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While Bitcoin pundits were sure 2014 was going to be the year Wall Street came to Bitcoin, their predictions may have been a year too early.
While Bitcoin pundits were sure 2014 was going to be the year Wall Street came to Bitcoin, their predictions may have been a year too early. The jury is still out, but signs are growing that large investment firms and other traditional financial services are becoming more interested in trading bitcoin and using its underlying technology.
According to a recent WSJ story, bigger players are becoming more interested in the space. Some of the biggest U.S. proprietary firms and traders are looking towards bitcoin as a speculative vehicle. These firms see an ability to profit from the cryptocurrency, bring liquidity to the market, and help to streamline transactions. Proprietary firms trade with their own money, so they don’t have an investor mandate to follow, which makes it much easier for them to test bitcoin trading.
Among the firms who have shown interest are DRW Holdings LLC from Chicago, who is one of the major investors in Digital Asset Holdings (the firm with which former JP Morgan Executive Blythe Masters is now CEO), Citadel Securities from Chicago, KCG Holdings from New Jersey and Wedbush Morgan based in Los Angeles. All have bought shares in Bitcoin Investment Trust (BIT), which recently started trading on the OTC Markets.
Many firms are staying out of the space because they are still waiting for regulators to finalize the laws that would protect traders and their clients from additional trading risks. From a technological standpoint, the infrastructure will also need to be built further to handle much larger order flows.
SecondMarket, the company that formed BIT, also won most of the bitcoin in the second U.S. Marshall’s auction. Director Michael Moro has said there are two glaring problems with trading bitcoin for larger players at the moment. “One is that at a $3.5 billion market cap, it is still a small place for traditional large money institutional guys to make markets,” he said. “Two, liquidity is scattered” across various exchanges around the world.
The hope is that larger players will increase liquidity and bring some stability to price. In other words, the price will become less volatile. NASDAQ OMX group recently partnered with Noble Markets “to implement Nasdaq's X-stream trading technology for the company's soon to be launched digital currency marketplace.” This is a step toward supporting large firms with big order flows to seamlessly trade bitcoin without suffering from slippage from low liquidity.
In a recent WSJ article, Suresh Kumar, CIO of BNY Mellon stated that his firm is looking into using bitcoin in its existing businesses. As has been noted in the recent Accenture report, banks use legacy software that is not open source. They also use differing software stacks that are not compatible with new technology, particularly decentralized architecture.
BNY Mellon is no stranger to this problem and is in the process of trying to figure out how to integrate blockchain technology. As the WSJ put it:
“BNY Mellon senior developer Arun Battu has spent the last several months using blockchain technology to build an application using open source code from Bitcoin.org. Mr. Battu, who modified the code to run on the bank’s internal network, says his biggest challenge is getting used to the bitcoin architecture. BNY Mellon’s computer systems are largely built on client-server architecture, in which a central server delegates tasks to and provides resources for a network of computers. Bitcoin operates in a peer-to-peer model, in which each computer can act as a server for the others, allowing shared access to files and peripherals.”
Despite the effort and massive overhaul needed to get this done, BNY Mellon sees massive potential in the blockchain for many of its business lines and is willing to test it out. Swiss bank UBS has also announced a similar initiative and is opening a blockchain technology lab in London to explore disrupting the financial payments space.
It appears there is interest in bitcoin and blockchain technology from many different firms in the traditional financial services sector. What is even more interesting is the different ways in which these firms plan to look under the hood of Bitcoin to help their businesses grow. In the coming months we should find out how interested these firms truly are in this space.
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