Bitcoin and the Wall Street brain drain

Wall Street has been throwing its weight behind bitcoin lately with high profile names leaving big ticket investment banks to join unheard of start-ups, focused on all aspects of cryptocurrency.

The blockchain is evolving into what has been called Finance 2.0 and it's now time the "grown-ups in the room" got involved, notes one Wall Street veteran. There are also sensible reasons why all banks should be looking at this.

Three good ones are increased capital requirements needed to cover things like counter-party risk, the sheer cost of regulation and concerns about security, according to Blythe Masters, the former chief financial officer and head of global commodities at JP Morgan.

Advertisement

Masters, who practically invented the modern credit default swap, may be looking to transcend her existing derivatives legacy. She recently became the boss of Digital Asset Holdings, a company examining the ways and means of trading via the block chain.

Other notable banking to bitcoin people moves include former New York Stock Exchange chief executive Duncan Niederauer, who is an advisory director at bitcoin derivatives exchange Tera Group, and ex-JP Morgan executive Paul Camp who became CFO at wallet provider Circle.

Other endorsements include the Securities and Exchange Commission (SEC) chairman Arthur Levitt, who joined the advisory boards of BitPay last October, and finance veteran and banking family scion Matthew Mellon accepting a volunteer leadership role at the Chamber of Digital Commerce.

Ron Quaranta, founder and executive director of the Wall Street Bitcoin Alliance (WSBA), told IBTimes UK: "There has been a dynamic change. Wall Street has started to realise what can be done with blockchain technology – trading, allocating capital, arbitrage, all the things you do now with capital.

"Over the past two years exchanges have become more professional – part of the financial ecosystem which is evolving and the natural progression is towards derivatives trading. We see a vibrant exchange market appearing as liquidity increases. Previously there was no liquidity, it was such a tiny market.

"We know there's interest in options, derivatives, hedge funds, active asset management. Five years from now I would be surprised if asset managers don't all have at least a percentage of holdings in digital currencies."

The big US banks have all participated in fintech competitions and events and have ongoing, low level investments in the space. Several small US banks have become, or are in the process of becoming rippled gateways; places like Capital One Labs are clearly setting out a stall with bitcoin focus.

Advertisement

There's also number of European banks busy with fintech innovation around bitcoin and ledger systems, including Barclays and Germany's Fidor.

Last week investment manager Jacob Dienelt, who was at Morgan Stanley for 10 years, jumped ship to join blockchain start-up Factom, which uses blockchain to offer businesses new ways to manage and store records. One of its aims is the chance to register undocumented land, allowing people in third world countries a way of proving ownership of their only source of wealth.

Dienelt spent years travelling to bitcoin conferences, mining, and running a paper wallet company while working at the bank. He believes Wall Street's involvement is inevitable.

He told IBTimes UK: "I am not sure you'll see a mass exodus from Wall Street. I think far more likely is a move by Wall Street to integrate the technology. I say the technology because, really it is the distributed ledger that is going to be what Wall Street adopts – not, in my mind, bitcoins the tokens. I think there will be much more mind share on these ledgers, but I think it will come from a combination of Wall Street defections and from Wall Street investments.

Advertisement

"I think generally, all the banks have internal groups working on the idea. I know we had an internal email group about it at Morgan Stanley that was bitcoin focused. I think there is a lot of focus, though, not a lot of capital at this point devoted to it."

Dienelt, who traded futures at Morgan Stanley, does not believe any banks are trading bitcoins at all. "I don't personally believe that trading the currency value of bitcoins has too much of a long term future.

"The real value will be in the distributed ledger, and other funding angles, through new tokens that leverage other technological advancements that these new 'coins' have attached to them."

Regarding large scale trading using ledger systems and the question of "blocktime", Dienelt admits the blockchain really can't handle this. However proof of stake and consensus methods can, he says, adding that it an adequate discussion of the technological nuances would be a longer conversation.

Legitimising bitcoin's maverick brilliance, especially through the imposition of regulations, is an obvious point of contention with many of the technology's staunchest supporters. The State of New York has been carrying the mantle with bitcoin regulation.

WSBA's Quaranta says: "New York passed first paper in 2014 and technologists freaked out. The banks said well we don't use this so we don't care. Then late in 2014 another pass got slightly better reception. Nothing is enforced yet but we expect to see something by summer."

The cost of a bitcoin licence will be $5,000 (£3,300), which is nothing to bank but could put off small innovators, with more costly regulatory functions to come. Quaranta says the government must protect innovators in the space. Banks, on the other hand, are used to regulations such as AML (anti-money laundering) and KYC (know your customer) and these existing regulations are thought to be sufficient.

Quaranta concedes that crypto-anarchists still working in the shadows are "a lot of smart people", but that other people want to use the technology as a force for good – bringing in the under banked and the disempowered.

He muses that intermediaries are a fact of life. "We need governments and banks for that matter. The goal is not to make banks go away. Banks and brokerages make money from commissions – so this will affect their bottom line. But we are thinking about the long view – lower costs, many, many transactions and more participants in the market."

© Copyright 2017 IBTimes Co., Ltd. All Rights Reserved.