Corporate America is gradually warming to bitcoin.
Amid a slew of deals involving prominent finance and tech companies lie signs that the U.S. business establishment is exploring innovative new enterprise uses for digital currencies. They are making early, tentative bets that the so-called blockchain-ledger technology behind bitcoin might one day transform how banks, businesses and even smart appliances circulate money, assets and sensitive data around the world.
The interest is most evident on Wall Street, where there’s a sense that the bank-dominated, centralized pathways through which international finance passes are long overdue for the kind of Internet-driven cost savings that have affected other industries.
“The price of handling bits [of data]has come down by a factor of 10,000 fold over the last generation; it’s high time that the costs of payments processing fall by a factor of even two,” says former U.S. Treasury Secretary Lawrence H. Summers. “Bitcoin offers the prospect of necessary and important disruption in finance for the benefit of buyers and sellers rather than financiers and middlemen.”
Most ordinary consumers remain wary of using an unproven, six-year-old digital currency that many associate with illicit drugs, extreme price fluctuations and security risks. But the talk now is that bitcoin’s potential lies more as a low-profile, back-office phenomenon than as mainstream medium of exchange for buying groceries.
The idea is that blockchain ledgers, which are verified, updated and maintained by a decentralized network of independently owned computers, for the first time let people and businesses trust each other in peer-to-peer online exchanges of assets, money and information. In cutting out intermediating middlemen, the theory goes, this technology could slash costs, cut settlement times and reduce default risks.
“It’s an opportunity for Wall Street to streamline some operations that are pretty antiquated,” says Duncan Niederauer, the former chief executive of the NYSE Euronext, who this week became an adviser to TeraExchange, the first Commodities Futures Trading Commission-regulated bitcoin derivatives platform.
There are still major hurdles to overcome. In addition to the security, criminality and price volatility concerns, it’s not clear that the bitcoin network can be sufficiently scaled up. Total daily bitcoin transactions currently average around $50 million, a tiny sliver of the more than $5 trillion traded in world foreign exchange markets.
However, with regulators in the U.S., U.K. and elsewhere devising digital-currency rules aimed at both protecting users and encouraging innovation, companies are exploring possibilities. It marks a big change from a year ago, when bitcoin was mostly viewed as a fringe idea for computer geeks and libertarian opponents of government-issued currencies.
In January, the New York Stock Exchange, USAA Bank, Spanish banking conglomerateBanco Bilbao Vizcaya Argentaria SABBVA +1.55% and former Citigroup Inc.C +0.46%chief executive Vikram Pandit took stakes in bitcoin consumer services and exchange provider Coinbase. USAA and Citigroup’s venture capital arm, Citi Ventures, are also doing mentoring work with startups at an accelerator program run by San Francisco’s Plug and Play Tech Center.
This week, Nasdaq OMX Group NDAQ -0.68% inked a deal providing order-matching technology to New York startup Noble Markets, which is building a high-tech marketplace in which hedge funds and other institutions can trade digital currency-based assets. Nasdaq’s executive vice president for market technology, Lars Ottersgård, said his firm is actively exploring ways in which blockchains “could be leveraged to reduce risk in markets.”
Meanwhile, leading figures from Wall Street and Washington are, like Mr. Niederauer, taking job offers in the digital-currency sector. Long-time J.P. Morgan Chase & Co. executive Blythe Masters, who is credited with pioneering the global credit derivatives industry, this month took the helm of blockchain trade settlement firm Digital Assets Holdings. In October, former Securities and Exchange Commissioner Arthur Levitt became an adviser to payment processor Bitpay and in January, digital currency-based payments platform Ripple Labs named former National Economic Council director Gene Sperling as a director. BitFury, which provides specialized computers for the “mining” process of confirming bitcoin transactions, has tapped Jason Weinstein, a former head of the Department of Justice’s criminal division, as an adviser.
Various new projects intend to offer a more robust, regulated and Wall Street-friendly trading environment for bitcoin, creating opportunities for investors who were otherwise unable or unwilling to participate in the volatile, hacking-prone web sites that have handled bitcoin trading until now. New York entrepreneur Barry Silbert’s Digital Currency Group this week opened public trading in its Bitcoin Investment Trust. That fund might soon face competition if twins Tyler and Cameron Winklevoss earn SEC approval for a full-blown exchange trade fund.
With these new trading instruments, the founding firms are hoping to create opportunities for a wider pool of investors – including those holding the strategic view that new non-currency uses for the blockchain will generate significant demand for the underlying currency. Even if those uses don’t necessarily involve payments in bitcoin, it is expected that the digital currency will still be needed as the foundation for transactions and that should translate into a higher price for bitcoin.
Widening the investment pool could also help quell bitcoin’s notorious price volatility — which could make it more appealing as a currency too. In 2013, the digital currency’s price soared from around $13 in January to a late-November peak of $1,150, only to drop 85% over the following 13 months. Bitcoin’s price has since stabilized around $250, according to an index produced by news service Coindesk.
Big-name tech companies are also testing the waters. International Business MachinesCorp .IBM +0.80% has a project to research how blockchain technology could allow network-connected gadgets exchange data, money and contracts within a future “Internet of Things.” And Chipmaker Qualcomm Inc. has joined a slew of top venture capitalists putting a combined $116 million into a startup called 21 that’s developing blockchain-enabled products.
There are still plenty of skeptics, however. Boston University professor Mark T. Williams, a vocal bitcoin critic, says regulation needs to be tougher to protect consumers. “What complicates things is this is a nationless currency,” he said. “What regulatory bodies are supposed to be responsible for it? “
At the other extreme, libertarian-minded early adopters warn that regulation and Wall Street co-optation undermine the empowering, decentralizing elements that first drew them to bitcoin. Outspoken anarchist Cody Wilson, who helped design a technology making it harder to trace bitcoin transactions, bemoans that new bitcoin entrepreneurs “desire authority.” They “give lip service to libertarian ideals but actually discard anything that appears to be revolutionary,” he said.
Many also wonder whether banks and other legacy institutions might one day quash the technology if it threatens revenues from businesses such as credit cards.
Still, the cost savings and potential efficiencies could prove too enticing for businesses to resist.
“Not only is it not a threat, it’s potentially an opportunity,” says Mr. Niederauer. “If the train’s leaving the station, you’d rather be on it and be the conductor, than a bystander on the platform.”