Years ago, at the World Economic Forum in Davos in 2014, Jamie Dimon, the chief executive of JPMorgan Chase, largest bank in the United States, called Bitcoin a "terrible" store of value that was also being used for illicit purposes. At a meeting to discuss violations of Iran sanctions, H. Rodgin Cohen, the finance industry’s most influential lawyer, warned the state’s regulators that the federal government was "very worried" about Bitcoin and its use. How times have changed..
Because those efforts failed. The New York’s Department of Financial Services began issuing licenses for Bitcoin businesses in 2015 and now there are now more than 75 million users of Bitcoin, up from around three million seven years ago. The number of digital currencies has literally exploded everywhere. Globally, 220 million people now use cryptocurrencies, according to a July report by the website Crypto.com. The value of Bitcoin went through the roof, making the market cap larger than the economies of individual developed countries.
But the record highs for Bitcoin are only part of this story. Because the bankers say they are investing in digital asset expertise for defensive reasons. They do not expect to set up operations trading in unregulated cryptocurrencies. They do believe that one day they will be trading in tokenised stocks and bonds approved by the regulators. "If you aren’t ready to go on Day One, it will be too late," said an insider.
The distributed ledger technology that underpins cryptocurrencies could make regulated transactions faster, cheaper and more sophisticated. And that is useful to the traditional financial system too. So the big banks have been experimenting for years. But there are three reasons that the big banks didn't fully jump on cryptocurrencies yet.
First, they have poured huge capital expenditure into legacy systems that they have no interest in disrupting. Second, there is no reliable legal or regulatory framework for dealing in digital assets. Third, there is a "collective action problem", the syndrome whereby telephones are useless unless many people install them.
Instead, at this moment it has been left up to Bitcoiner believers to show that a digital asset can be widely held and exchanged, albeit sometimes unreliably and disreputably. Bitcoin may therefore prompt the introduction of government sanctioned digital currencies as an alternative. China already has a limited version of this. European central banks aspire to follow suit as soon as possible. The United States and the United Kingdom are still sitting on the fence.
But things seem to be changing. Just last year, Bank of America filed the biggest number of patent applications in the bank’s history, including hundreds of patents that involve digital payments technologies. It’s unclear how exactly the bank plans to use its technology, but it was also driven by the desire to keep customers within the bank’s systems rather than lose them to new cryptocurrency start ups that allow them to transfer money free.
"Bank of America sees potential in blockchain, and we’re currently a leading patentholder in the space with more than 160 patents,” a spokesman, Mark Pipitone, said. "But we still haven’t found a use at scale to make the financial lives of customers and clients better."
Other big banks are embracing even more direct contact with cryptocurrencies. Bank of New York Mellon and Northern Trust are working on offering custodial services to their clients, essentially bank accounts for other banks, that would be able to hold Bitcoin. On Oct. 5, U.S. Bank announced that it would offer cryptocurrency custody services to money managers.
A recently launched exchange traded fund from US specialist ProShares has been described as "the first Bitcoin ETF". In reality, its exposure comes from regulated futures. Nor can retail clients of Fidelity buy Bitcoin through its platform, although they can use it to view holdings on Coinbase, a well known cryptocurrency exchange.
Nomura, as another example, does not handle cryptocurrencies itself, but has a stake in a custodian that does. Banks including JPMorgan, Morgan Stanley and Deutsche Bank regularly publish research on digital assets. This is usually observational in tone and sometimes gives recommendations on shares of cryptocurrency businesses.
The United Kingdom is even way ahead of the United States, with banks such as Revolut already allowing their customers to directly invest in cryptocurrency. It is apparent that the financial establishment has tentatively begun to assimilate parts of the cryptocurrency world that may be useful to it. Or at least they will be trying.
Sources:
https://www.nytimes.com/2021/11/01/business/banks-crypto-bitcoin.html
https://www.ft.com/content/7556f53f-bf3e-42cd-ab04-dac0097440f0