarketCap data. The top five currencies, Bitcoin, Ethereum, Cardano, Tether, and Binance Coin account for roughly 71% of the market's overall assets.

Competitive threat

Discount brokerage Robinhood provides another potential warning light for Schwab to consider as it mulls adding crypto capabilities.

The Menlo Park, Calif. retail brokerage's third quarter revenues fell short of Wall Street estimates, in part, because transaction-based crypto revenues sank from $233 million to $51 million, quarter-over-quarter.

Robinhood's share price plummeted 12%, as a result, falling as low as $34.85, on Oct. 27, down from $39.57 on Oct. 26, as investors also digested a fall in the number of funded accounts on its platform.

Yet, the startling growth of companies with crypto trading capabiltiies, including Robinhood and San Francisco-based Coinbase, means Schwab's prudence is not without risk, Lindenbaum continues.

"Coinbase has accumulated more client accounts than Schwab in a fraction of the time, so it is a competitive threat," he explains.

"I would challenge Schwab to look at the economics of crypto because there's a lot of money to be made, especially if you pad Schwab’s size and scale with solutions that add more value to wealth managers and investors, like sophisticated SMA solutions, versus doing another commoditized ETF product," he adds.

Sprinting ahead

Such potential pitfalls notwithstanding, Schwab has earned the right to move slowly, because it can easily catch crypto first movers at a time of its own choosing, says Sokolin

"I don’t believe this [cautious] position is really warranted given the [crypto] asset class is now worth $2.5 trillion. Schwab is great at fast following when it has made up its mind -- just take a look at its market and AUM position in robo-advice."

Although Schwab launched its robo-advisor, Intelligent Portfolios, seven years after first movers like Betterment and Wealthfront, today its robo manages in excess of $65.8 billion, more than double the $32 billion under Betterment's management.

Schwab has already outlined its crypto intentions, too.

"When there is more regulatory guidance, you can expect Schwab to have more investment options for clients, including spot crypto trading and custody," it wrote in an August blog post.

Needle will move

Schwab's continued crypto caution is also arguably more consistent than its somewhat differing April, June, and its latest October messaging might suggest, because SEC approval of a futures ETF is by no means equivalent to the approval of a full-blown digital currency ETF, says Sokolin.

Only the latter might prove sufficient for Schwab to act, he argues. "The green light signal is maybe a Bitcoin ETF that is based on spot markets rather than futures markets."

Pressure from RIAs will also play a key role in Schwab's timing, says Lindenbaum.

"To date, institutions and retail clients have been the main users [of crypto], while independent RIAs are becoming a fast growing segment. If RIAs demand this service, then Schwab will respond," he explains.

"Crypto is still hard to understand, difficult to transact across platforms ... and has poor customer service. In theory, Schwab could disrupt the entire space just by calling or emailing people back within the same month," he adds.

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Robinhood gets 'brilliant' upper manager -- and a spare CEO -- by nabbing TD Ameritrade's ex-thinkorswim top exec, hopefully to throw a lifesaver to Robinhood's sinking stock

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January 6, 2022 – 10:33 PM

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December 27, 2021 – 9:58 PM

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Brian Murphy

Brian Murphy

October 31, 2021 — 5:01 AM
The approval for crypto ETFs was limited to ETFs holding only futures contracts on underlying Bitcoin, and (so far) does not allow ETFs that hold BTC directly. Hmm...why would that be? So, if one were to buy BITO, you aren't actually buying bitcoin at all - but instead placing a "side-bet" (with the other side of the futures contracts) on how BTC as an asset performs. If anything, this ETF structure "bleeds" demand for BTC from the spot market. So that $1.1 Billion in BITO assets might not find its way into boosting the demand for BTC at all!

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