Crypto Analytics

Bankers quietly shape crypto innovations for their own use

When Elon Musk revealed earlier this year that he had invested $ 1.5 billion of Tesla’s corporate money in Bitcoin, many adult financiers winced. No wonder.

The world of corporate treasury management is supposed to be a deadly boring place where security prevails. Nobody expects treasurers to dance with the crypto kids.

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

Take JPMorgan. This year, Umar Farooq, head of the bank’s Onyx project (which created a JPMorgan cryptosystem, coin and Ethereum-style blockchain platform), announced that it was developing so-called “programmable money” for corporate clients. This is intended to allow treasurers to close deals with partners on autopilot via a shared computer ledger, with an innovation known as “smart contracts”.

It sounds futuristic. But the bank is ready to announce that one of the largest industrial groups in the world is taking over this crypto innovation. No, this is not the same as Musk’s adventure with Bitcoin: instead of using crypto as a store of value (i.e. investment), the JPMorgan initiative is using it as a payment method to transfer values ​​associated with other assets – including the old-fashioned fiat currency .

This second use of crypto will almost certainly be far more important to the business world than Bitcoin, not least because other banks are also racing to develop crypto innovations. To take another example, this week HSBC and Wells Fargo revealed plans to use blockchain to process foreign exchange transactions between financial institutions.

The impetus behind these experiments is the realization among financiers that treasurers face at least three major headaches. The first is that organizations require armies of people to execute (and review) treasury transactions, which is costly and, as transactions increase, the risk of human error.

Second, treasury transactions typically take a few hours (if not days) to process, especially across borders. This creates a third problem: in order to compensate for these execution delays, companies and banks need large liquidity buffers to cover delays and risks.

In theory, these three problems could be solved (or reduced) if older financial systems were better automated and allowed for faster execution and settlement. This is happening to some extent now as the competitive threat of crypto (belatedly) is forcing traditional systems to be up to date. The Swift messaging system saga is a case in point.

In practice, however, it is often very difficult to upgrade legacy systems, and a wider leap into digitization is drowning companies in cross-border micropayments. JPMorgan hopes that the “programmable money” project is trying to offer a workaround by making it possible, for example, for a micropayment to be carried out immediately and processed at the moment of the “sale” and offset against other transactions on a company account.

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

However, some non-financial corporate experiments have been less successful. In 2018, for example, BP and other energy companies presented a blockchain-based system for oil trading. But earlier this year, Karen Scarbrough, Senior Technology Associate at BP, admitted that the project “really didn’t go as we thought” and was withdrawn. The reason, it seems, was that it is tedious to update a shared computer ledger with the current blockchain technology – so “Blockchain is not yet an excellent tool for tracking and tracing”.

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

Still, there are already three important lessons investors should be aware of. First, while enthusiasts used to believe that crypto-innovation would dissolve legacy institutions, the establishment is fighting back. Second, while crypto enthusiasts used to tout the idea of ​​“public”, permissionless blockchains (ie ones that anyone can join without asking), the real measures for businesses are “private” chains (ie those that allow access controlled).

This focus on private chains can be temporary. The Internet emerged in the form of private “intranets” that were later connected to form a public network. But the rise of private – not public – chains raises a third important point: The reason large companies and banks want to use blockchain for payments is not anonymous, but for reasons of flexibility, automation, and speed. Crypto is no longer (just) a tool to create trust where none exists or to undermine authority.

That subtle twist could scare libertarians. But it’s also a sign that the crypto world is growing up. All eyes are now on how regulators and corporate treasurers are reacting to the idea of ​​”programmable money”; even if it’s not as easy to tweet as Musk.

gillian.tett@ft.com

Source: Crypto News Austria

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