CRYPTO

Crypto goes mainstream: what big finance is doing - Financial News

FN looks at how the world's biggest finance houses are approaching the rise of digital money

7 Aug 2018, by Rosalie Stafford-Langan - This time a year ago, one bitcoin was worth around $3,500. Today, it is closer to $7,000. That does not, of course, come close to the whole story.

Over the past year, the price of the world’s number one digital currency almost touched $20,000 and has suffered some very steep falls since.

This extreme volatility, combined with reported ties to cyber criminals and fraudsters, initially led many Wall Street chief executives to dismiss cryptocurrencies outright and in no uncertain terms. Perhaps most notably, JPMorgan boss Jamie Dimon last September said bitcoin was “a fraud” and threatened to fire on the spot any employee caught trading the currency.

But the tone at the world's biggest banks, fund managers and exchange groups has softened since, with many now exploring the possibilities of trading cryptocurrencies and others having already taken steps to do so.

The market infrastructure needed to support a legitmate market for buying and selling these assets is beginning to emerge, just as regulators start to make noises about formal oversight.

Following the news in recent weeks that BlackRock and Barclays have set up internal teams to explore the risks and rewards of bitcoin and other crypto assets, Financial News decided to round-up what we know so far about what the biggest financial institutions are up to in the field.

Goldman Sachs

Late in 2017, around the same time Dimon came out against bitcoin, Goldman’s chief executive Lloyd Blankfein appeared cool and neutral on investigating the cryptocurrency. Tweeting from his personal account, Blankfein wrote: "Still thinking about #Bitcoin. No conclusion — not endorsing/rejecting. Know that folks also were skeptical when paper money displaced gold."

But the bank has started to explore the market since. In April, it hired its first digital assets trader, Justin Schmidt, as reported by US finance-industry news site Tearsheet. In May, The New York Times reported this hire was part of the set-up of a desk trading bitcoin-linked contracts, though it will not yet be trading actual bitcoins.

Goldman’s new CEO-elect, David Solomon, also seems upbeat about the future of digital money, telling Bloomberg the bank is looking at expanding that business beyond publicly-traded bitcoin futures. The bank is proceeding “cautiously”, he said, but added: “We’re listening to our clients, and trying to help our clients as they’re exploring those things [bitcoin] too.”

The bank did not comment in time for publication.

JPMorgan

CEO Dimon has been forthright about his distaste for bitcoin. In September he described the craze as “worse than tulip bulbs” — referring to perhaps the foremost example of a speculative bubble in modern history.

But a few months later, talking to Fox, he said he regretted using that language. He went on: “The blockchain is real. You can have crypto yen and dollars and stuff like that… but I’m not interested that much in the subject at all.”

By May, Daniel Pinto, the head of JPMorgan’s corporate and investment bank, told CNBC the firm was “looking into” digital currencies, adding that “cryptocurrencies are real, but not in the current form”. He argued regulators are sure to crack down on the anonymous use of digital currencies to finance illicit activities, and concluded: “If we need to clear futures of bitcoin, can we do it? Yes. Have we done it? No.”

Not long after that, FN reported the appointment of London-based Oliver Harris to investigate the potential of cryptocurrencies and digital money as a whole. He heads JPMorgan’s own in-house blockchain project, the open-source Quorum.

The bank did not comment in time for publication.

Morgan Stanley

Morgan Stanley has been more receptive than some rivals to the potential of crypto, with CEO James Gorman describing bitcoin as “more than just a fad” in September.

Like Goldman, Morgan Stanley has begun clearing the bitcoin futures launched by Cboe Global Markets and CME Group, according to Bloomberg. In January CFO Jonathan Pruzan also told the newswire that the bank’s top executives are considering other ways to engage with crypto.

The bank’s analyst James Faucette, who researches US payment systems, caused a stir in December by arguing the cryptocurrency had “virtually no acceptance, and shrinking” among retailers, and that its true value might be zero.

But in February he said it could be “disruptive” in the payments industry, according to Business Insider, which also reported that his employer is looking to hire more analysts with knowledge of the field.

A person familiar with the firm told FN that Morgan Stanley was not considering trading cryptocurrencies. However, they said the firm, in response to interest from clients, was considering facilitating transactions linked to cryptocurrencies.

In June, Morgan Stanley hired Andrew Peel, a vice-president in sales and trading innovation from Credit Suisse, as head of digital asset markets.

HSBC

The UK-Asian banking giant has sounded fairly sceptical on cryptocurrencies, with its global head of digital, former Google executive Josh Bottomley, telling Forbesin July that the bank is “cautious”.

HSBC is involved in a blockchain-based trade-finance platform developed with Hong Kong’s banking regulator, alongside other leading names such as Standard Chartered, Reutersreported the same month.

But as for trading or investing directly in cryptocurrencies, Bottomley told Forbes: “Right now we’re not interested in that at all”.

A spokesperson for the bank told FN: “We do not currently trade cryptocurrency. Our involvement has not been related to cryptocurrencies, but blockchain initiatives.” They added the bank has made no developments towards cryptocurrency trading.

Citigroup

"We cannot be dismissive of the underlying technology and ultimately what it represents," said Michael Corbat, CEO of Citigroup, in an interview with Bloomberg last year.

But the bank’s moves so far indicate a focus more on the risks associated with crypto than the potential rewards. In February, Citi was one of three major US retail banks (the others being JPMorgan and Bank of America Merrill Lynch) which confirmed to CNBC they would not allow retail customers to buy crypto assets using their credit cards.

And in April, Business Insider reported that Citi was looking for people with bitcoin expertise to staff its anti-money laundering department.

According to a person familiar with the bank’s thinking, Citi is not wholly disinterested in cryptocurrencies, but the current regulatory environment prevents the trading of digital money. However, this person added that Citi is studying the potential for blockchain technology to improve post-trade services and settlement.

Barclays

CEO Jes Staley has firmly denied rumours that the bank might be interested in starting a cryptocurrency trading desk. Staley said he was torn between the “innovative side of it” and the criminal connotations associated with bitcoin.

In March, Bloomberg revealed that Coinbase – a cryptocurrency exchange facilitating the buying, selling and transferring of digital money – was granted a bank account by the firm. But there was no sign of Barclays participating in sales and trading.

Earlier this month, several cryptocurrency sites carried the news that Barclays had filed for three crypto patents in 2016 – something that came to light only after they were published by the US Patent Office. These were aimed at developing systems by which banks can verify the identity of customers who are banking using crypto assets, something regulators insist that banks do. However, there has been little indication of such a system having seen the light of day since.

FN has reported that the bank has formed a team composed of senior staff, which includes global head of energy trading Chris Tyrer, to explore the possibilities surrounding cryptocurrency trading via a digital assets project. The initiative will look into how a digital assets trading desk could integrate into the bank’s sales and trading functions. People familiar with the situation say Barclays is exploring client appetite as well as revenue opportunity.

Credit Suisse

Credit Suisse boss Tidjane Thiam said bitcoin speculation was “the very definition of a bubble” back in November. He added that “the only reason today to buy or sell bitcoin is to make money, which is the very definition of speculation”.

Like its rivals, the Swiss bank is interested in the use of blockchain technology to cut its trading costs. Speaking on a Bloomberg panel in September, Emmanuel Aidoo, head of distributed ledger and blockchain strategy, said the bank is looking at blockchain tech to do things like shorten trade settlement times.

In March, the bank completed a €25m securities-lending transaction via blockchain-based software.

As for crypto assets, Paul Condra, one of the bank’s analysts, has written that the “investment infrastructure is emerging” and if regulators developed rules covering the sector, that could “catalyse more broad-based investment”.

But Credit Suisse has itself made no moves toward crypto trading. In April, Bloomberg reported that Brian Wirtz, a technology, media and telecoms banker who had urged Credit Suisse to get more directly involved in crypto assets, had left to join the Blockchain Advisory Group, which bills itself as a “digital investment bank”.

Deutsche Bank

The Financial Timesreported in 2016 that Deutsche, along with several other institutions, was involved in a project to create a digital “coin” that would make the clearing and settlement of financial trades more efficient.

The FT reported that the partners hoped to launch the new technology — which was aimed at blockchain-based improvements to the trading of conventional securities rather than the trading of cryptocurrencies themselves — in 2018.

A spokesperson for the bank declined to comment.

UBS

In January this year, CNBC reported that the bank’s chair, Axel Weber, regarded cryptocurrency as “not an investment we would advise” — though he also said the bank allows institutional clients to trade cryptocurrency.

“Retail clients, who don’t fully understand these products, should be protected from going into these products, because if there is a retail client affected in the future, the question will be again who was the bank that sold them these products and then banks will be blamed again for what has happened,” Weber said at the World Economic Forum in Davos.

“I don’t call it currency,” he added.

A spokesperson for UBS declined to comment on whether the bank had any plans to open a cryptocurrency trading desk. The bank typically advises retail clients against investing in digital money, the spokesperson added, but will serve clients who choose to engage.

UBS released a report in early August stating that bitcoin “cannot be considered money or a viable asset class yet”, as it is “currently too unstable and limited” to be a method of payment for global transactions.

Fidelity Investments

Fidelity has been one of the biggest boosters of crypto assets in the fund management community.

Its CEO Abigail Johnson told a New York blockchain conference in May that she was a “believer” in bitcoin and “one of the few… that has not given up on digital currencies”.

Fidelity is planning to make it possible for its retail customers to see cryptocurrency balances on Fidelity’s website and has even set up its own bitcoin and ethereum mining operations, according to a Reuters report.

In June, Business Insider reported that Fidelity is building its own digital currency exchange, with internal job postings seeking a DevOps System Engineer who can “create and deploy” the necessary technology.

A person familiar with the asset manager said it was “hiring to meet the demand for this exploration [of digital assets, currencies and blockchains]”, while claiming the specifics of the Business Insider report were not accurate.

The person added that Fidelity is “actively exploring cryptocurrencies” and confirmed it had set up a “small bitcoin mining operation” to learn more about the cryptocurrency.

Fidelity has also introduced bitcoin as a means of payment in some of its staff cafeterias, the person said, but “fewer than 10 employees actually used it”.

BlackRock

In July, FN revealed that the world's biggest asset manager had been investigating the possibilities surrounding digital currencies. An internal working group is looking at both cryptocurrencies and their underlying technology, blockchain, according to people familiar with the matter.

But CEO Larry Fink has expressed some crypto-scepticism in the past. In an October interview with Bloomberg he said that bitcoin “identifies how much money-laundering is being done in the world”. But he added that “if we create a true global digitised currency then you would not have money-laundering any more”.

Fink said in July that BlackRock is a “big student of blockchain” but does not see “huge demand for cryptocurrencies”.

The exchanges

It is the endorsement of bitcoin futures by major exchanges, principally the CME Group and Cboe Global Markets in late 2017, that bitcoin advocates are hoping will lead to the creation of trading desks in the big institutions.

Nasdaq, another US exchange group, is also interested. Adena Friedman, its CEO, told CNBC in April: “Certainly Nasdaq would consider becoming a crypto exchange over time”. Nasdaq is already selling some of its surveillance tech to crypto exchanges, such as the Winklevoss brothers’ Gemini. But Friedman stressed Nasdaq would need regulatory sign-off from the SEC before getting directly involved.

In July, the Swiss stock exchange operator SIX Group announced plans for a digital trading, settlement and custody venue.

Intercontinental Exchange, which owns the New York Stock Exchange, has announced its intention to launch a crypto asset platform, Bakkt. The platform, developed using Microsoft Cloud technology, will also work with firms such as Starbucks to enable retail consumers to trade and use digital money.