Bitcoin technology attracts Wall Street attention: may change the financial industry

Introduction: The online version of the New York Times wrote today that although Bitcoin was not recognized by the financial industry in its early stages of development, with the continuous advancement of technology, more and more financial institutions have recognized the potential of the technology behind this currency and hope to use it to change many models and processes in the financial industry.

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Strong interest

In the eyes of most people, Bitcoin is still a virtual currency used by drug dealers or hackers to evade regulation. But continuous innovation has helped Bitcoin become the most popular virtual currency. In the eyes of some, it may even cause a huge disruption to industries such as accounting, music and journalism.

However, in terms of the money and resources invested in Bitcoin, no place compares to Wall Street - which is precisely the original target of Bitcoin's disruption.

"There's a lot of interest in Bitcoin on Wall Street right now," said Derek White, chief digital officer at Barclays, which has set up a team to explore how Bitcoin's underlying technology can change the financial industry through about 20 experiments. "Everyone is realizing, 'We can use this technology to change the basic operating model and create a future for ourselves.'"

For people like White, Bitcoin is more than just a digital token for online shopping. Instead, many financial executives see the virtual currency software as enabling entirely new ways to process and maintain records online, allowing individuals and banks to exchange funds or trade assets like stocks and bonds directly without relying on lengthy and expensive middlemen.

Several banks have already announced their work, but much of the activity is still happening behind the scenes. In April, executives from more than a dozen major banks gathered at a Bank of America office in Manhattan to discuss in secret how to use the technology underlying bitcoin to transform foreign exchange trading, the world’s largest financial market, according to people familiar with the matter.

Central banks such as the Federal Reserve and the Bank of England have also formed their own teams to study the technology.

“What was primarily an idea a year ago was now a real opportunity,” said Max Neukirchen, JPMorgan’s head of corporate strategy. “We’ve tested it and found that it can play an important role in how we think about how we develop our infrastructure.”

Changing attitudes

Wall Street's attitude has indeed changed dramatically compared to when Bitcoin was first introduced in 2013. At that time, many bankers, including JPMorgan Chase CEO Jamie Dimon, dismissed the virtual currency. That year, Bitcoin's value also saw a surge, and many people compared it to another Dutch tulip bubble.

At that time, large companies such as Dell and Overstock announced that they would accept Bitcoin payments in their online stores, but not many consumers were really willing to use this virtual currency, and people's enthusiasm for Bitcoin almost disappeared.

Organizations that are paying attention to Bitcoin today generally have no interest in using the currency to sell products, or even owning the virtual currency. Instead, they are focused on the networks and software that Bitcoin has made popular around the world for free.

Until now, digital transactions have required some form of central authority to move funds and update records — a model used by PayPal and Visa for most online purchases.

However, the Bitcoin network is a decentralized network of users who jointly keep transaction records and update various records in real time, without a single user or company in charge. All transaction records are kept on a public ledger - essentially a large public spreadsheet - called a blockchain. Everyone can see it, but it is impossible to tamper with it - at least for now.

Standalone use

A lot of research work in banking and other industries focuses on the question: Can blockchain be used independently of Bitcoin?

Music publisher Billboard recently wrote about several startups that hope to use digital ledgers such as blockchain to track music downloads and pay royalties to musicians without relying on a central recorder.

The Vermont government also launched a study in June this year to learn how to use blockchain to preserve judicial records. Several other government agencies are also conducting similar explorations, but most are located outside the United States.

However, financial companies are investing the most. For example, Nasdaq OMX Group has hired programmers in Manhattan to design software that will be released this year.

Nasdaq will allow investors to trade shares of private companies, such as tech startups, on a new blockchain, replacing the traditional system of issuing and trading private company shares using paper certificates, a process that can take weeks to complete even for basic trades.

Nasdaq is also experimenting with using blockchain-like ledgers in several other markets to speed up and reduce transaction costs, an effort led by Fredrik Voss, who recently moved from the company’s commodities division to become its head of blockchain technology.

"We believe blockchain technology has broad promise to improve the efficiency of capital markets while providing greater security and transparency, all of which are in the public interest," Nasdaq CEO Robert Greifeld said in an investor conference call in July.

Many projects

Financial firms began talking publicly about Bitcoin in late 2013. But at the time, most of the views were negative, focusing on the speculative nature of the virtual currency.

But recently, Goldman Sachs, Santander and BBVA have all invested in startups working on bitcoin technology, some of which were founded by former employees of large financial institutions.

But these banks are generally reluctant to disclose their internal efforts in these technologies. For example, Citigroup has conducted six internal experiments to develop software using blockchain technology, according to people familiar with the matter. The bank also developed its own virtual currency, Citicoin, in one test and gave it to the company's employees for testing.

Beyond Nasdaq’s project, there is still much debate about where the technology might first be used. Barclays has 20 trials underway, mostly at its two technology offices in London, looking for ways to use blockchain to speed up consumer payments while lowering their costs to compete with credit card companies and remittance services.

But bankers generally say most of the work is aimed at changing the systems that big Wall Street trading houses and investors use to buy and sell complex assets, such as syndicated loans and corporate bonds.

Because innovation in these areas requires collaboration among multiple banks, the banks have held meetings to discuss collaboration options, often led by external startups that want to provide them with software.

One of the most eye-catching meetings was led by the startup R3Cev, whose head David E. Rutter was once a Wall Street executive. People familiar with the matter said that R3Cev has designed several models that can facilitate banks to trade foreign exchange on a jointly maintained spreadsheet, similar to the effect of blockchain. The meeting held at the Bank of America office in April this year was led by R3Cev, with 75 people from 15 financial institutions attending.

It may seem like a very obscure business, but huge amounts of money circulate in it every day, and these markets do have an impact on the profits of large financial institutions. For example, the foreign exchange market trades up to $3 trillion per day.

Positive outlook

For many bankers, the key question is not if the technology will be available, but when. JPMorgan’s Nucker and many bankers expect it will take several more years for blockchain to be used on a large scale. Barclays’ White, on the other hand, predicts it could happen next year.

The use of blockchain by banks has been a source of frustration for early bitcoin fans, who see the technology as a way to store and transfer money without relying on banks.

Many in the financial industry are hoping to find a model for using blockchain technology without having to associate it with bitcoin.

Although bankers have not yet reached a consensus on the popularity of this technology, they are unanimously optimistic about its prospects. Heath Terry, a top Internet analyst at Goldman Sachs, recently said in the company's podcast: "The whole blockchain technology behind Bitcoin has great significance for any asset, and the same is true for transferring ownership of digital goods."

“I firmly believe that blockchain technology can ultimately change the way we think about asset ownership,” he said.