What Are Banks Doing With Cryptocurrencies?

There’s one word on everyone’s lips right now, and it begins with a “C”.

Forget Christmas. Cryptocurrencies are the topic of discussion on trading floors, in bars, on planes, trains and in automobiles all over the world.

By now most people are up to speed with what cryptos are. Distributed ledgers, soft forks, hard caps… The terminology is endless, which is probably part of the attraction. Hordes of speculators – and bonafide investors – are piling into the ’long bitcoin’ trade, which the media is likening to dot com shares, railways stocks, even tulips.

I’m not going to speculate on price movements. Instead, I want to examine how banks are dealing with cryptos. There’s a lot of information out there on banks and their new found (and sometimes irrational) love for blockchain, but surprisingly little has been written about what banks think of cryptos and how they are going to exploit the opportunity – or mitigate the threat.

Banks are very suspicious of bitcoin on the surface. Morgan Stanley’s Chairman and CEO James Gorman recently said that, “bitcoin doesn’t quite deserve the attention it’s getting”, that it is the “definition” of a speculative investment and anyone thinking it might be stable is “deluding themselves”. J.P. Morgan’s Jamie Dimon has vociferous in his condemnation of Bitcoin, calling it a “fraud” and saying that those who play in the asset are “stupid”.

And yet, the Internet nearly expired when it noticed that Mr. Dimon’s employer seemingly held the highest volume in a bitcoin investment product. To be fair, the hordes of people who level accusations of hypocrisy at J.P. Morgan have no idea how a bank works, and so they can’t distinguish execution and agency business from prop trading.

However, the bank seems to be looking at more a strategic commitment to cryptos. It is reportedly getting into bitcoin futures trading by providing clients with access to CME’s new bitcoin product through its futures-brokerage unit. Other banks are developing products and services to cater to the needs of crypto-enthusiasts. Goldman Sachs is reportedly planning clear bitcoin futures contracts for certain clients. And as far back as the summer, Barclays’ CEO for personal and corporate banking, Ashok Vaswani, revealed that the bank opened discussions with UK regulators about adopting digital currencies.

The first bank to properly explore the opportunity was actually Wells Fargo, who considered opening a bitcoin exchange back in 2013. But in the intervening years, banks have been deterred from dealing in cryptos by a lack of technical understanding and an atmosphere of regulatory uncertainty. That is now changing, as awareness amongst management and clients hits a tipping point and regulators begin to get to grips with digital assets.

There are perhaps parallels to be drawn here with other infamous examples of financial innovation, many of which did not turn out so well for banks, their clients or the real economy. I’m thinking, of course, about CDOs and other structured debt products that laid the foundations for the global financial crisis of 2007/8. Conversely, the invention of CDS – credited to Blythe Masters from J.P. Morgan in 1994 – actually helped to create more stable and resilient markets by providing dealers and clients with a way to cheaply and effectively hedge risk.

The truth is, there’s nothing new here. Banks are always looking to innovate by offering new products. And they’re always looking to service client demand, particularly when it’s so rampant. I wouldn’t be surprised if within 5 years, every major bank has a crypto trading desk making markets and analysts providing professional research on currencies. After all, today’s future is tomorrow’s past and this time it’s no different.