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Should Banks Start Betting on Bitcoin?

Nikita Blows | Dec 01, 2017 | 12:00

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Should Banks Start Betting on Bitcoin?

Nikita Blows | Dec 01, 2017 | 12:00


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With Bitcoin reaching record heights this week, more and more established financial institutions are taking an interest in its undeniable, and lucrative, appeal.  However, mainstream banks are still hesitant.


This week saw crypto enthusiasts enjoying the rollercoaster ride that is Bitcoin with the currency exceeding heights of $11,000, and dipping to lows of just under $9,500.

Surging into the five-figure zone resulted in global headlines, and Bitcoin became the topic of conversation for both cynics and optimists alike.  However, perhaps we should be lending our ears to what the mainstream financial institutions are saying.

Established Financial Institutions Want in on the Action

Bitcoin seems to be garnering more and more interest from these institutions and is taking tentative steps into the realm of legitimacy.  Chicago Mercantile Exchange (CME Group) announced earlier this month that they will be introducing Bitcoin futures contracts this year, while Cantor Fitzgerald aims to offer Bitcoin derivatives in the first half of 2018.

Wednesday saw Nasdaq hopping on the Bitcoin bandwagon when they announced that they too would be launching Bitcoin futures next year.

In an article in American Banker, chair of the financial services technology and regulation practice at Polsinelli PC law firm, Richard Levin, said he believes that this move is “a clear message that the traditional parts of the financial services industry are embracing digital currencies.”

Levin explained:

You look at the fact that the Chicago Mercantile Exchange and Nasdaq, two of the leading exchanges, are embracing financial products connected to a digital asset.  They aren’t charging into this cavalierly.  They had discussions with their regulators.  Many [institutional investors] are taking a look at this digital asset class and asking, is this a new asset we can trade?  Just like the development of derivatives, some may feel this is a new area they can make money trading in.

Unpredictability Still an Issue

However, Levin went on to add that regulators may still be apprehensive about individual retail investors who may not be aware of Bitcoin’s penchant for volatility.  This concern may be exacerbated by the recent warnings made by the Federal Reserve about Bitcoin’s unpredictability.

Bitcoin growth chart

“I think they’re worried that retail investors deemed not sophisticated enough might get burned,” Levin added.

Automatic Integration is not a Given

Experts say that having the support of these big names in the financial industry may not automatically result in the widespread adoption of Bitcoin by the banking industry.  It may, however, foster more interest in understanding the currency.

“Something that moves up and down 20% in a day doesn’t feel like a currency, doesn’t feel like a store of value,” said Goldman Sachs CEO, Lloyd Blankfein.  He also said that due to this volatility, his bank does not need a Bitcoin strategy yet.

At least he’s not calling it “a fraud” like JPMorgan Chase CEO, Jamie Dimon, did once upon a time.

In addition to its unpredictability, Bitcoin faces other challenges before global adoption can happen.

A Futures Market May Help

A Futures Market May Help

Credit Suisse CEO, Tidjame Thiam, has said that many banks “in the current state of regulation have little or no appetite to get involved in a currency which has such anti-money-laundering challenges.”

Price stability and unclear regulations are also concerns.

“It’s very difficult for banks themselves to benefit from Bitcoin,” said managing principal at Capco consulting firm, Ben Jessel.  “There’s a lot of concern around its overall fundamentals.  One would hope the advent of a futures market now will provide us with an idea of the future price of bitcoin and perhaps take out some of the speculative bubble element.”

This year saw the price of the currency grow by over 900%.  It’s increasing popularity, and price has resulted in both individual and institutional investors hoping to put some of their eggs in the Bitcoin basket.

“Every day, at the moment, only one million Bitcoin are actively traded,” said co-founder of the crypto trading platform, Cryptonaut, Maximilian von Wallenberg.  “But by now there are millions of people who want to get into the market.  In addition, we have institutional money pouring in.”

 

Blockchain, Bitcoin, and Cross-Border Payments

Jessel has however highlighted the fact that the efficiency of Bitcoin and blockchain technology can radically transform the currently inefficient cross-border payments system.

“I think the biggest possibility will come in cross-border payments,” he said. “The correspondent banking network we have now takes three days [to complete a payment],” Jessel explained.

“For cross-border payments, there is nothing better than cryptocurrency,” added managing director of Clearstone Venture Partners, and CEO of the Worldwide Asset Exchange, William Quigley.  “More people are beginning to understand that fact and it is getting reflected in the price of Bitcoin.”

Blockchain, Bitcoin, and Cross-Border Payments

Banks Could be Missing Out

Whether it will be used for these types of payments or a way to completely revolutionize the financial industry, banks who cannot see the true potential of Bitcoin could be in for a rude awakening.

“This is a runaway train, no one is closing it down now,” said David Tawil, a director at Maglan Capital and former investment banker at Credit Suisse.  “If any financial services professional is not taking notice and educating themselves on Bitcoin and cryptocurrency, they are doing themselves a big disservice.”

As soon as the risks attached to Bitcoin are reduced, the road to adoption may be less bumpy.  Tawil added that a universal digital currency “is extremely compelling”, especially in countries offering an unstable political and economic environment.

“Regulators need to get all over this as fast as possible and start figuring out a way to legitimize it,” Tawil said.

It seems that even with Bitcoin breaking through the $11,000 ceiling, it’s road to global domination integration is still paved with concern and apprehension.  However, with big names in the financial industry paying serious attention, universal adoption doesn’t seem that far away.

Do you think mainstream banks will be adopting Bitcoin and cryptocurrency anytime soon?  Let us know in the comments below!


Images courtesy of Coinbase, Shutterstock


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