Bankers quietly shape crypto innovations for their own use

[ad_1]

When Elon Musk revealed this year that he had invested $ 1.5 billion of Tesla’s cash in bitcoin, many adult financiers winced. Not surprising.

The world of corporate cash management is supposed to be a deadly boring place where security reigns supreme. No one expects treasurers to dance with crypto kids.

But these days, something striking is quietly happening on Wall Street: Some adult bankers are starting to offer these conservative treasurers crypto-focused solutions as well.

Take JPMorgan. This year, Umar Farooq, head of the bank’s Onyx project (which created an Ethereum-style cryptocurrency and blockchain platform from JPMorgan), revealed that he is developing what is known as ‘programmable currency’. for corporate clients. This aims to allow treasurers to conclude deals with partners via a shared computer ledger, on automatic pilot, with an innovation known as “smart contracts”.

It sounds futuristic. But the bank is about to announce that one of the world’s largest industrial groups is adopting this crypto innovation. No, this is not the same as Musk’s adventures with bitcoin: instead of using crypto as a store of value (i.e. investment), the JPMorgan initiative uses it. as a payment method to transfer values ​​linked to other assets – including fuddy-duddy fiat currency.

However, this second use of crypto will almost certainly end up being much more important than bitcoin to the business world, not least because it comes as other banks rush to develop crypto innovations as well. To cite another example: This week, HSBC and Wells Fargo revealed their intention to use blockchain to settle foreign exchange transactions between financial institutions.

The impetus behind these experiments is a recognition among financiers that treasurers face at least three big headaches. The first is that businesses need armies of personnel to execute (and verify) cash transactions, which is costly and carries the risk of human error as transactions increase.

The second is that it usually takes a few hours (or even days) to settle cash transactions, especially across borders. This creates a third headache: to compensate for these delays in execution, companies and banks need large reserves of liquidity to cover delays and risks.

In theory, these three problems could be solved (or reduced) if existing financial systems became better automated, offering faster execution and settlement. This is now happening to some extent, as the competitive threat of crypto forces (belatedly) traditional systems to become more technologically advanced. The saga around the Swift messaging system is one example.

However, in practice it is often very difficult to upgrade existing systems and a greater digital business ascent leaves companies drowning in cross-border micropayments. Thus, the “programmable money” project tries to offer a workaround, for example by allowing a micropayment to be made and settled instantly at the time of the “sale” and to be deducted from other transactions in an account. company, at least JPMorgan hopes so.

Will it work? It remains to be seen. JPMorgan has already had some success using blockchain and its own crypto coin for bank-to-bank transactions; with over 400 banks using them. Entities such as DBS, Standard Chartered and HSBC also have digital initiatives.

But some experiments with non-financial firms have been less successful. In 2018, for example, BP and other energy companies unveiled a blockchain-based system for trading oil. Yet earlier this year Karen Scarbrough, senior technology associate at BP, admitted that the project “really didn’t go the way we thought” and had been canceled. The reason, it seems, was that it is tedious to update a shared computer ledger with current blockchain technology – so “blockchain is not yet a great tracking and tracing tool.”

Crypto enthusiasts counter that blockchain is now much more efficient due to technology upgrades. But we just don’t know yet if it can scale. We also don’t know how the regulators will react; the devil will be in digital detail.

Nonetheless, there are already three important lessons that investors should take away. First, while enthusiasts believed crypto innovations would disintermediate legacy institutions, the establishment is fighting back. Second, while crypto enthusiasts also advocated the idea of ​​”public” blockchains, without authorization (that is, those that anyone can join, without asking), the real action for businesses is with “private” channels (ie those whose access is controlled).

This focus on private channels may be temporary. The Internet began life as private “intranets”, which were then linked to create the public network. But the rise of private – and non-public – chains raises a third key point: The reason large corporations and banks might want to use blockchain for payments is not to be anonymous, but for flexibility reasons. , automation and speed. Crypto is no longer (just) a tool to build trust where there is none or to overthrow authority.

This subtle twist could horrify libertarians. But it’s also a sign that the crypto world is growing. All eyes are now on how regulators and corporate treasurers are reacting to the idea of ​​”programmable money”; although he’s not as easily tweetable as Musk.

[email protected]

[ad_2]