Apr 25 2019

Large Investment Firms Slow to Embrace Cryptocurrencies

Traditional financial services firms eye bitcoin and other cryptocurrencies with skepticism, but blockchain technology may prove valuable in other ways.

Recent testimony on Capitol Hill reveals that large banks will be slow to embrace trading in cryptocurrencies. Financial services firms see uncertainty in cryptocurrency marketplaces, and they are not certain the currencies will survive.

For example, Goldman Sachs CEO David Solomon quashed a rumor that his firm considered opening a trading desk dedicated to cryptocurrency, CNN reports. “We might at some time [open a desk] in time. But it’s a new area,” Solomon said in a hearing of the House Financial Services Committee on April 10. He added, “There are a plenty of issues. It’s unclear from a regulatory viewpoint, and it’s not clear in the long run that those currencies will be viable.”

Solomon said because cryptocurrencies are so new, his firm isn’t clear on how regulations apply to them. In addition, Solomon was uncertain as to whether supporting technologies would “work and be viable” in the future.

In remarks last year, Goldman Sachs CFO Martin Chavez said planning for traditional banks to work with cryptocurrencies would take a long time, contrary to a report in Bloomberg, notes Cryptocurrency News.

“When we talked about exploring digital assets, it was going to be an exploration that would be evolving over time. Maybe someone who was thinking about our activities here got very excited that we would be making markets as principals in physical bitcoin, and as they got into it, they realized that is part of the evolution, but it’s not here yet. From the perspective of custody, we don’t yet see an institutional-grade custodial solution for bitcoin. We’re interested in having that exist, but it’s a long road,” Chavez said.

Digital Transformation

Traditional Banks Make Tentative Moves to Embrace Digital Tokens

JP Morgan CEO Jamie Dimon expressed a little more optimism in blockchain, reports The Tokenist.

The blockchain is real, its technology, a lot of people use and attest to it today and we think it will work over time,” Dimon told Congress. “But the part that is not real is that cryptocurrency is not supported by anything. There’s no value behind it other than what the next person will pay for it. And they have serious issues about that.”

Dimon explained that his firm created the JPM Coin as a means of utilizing blockchain, but that token is backed by money held by the bank.

“The JP Morgan Coin is a token which is supported by a deposit at JP Morgan. So it can be shipped around the world real-time, it can go with a lot of data on it, you can split it into pieces, and the second someone wants cash, we can move the cash,” he said.

As the Risk Management Association cautions of cryptocurrencies, “If traditional financial institutions join this burgeoning market, they should apply sound risk management practices with respect to financial, technological, and emerging market risk.”

MORE FROM BIZTECH: Explore what blockchain means for the banking sector.

Financial Services Benefit from Blockchain Outside Cryptocurrency

In a recent article, Deloitte specifies five blockchain technology use cases in financial services, outside of trading in cryptocurrencies.

  1. Faster and simpler cross-border payments. Making cross-border payments becomes significantly faster and less expensive via blockchain.

  2. Modernized share trading. Share trading via blockchain is more accurate with a short settlement process.

  3. Smart contracts. Blockchain offers the possibility of commercial transactions and agreements settled automatically. The public ledger would enforce all obligations of parties in a contract with a middleman.

  4. Improved online identity management. After registering an identity with blockchain, individuals will choose how to identify themselves and to whom.

  5. Improved loyalty and rewards programs. Thanks to the transparency of blockchain transactions, banks and other financial services firms could recognize loyalty quickly and design programs to capitalize on that loyalty to engage customers.

Kartik Hosanagar, the Hower Professor of Technology and Digital Business at the Wharton School of the University of Pennsylvania, anticipates financial institutions will introduce a first wave of applications in which a bank acts as a central authority, rather than using public blockchains with no central authority.

These applications will be more secure and offer some benefits of the ledger technology while operating in ways very similar to traditional banking, Hosanagar says.

But over time, notes Knowledge@Wharton, Hosanagar “expects smart contracts (self-executing contracts when requirements are met) to be offered on public blockchain networks like Ethereum."


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