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April 10, 2015

5 banks preparing for the Bitcoin bonanza

Finance is bracing itself for the rise of cryptocurrencies.

By Jimmy Nicholls

Cryptocurrency is heading for the mainstream, or that least that’s what the world’s financial industries appear to think.

Once a fringe movement used for allowing people to buy drugs from the online marketplace Silk Road, currencies like Bitcoin are increasingly being investigated by banks keen to reduce their transaction costs.

As such, firms from Wall Street to Threadneedle Street will soon be entering the cryptocurrency scene. It will never be the same again.

1. UBS

Last week the Swiss bank UBS announced that it would create an innovation lab in London, focusing on the blockchain technology, which functions as a sort of public ledge to record transactions and can enable anonymous payment.

Located in Canary Wharf, London’s second financial district, the lab will open in the Level 39 research space in One Canada Square, where it will be surrounded by other fintech firms, as well as retail and cybersecurity research projects.

Oliver Bussmann, CIO of UBS, said: "Our innovation lab at Level39 will provide a unique platform to explore emerging technologies such as blockchain and cryptocurrencies, and to understand the potential impact for the industry."

2. BNY Mellon

At around the same time as UBS, the US-based BNY Mellon announced it was exploring cryptocurrencies, speaking in an interview with the Wall Street Journal.

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"We want to try it out to see the applicability of [Bitcoin] in our businesses," said Suresh Kumar, CIO of BNY Mellon, adding that he was particularly interested in seeing whether bitcoins could make transactions more efficient.

"There is a big mindset change that comes with many of these new technologies," he said. "So if we can find a way to make it tangible, in a controlled environment like our internal employee recognition program, then we have a great opportunity to help our businesses better understand the potential value."

3. Bank of England

Regulators have looked on cryptocurrencies with some suspicion due to their lack of an official backer, a key test of confidence in physical currency, and their links to both virtual and physical crime.

Despite this the Bank of England is optimistic about the potential. Writing in a report in February, it said: "While existing private digital currencies have economic flaws which make them volatile, the distributed ledger technology that their payment systems rely on may have considerable promise."

The paper even mused on whether central banks could themselves issue digital currencies, just as the US Federal Reserve has, but noted that there were technological and regulatory hurdles that would have to be overcome first.

4. Credit Suisse

Like the Bank of England, not all private banks are convinced that cryptocurrencies are unambiguously the way forward, a camp Credit Suisse falls into.

Writing last month Jonathan Horlacher, a research analyst with the company, worried that the erratic value of cryptocurrencies was an impediment to their adoption as a general means of payment, citing Bitcoin as a striking example.

However he added a caveat: "When combined with the traditional financial system, bitcoins could have cost advantages over credit cards or providers such as Western Union when used as a transaction system."

5. JP Morgan

As revealed by CBR this week, finance is increasingly feeling the pressure from Silicon Valley, which is poaching their executives and may soon be stealing their profits.

Jamie Dimon, the chief executive of JP Morgan, confirmed as much in a letter to shareholders recently, writing that: "There are hundreds of start-ups with a lot of brains and money working on various alternatives to traditional banking."

The response of the US bank will be to compete with the upstarts on the seamlessness of the payment service. When that fails Dimon says it will partner with them "where it makes sense", which could open the firm up to some interesting deals in future.

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