Kraken and Morgan Stanley are playing in each other's backyards

Your crypto is in my banking
The beams are crossing, the multiverses are converging, your peanut butter is in my chocolate. The crypto industry is inside the walls, and Wall Street is going inside crypto. This has, of course, been happening for some time now, but if you ever doubted the degree to which it's been happening two recent developments make it crystal clear. 

First there was the news that the crypto exchange Kraken was approved by the Kansas City Fed for a limited purpose account for its Wyoming-based chartered bank. It's not a full-fledged master account – the type that Custodia bank is suing to get – but it will give the bank access to the Fed's payments systems, on a one-year term. This is the first time a crypto-focused company has gotten itself right inside the nation's financial plumbing. 

You might be wondering, why Kraken? There were in fact a lot of questions being asked. Why Kraken, and not Custodia, which is at least an actual bank? Why did the KC Fed front-run the "skinny account" idea being developed by Fed Gov. Christopher Waller? How does Waller feel about that? Is it really smart to allow an not-federally-insured, risky business such as a crypto trader access to the Fed's payment rails? And here's one of my own: How much will this really improve Kraken's business? Oh, sure, it'll create some efficiencies, but will it really make a material difference to its bottom line over the long term? I doubt it.

The second thing that caught my eye was Morgan Stanley applying to the OCC to open a crypto bank. Kraken burrowing its way onto the Fed rails is one thing, but Morgan Stanley standing up a crypto bank is through-the-looking-glass level stuff. Morgan wants to create a de novo national trust bank; as far as I could see from the application, they just want it to buy, sell, and custody digital assets. It won't be FDIC insured, and it won't do much of what you might normally think of as "banking," but will "engage in activities that the OCC has identified as permissible for national banks as part of the business of banking." So if you're a Morgan customer and don't want to be bothered with the hassle of opening up an account on Kraken, you can just have your financial advisor at Morgan buy it for you.

Kraken got access to the Fed and Morgan Stanley applied to open a crypto bank. I don't think there's any question but that tradfi and defi are now swimming in the same pool. Whether that's a good thing or not is a big question. But it is clear that the proverbial Overton window has shifted for crypto, and everybody is jumping through.

Prediction markets
Prediction markets are coming under a renewed glare, our Melinda Huspen writes. It seems that over the weekend, before the bombs started dropping on Tehran, people were making bets on Polymarket about, well, when the bombs were going to start dropping. And when the Supreme Leader would not be the leader anymore (or, you know, alive). 

Look, I am biased against gambling. I just don't like it. I've lived my entire life in New Jersey, and have been to Atlantic City exactly once, for an afternoon. I lost $40. I'll probably never go back. So I'm not the most objective person on this topic. And I do think prediction markets are gambling. And I do think prediction markets are bad for society. And things like making bets on when a war would start or when a foreign leader will get killed is a pretty prime example of why. What possible benefit does that serve society? And it gets worse when you consider that it's possible – possible – that people with advance knowledge of those events were making those bets. That is what's got the regulators and lawmakers standing up at attention. 

I will, though, acknowledge that some people do actually think there is a socially beneficial use to prediction markets, and it's not just the CEOs of Polymarket and Kalshi. Some researchers at the Fed crunched the numbers, and say that prediction markets are just as good, or sometimes even better, at predicting things like GDP reports, inflation numbers and other economic indicators. And these markets are operating continuously, providing a live feed on the wisdom of the crowd.

Spanish fly in the ointment
And you thought trying to keep up with the tariff plans was hard? 

Imagine this: you are a giant bank in Spain. You operate in the U.S. but you want to get bigger. So you strike a deal and buy a sizable U.S. regional bank. It's the biggest deal in the U.S. in several years. A savvy business deal, right? Then the bombs start dropping in Iran, the Spanish denies the U.S. military use of their air space and the prime minister of Spain calls the war illegal, and the U.S. president says he's going to cut all trade with Spain. 

Banco Santander's $12 billion deal to buy Webster Financial doesn't look like the sure thing it did a week ago, Allissa Kline reports. At best, it may get delayed. Well, at theoretical-best it won't get delayed, but reality-best is a delay. At worst, it may get entirely scotched and Webster might go out on the block for some other player to come in and make a deal. 

Buying Webster would make Santander one of the biggest regional banks in the U.S., with almost $330 billion in assets, larger than M&T and Fifth Third. It doesn't take a lot to imagine this administration suddenly declaring it doesn't want a foreign bank to be that big here in the land of Coca-Cola, and blocking it.