Bitcoin’s rise has banks taking notice
Digital currency has seen 300-per-cent surge this year, but anonymity is an obstacle
NEW YORK— At first, bitcoin was a way to make payments without banks. Now, with more than $100 billion (U.S.) stashed in digital currencies, banks are debating whether, and how, to get in on the action.
Goldman Sachs Group Inc. chief executive officer Lloyd Blankfein tweeted Tuesday that his firm is examining the cryptocurrency. Other global investment banks are looking into facilitating trades of bitcoin and other cryptocurrencies, according to industry consultants. Bitcoin has surged more than 300 per cent this year, drawing the attention of hedge funds and wealthy individuals.
“They’re clearly receiving interest from their clients, both from retail investors and on the institutional side,” said Axel Pierron, managing director of bank consultant Opimas.
“It’s highly volatile, it’s highly illiquid when you need to trade large volumes, so they see the opportunity for a new asset class which would require the capability of a brokerdealer.”
But bitcoin presents Wall Street with a conundrum: How do banks that are required by law to prevent money-laundering handle a currency that’s not issued by a government and that keeps its users anonymous?
The debate has played out in the open recently, with JPMorgan Chase & Co. CEO Jamie Dimon and BlackRock Inc. CEO Larry Fink saying that bitcoin was mostly used by criminals, while Morgan Stanley chief James Gorman took a more measured stance, calling it “more than just a fad.” On Wednesday, UBS Group AG chairman Axel Weber, a former president of Germany’s cen- tral bank, said he was skeptical about bitcoin’s future because “it’s not secured by underlying assets.”
Handling bitcoin would invite scrutiny from every major U.S. regulator, according to Joshua Satten, director of emerging technologies at Sapient Consulting.
“From the perspective of the U.S. Treasury, do you classify it as an asset class or a currency?” Satten said.
And banks need to avoid antagonizing governments that are increasingly concerned about this area. For instance, China is cracking down by shutting cryptocurrency exchanges.
Then there’s the risk that stems from its high volatility and lack of correlation to other major assets. “What are they going to do if bitcoin drops for a given client and they’ve given that client a ton of leverage on margin, and that client only has assets in bitcoin?” Satten said.
Derivative contracts could help. CBOE Holdings Inc., the owner of the Chicago Board Options Exchange, announced in August that it plans to introduce bitcoin futures this year or next. That could help traders hedge positions. Banks are also exploring creating derivatives and using bitcoin in international trade finance to avoid exchanging currencies, Pierron said.
Bitcoin already has a toehold in mainstream finance. In July, Falcon Private Bank said it was the first Swiss bank to offer bitcoin asset management to its clients. In the U.S., both Fidelity Investments and USAA let clients view their bitcoin balances if their accounts are linked to the Coinbase exchange.
The qualities that have made bitcoin the payment form of choice for drug deals and ransom demands — it runs on a decentralized web of computers around the world that sidesteps regulators and banks — are also what makes it hard for governments to control.