Crypto pledged to dethrone Wall Street. It’s getting swallowed instead.

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Wall Street heavyweights are changing their tune on crypto.

Take BlackRock CEO Larry Fink, who in 2017 dismissed bitcoin as “an index of money laundering.” Last week, the chief of the world’s largest asset manager gave a starkly different appraisal of the most popular cryptocurrency, saying it is “digitizing gold” and could “revolutionize finance.”

Then there’s fellow billionaire financier Ken Griffin, who blasted the sector as a “jihadist call” against the dollar two years ago. Now, his hedge fund, Citadel Securities, is backing a recently launched platform that allows institutional investors to trade the digital assets.

Fidelity Investments, the nation’s largest 401(k) administrator, is another example. The 77-year-old financial stalwart is nobody’s idea of an anti-establishment renegade. Yet it, too, is moving on several fronts to get into crypto. It started allowing workers to invest a portion of their retirement savings in bitcoin last year. Its subsidiary Fidelity Digital Assets joined Citadel — and Charles Schwab — in investing in the new crypto exchange, called EDX. And like BlackRock, it is seeking approval from the Securities and Exchange Commission to introduce a publicly listed fund that will track the real-time price of bitcoin.

The cryptocurrency industry built a cultlike fan base in the United States by promising to break Wall Street and Washington’s joint grip on the financial system. But as the sector weathers a steep decline and faces tough new scrutiny from the SEC, some of Wall Street’s biggest names are trying to enfold it.

The developments place the industry at crossroads in the United States. Popular interest in crypto has cratered after a year of spectacular meltdowns left a trail of bankrupt crypto companies, criminally charged entrepreneurs, shamed celebrity endorsers and ravaged investors. With the hype deflated, financial giants sense an opportunity for profit by offering their customers a pared-back menu of crypto products and services unlikely to raise hackles from regulators.

Whether crypto’s founding ambition to democratize finance survives remains an open question.

“Assets often move from weak hands to strong hands during bear markets,” said Matthew Sigel, the head of digital assets research at fund manager VanEck. “We think that’s what is happening in crypto. A lot of losses last year were taken by retail or immature players, and now here come the big boys” of traditional finance.

Those firms can pick up where collapsed crypto companies left off, said Tyler Gellasch, president and CEO of the investor advocacy organization Healthy Markets.

“While many crypto firms built their businesses around not complying with the law, traditional finance firms have already mastered making money trading an asset or operating an exchange while also complying with securities laws,” he explained. “The SEC might appreciate that, and certainly serious institutional and individual investors would.”

Fidelity declined to comment. But Jamil Nazarali — the CEO of EDX, the crypto trading platform for institutional investors that the firm is backing — said that “more firms are coming” even while some in the financial establishment wait for more regulatory clarity before jumping in.

For some financiers, the development marks an inevitable reckoning for a sector that at its late 2021 peak had grown into a $3 trillion juggernaut seemingly overnight while flouting decades of investor protection laws.

“More and more people are coming to the realization that, like it or not, cryptocurrencies are here to stay, and the current environment and market structure for cryptos lacks a lot of the protections that we have come to take for granted in traditional finance,” said Nazarali, who left Citadel last year to launch EDX.

Those protections were at best an afterthought for venture capitalists, entrepreneurs and everyday traders who jumped into crypto as it started a rocket-like ascent two years ago. Americans stuck at home during the coronavirus pandemic and suddenly flush with stimulus checks opened up a vast new pool of money for an industry that had long been the preserve of a hardcore fringe.

Social media tales of instant riches minted seemingly out of thin air on new crypto tokens helped fuel a viral craze, as millions of Americans flocked to platforms like Coinbase that made it easy to open an account and start trading from a smartphone. At its peak in November 2021, the value of the overall crypto market had quadrupled since the start of that year. The industry became a pop-culture phenomenon, with trading platforms Crypto.com and FTX shelling out tens of millions of dollars to affix their names to major sports arenas and crypto ads dominating the Super Bowl broadcast in early 2022.

Then, even faster than the crypto bubble inflated, it popped. The implosion in May 2022 of a digital coin called TerraUSD set off a chain reaction that toppled three other major crypto companies in the ensuing weeks, pummeling investor confidence and cutting the value of the overall market roughly in half. The already devastated sector was dealt another punishing blow in November, when FTX — one of the world’s largest crypto exchanges that had billed itself as a responsible operator — collapsed and led to allegations that its executives fraudulently misappropriated customer funds on risky investments and personal expenses.

Bitcoin has staged a major comeback this year, nearly doubling in price. It rallied strongly in March as midsize bank failures shook confidence in the banking system and has been surging again in recent weeks on news of the institutional appetite for the asset.

The SEC — whose chairman, Gary Gensler, long has accused crypto companies of operating illegally — effectively rang a closing bell on crypto’s Wild West era last month. The agency took its most aggressive steps yet toward cracking down on the sector when it sued Binance and Coinbase, two of the largest crypto trading platforms, on successive days. It charged both with violating securities laws meant to shield against conflicts of interest and provide basic disclosures to investors.

The SEC’s one-two punch against companies with starkly divergent approaches to regulatory compliance signaled its aggressive new push to police the industry. Binance, which operates offshore, still faces criminal probes from U.S. authorities; the U.S.-based Coinbase, by contrast, is publicly traded and has styled itself as a safe option for everyday investors.

“We knew something was coming, but we didn’t expect it to be so expansive,” Blockchain Association CEO Kristen Smith said. She pointed to the SEC’s decision in the Coinbase suit to argue that 13 crypto tokens listed on the platform qualify as securities, a designation subjecting them to the agency’s oversight.

As Washington and Wall Street move in on crypto, tech-focused investors in San Francisco are moving on. In bars and restaurants, conversations about artificial intelligence have replaced the breathless talk about crypto. Venture capitalists who fashioned themselves as crypto devotees have now pivoted to AI. Tech influencers on social media who implored people to buy cryptocurrency are now posting about the wonders of ChatGPT and other AI tools.

Young people are moving to San Francisco to join “hacker houses” and go to parties focused on AI, sweeping aside the gold rush into crypto that had brought previous waves of people to the city looking for investors and co-founders.

Meanwhile, the massive amounts of money that poured into crypto start-ups from venture capital firms has slowed to a trickle. In 2021, there were 794 venture capital investments made into crypto companies, totaling $18.1 billion in investment, according to research firm PitchBook. In 2022, the industry kept growing, seeing 831 deals worth $22.8 billion. But this year, the pace of investment has fallen off a cliff. Halfway through the year, there have been only 105 venture investments, and $2 billion invested.

Crypto traders have also scaled back their activity. In May, the five largest U.S. platforms hosted a total of $56 billion worth of crypto trades, the lowest such volume since October 2020, according to Riyad Carey, a research analyst at crypto data firm Kaiko.

Idling interest has taken a toll on Coinbase, for one, which in May reported that it lost $79 million in the first three months of the year, its fifth consecutive quarterly loss. Nonetheless, the company’s stock has rallied in recent weeks, in part on the news that BlackRock named it as a partner for its bitcoin fund.

Dan Dolev, a Mizuho Securities analyst, said Coinbase still has little to celebrate in the face of the SEC’s lawsuit. “I wouldn’t bet against the regulators,” he said. As he sees it, the company should embrace the inevitable and adopt a narrower — and less profitable — business model.

Even though Coinbase has said it will continue to operate its business “as usual” while the legal process plays out, “they’re like Wile E. Coyote after he’s run off the cliff but before he realizes it,” Dolev said. “That’s exactly what’s happening.”

Gerrit De Vynck contributed to this report.

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