Morgan Stanley’s E-Trade Explores Offering Crypto Trading
The Takeaway
• E-Trade, Charles Schwab exploring spot crypto trading
• SEC accounting guidance repeal, approvals by bank regulators are key conditions
• Moves could introduce more capital into crypto markets as well as foster competition
Morgan Stanley’s online stock-trading arm, E-Trade, is exploring adding crypto trading in anticipation of a more favorable crypto regulatory environment under the incoming Donald Trump administration, according to two people familiar with the firm’s plans.
If Morgan Stanley goes ahead with the launch, E-Trade would become one of the largest mainstream financial firms to offer crypto trading, pitting a traditional brokerage giant against Coinbase and other crypto exchanges.
Trading platforms including Robinhood, Fidelity and Interactive Brokers already offer crypto trading in a limited number of tokens such as bitcoin and ether. But big brokerage firms that are part of a banking organization supervised by federal bank regulators have so far held off.
Morgan Stanley’s E-Trade would need the blessing of regulators including the Federal Reserve before launching crypto trading, one of the people said. E-Trade's parent firm is a bank holding company, so it falls under Fed oversight.
E-Trade, which had more than 5.2 million accounts holding over $360 billion for individual investors when Morgan Stanley acquired it in 2020, likely won’t be alone in jumping into crypto trading. Charles Schwab, the biggest publicly traded U.S. brokerage firm, expects to launch crypto trading if the regulatory environment allows it, CEO Rick Wurster told Bloomberg in November.
Schwab would also need approval from the Federal Reserve, which supervises Charles Schwab Bank, a person familiar with the company’s thinking said.
Traditional brokerages will likely start with just a small number of tokens such as bitcoin and ether. Both E-Trade and Schwab already offer access to bitcoin exchange-traded funds, which allow customers to trade crypto as they would a stock. Some crypto volume could come from customers switching to trading crypto directly instead of investing in ETFs, which charge annual management fees.
Coinbase’s business is dominated by bitcoin and ether trading, which together account for more than half its overall trading volume. Customers won’t necessarily ditch Coinbase to move money into brokerages like E-Trade, but traditional brokerages could take up more market share as more people try out crypto trading and wish to avoid the hassle of opening new accounts on other apps or crypto exchanges.
Still, Coinbase will likely retain an edge with customers that have long traded crypto and want to invest in other kinds of crypto beyond bitcoin and ether. “Why Coinbase can survive is they have a lot of crypto-native users and it offers over 200 tokens,” said Owen Lau, senior analyst at Oppenheimer & Co.
And traditional brokerages venturing into crypto services won’t necessarily cut out crypto companies entirely. Interactive Brokers, for example, partners with crypto firms Zero Hash and Paxos to provide trading and custody of crypto assets for its clients.
Many brokerages explored adding crypto trading during the last crypto bull market, but they mothballed plans amid a regulatory crackdown on the crypto industry following the collapse of FTX in 2022.
Another major barrier to traditional firms jumping into offering crypto trading is accounting guidance issued by the Securities and Exchange Commission in 2022 that requires banks and broker-dealers to report their customers’ crypto, such as crypto held in brokerage accounts, as liabilities on their balance sheets.
That accounting guidance, known as Staff Accounting Bulletin No. 121, has made it unattractive for Wall Street firms to have sizable crypto businesses. The firms also need to comply with regulatory capital requirements, and the treatment of crypto assets on the balance sheet means companies need to set aside more capital instead of using the funds for lending or other activities that can generate revenue.
“SAB 121 makes it nearly economically impossible for broker-dealers to custody crypto assets for customers,” said Justin Levine, a senior associate at Davis Polk’s financial institutions group.
But under Trump, the SEC will likely have a majority of crypto-friendly commissioners, including Paul Atkins, Trump’s nominee for SEC chair. That has raised the prospect that the SEC may withdraw the accounting guidance.
The regulator could do so as soon as after Trump’s inauguration on Jan. 20, said Levine.