New York Times: Wall Street is beginning to succumb to Bitcoin

     Most people still view Bitcoin as a virtual currency used by drug dealers and shady hackers to circumvent government agencies.

But innovation has helped turn Bitcoin into the hottest cryptocurrency in the world, with the potential to upend industries as diverse as accounting, music and law.

But no place is investing more money and resources in this technology than Wall Street, an industry that Bitcoin was created to circumvent.

"There's a lot of interest in it right now," said Derek Whit, chief digital officer at British global bank Barclays, which has a team of several employees working on about 20 experiments to explore how the technology behind Bitcoin might change the financial industry. "It all stems from the realization that: 'Wow, we can use this technology to fundamentally change how we operate and create our future.'"

To people like Wright, Bitcoin is more than just a token for online transactions. Instead, many of the financial industry’s top figures have come to believe that the software that created Bitcoin also enables a fundamentally new kind of online trading and record-keeping — one that lets people and banks trade currencies and other assets like stocks and bonds directly, without relying on lengthy and costly middlemen.

Many banks have made their moves public, but much of the activity still happens behind the scenes. Executives from more than a dozen major banks gathered in secret to discuss how to use the technology behind Bitcoin to transform foreign exchange trading, the world's largest financial market, according to people who attended a secret meeting in April at the Manhattan offices of Bank of America.

Central banks such as the Federal Reserve and the Bank of England also have their own teams looking at this technology.

“A year ago, this was more of a concept,” said Max Neukirchen, head of corporate strategy at JPMorgan Chase. “Now it’s a real business opportunity. Once you try it, you realize it can play an important role in how we think about how the infrastructure of this industry evolves.”

It’s a long way from when Bitcoin burst into the public consciousness in 2013, when many bankers, including JPMorgan Chase CEO Jamie Dimon, sneered at it and its price soared on a speculative frenzy that it was often compared to the Dutch tulip bubble.

At the time, some large companies like Dell and Overstock announced they would begin accepting Bitcoin for online transactions, but few consumers expressed interest in using the digital currency to pay for bills, and the enthusiasm surrounding Bitcoin largely died down.

The institutions now involved generally have no interest in using bitcoin to sell goods or holding the virtual currency. Instead, they are eyeing the networks and software that allow bitcoin to be moved around the world instantly and for almost no money.

Currently, digital transactions typically require some form of central authority to move funds and update records between parties - this is the approach taken by PayPal and Visa, which are used by many online exchanges.

Instead, the Bitcoin network is run by a decentralized network of users who work together to track transactions and update them in real time, rather than a single user or company. All transactions are kept on a public ledger, known as the blockchain. It’s essentially just a giant public spreadsheet that everyone can see. And, at least for now, it’s proven impossible to tamper with.

Much of the work being done within banks and other industries is examining whether the technology can be used independently of virtual currencies such as bitcoin, which is the first element recorded on a blockchain ledger.

Music publication Billboard recently wrote that several startups plan to use a blockchain-like electronic ledger to track music downloads and pay royalties to artists based on that information, rather than relying on a central record-keeping system.

The Vermont state government also commissioned a study in June to see whether blockchain could legally be used to preserve judicial records under state law; several other governments are also studying the technology, but many of them are outside the United States.

But the biggest efforts are being made by financial companies like Nasdaq OMX Group, which has a handful of programmers in Manhattan working on software that it plans to release this year.

Nasdaq's software will use a new type of blockchain to trade shares of private companies, such as technology startups. It will replace the existing system, which currently requires private companies to issue and trade shares using paper certificates. This process means that even the most basic transactions can take weeks to complete.

In addition to the short-term trial, Nasdaq is also conducting experiments in several other markets that could speed up and reduce the cost of transactions through blockchain-style ledgers. The work is being led by Fredrik Voss, who recently moved from the company’s commodities division to the company’s chief blockchain officer.

“We believe that blockchain technology has tremendous potential to improve the efficiency of capital markets while increasing transparency and security, all in the public interest,” Nasdaq CEO Robert Greifeld said in an investor call in July.

The first public discussion of Bitcoin in the financial community dates back to late 2013. Although most of the attention at the time was negative, it was mainly focused on the speculative side of the virtual currency.

But recently, banks such as Goldman Sachs, Santander and BBVA have made the first investments in outside startups working on bitcoin technology, several of which were founded by former employees of the big banks.

But in general, the big banks have been less open about what they’re doing internally with their own employees. Citigroup, for example, is working on six different experiments to develop software that uses blockchain technology, according to people familiar with the company’s work. In one of the tests, the bank created its own virtual currency, Citicoin, which employees can use to experiment.

Beyond Nasdaq’s project, there is a lot of debate about where the technology is most likely to be used first in real life. Some of Barclays’ more than 20 internal experiments, most of which are taking place in two offices in London dedicated to the technology, are looking at how blockchain can be used to increase the speed of consumer payments while lowering their costs to compete with credit cards and direct wire transfers.

But bankers generally say much of the work is aimed at changing the systems that Wall Street's big exchanges and investors currently use to buy and sell complex assets such as syndicated loans and corporate bonds.

Because any innovation in this area requires cooperation among multiple banks, the banks have held several joint meetings to discuss how to work together, usually led by external startups that want to provide the required software.

One of the most high-level talks was organized by a startup called R3Cev, headed by David E. Rutter, a former Wall Street executive. People familiar with the project said R3Cev has come up with several models where banks can trade foreign exchange through a jointly maintained, blockchain-like spreadsheet. R3Cev also convened the Bank of America meeting in April. More than 75 people from 15 financial institutions attended the meeting, according to people familiar with the project.

It may seem like a rather obscure business, but it is precisely in these markets that a huge amount of money moves every day, and these markets also affect the profits of the largest financial institutions. For example, the foreign exchange market changes hands every day for more than $3 trillion.

For many in the banking industry, the question is not if, but when. JPMorgan’s Nucker and many other bankers expect it will be many years before the first large-scale application of blockchain technology is realized. But Barclays’ White believes it will happen much sooner, as soon as next year.

The prospect of banks using the technology is likely to disappoint many of Bitcoin’s early fans, many of whom were attracted to the technology because it offered a way to move and store money without relying on banks.

Many in the financial industry hope to find ways to use the concept of blockchain (which is generally used to refer to a decentralized ledger) directly without having to associate it with Bitcoin.

While bankers working on the concept disagree on how to achieve it, they are surprisingly unanimous about whether it can be achieved. “The whole blockchain technology behind bitcoin has huge implications for all types of assets — the transfer of ownership of electronic goods as well,” Heath Terry, one of Goldman Sachs’ top internet analysts, said in a podcast with the bank.

“It’s hard to think of any area of ​​the world where blockchain technology won’t ultimately change our concept of ownership,” he said.