Goldman Sachs Explores a New World: Trading Bitcoin
Goldman Sachs Group Inc. is weighing a new trading operation dedicated to bitcoin and other digital currencies, the first blue-chip Wall Street firm preparing to deal directly in this burgeoning yet controversial market, according to people familiar with the matter.
Goldman’s effort is in its early stages and may not proceed, the people said. The firm’s interest, though, could boost bitcoin’s standing among investors and fuel the debate around digital currencies, which were initially viewed as havens for illicit activity but are pushing further into the mainstream investment world.
China in recent weeks has banned exchanges that trade bitcoin, fearing the virtual currency could provide an avenue for capital flight. J.P. Morgan Chase & Co. Chief Executive James Dimon, whose bank is the largest dealer in global currencies, last month called bitcoin a “fraud” and said he would fire any employee who traded it.
Yet Japan’s government has embraced bitcoin, creating regulations to legitimatize its trading. India and Sweden have mused about creating their own virtual currencies, and the U.S. Federal Reserve has studied bitcoin and the technology underpinning it.
Bitcoin pioneered the cryptocurrency movement, but after eight years, the virtual currency is still struggling to find mainstream acceptance.
“In response to client interest in digital currencies, we are exploring how best to serve them in this space,” a Goldman spokeswoman said.
Bitcoin is a digital currency that runs on a decentralised network of computers, rather than a centralised ledger under the control of a central bank or government. Users can exchange value directly, without a middleman such as a bank.
Big banks, including J.P. Morgan and Goldman, have dabbled in the technology behind bitcoin, known as blockchain, and opined on its potential to reshape industries. But they have been wary of venturing directly into a market whose early enthusiasts included anarchists and drug dealers.
Bitcoin has been a popular tool of ransomware, like the 2017 WannaCry cyberattack. It was also used extensively on darkweb marketplaces like the Silk Road, which trafficked in illegal drugs. It has also been beset by frauds and Ponzi schemes and its anonymity complicates governments trying to track the people behind transactions.
As digital coins proliferate and draw interest from professional investors, though, they become harder for Wall Street trading desks to ignore.
Bitcoin’s price has soared this year, from $US969 to more than $US5,000 last month before pulling back. Ethereum, a rival, traded as high as $US400 after ending 2016 at $US8. In all, nearly $US150 billion of digital currencies are in circulation.
Goldman seeks to serve a growing cadre of institutional investors wagering on bitcoin. Its effort could eventually entail a team of traders and salespeople making markets in bitcoins much as they do Japanese yen or Apple Inc. shares.
Keeping abreast of the day-to-day cryptocurrency market could also position Goldman to capitalise on further development of this market. Digital-currency proponents envision a world where coins will be widely accepted by online retailers and companies will use the tokens for cross-border commerce.
Already, cryptocurrencies are infringing on some traditional banking activities. Some start-up companies that historically might have hired banks to take them public are bypassing Wall Street by selling digital tokens, rather than shares, to the public. Such “initial coin offerings” raised $US1.3 billion over the past three months without paying fees to underwriting banks.
Goldman’s effort involves both its currency-trading division and the bank’s strategic investment group, the people said. That suggests the firm believes bitcoin’s future is more as a payment method rather than a store of value, like gold.
Launched in 2009, bitcoin grew as a communal software project championed by cypherpunks, who embraced its technological promise, and libertarians, who cheered its independence from government influence. In recent years, more sophisticated exchanges have cropped up to host trading, attracting professional investors.
Some 70 hedge funds now invest in cryptocurrencies, according to research firm Autonomous NEXT.
Exchange-traded funds meant to track digital currencies have so far faced pushback from regulators, but they could one day give a wider base of investors a way to indirectly own bitcoin and create new opportunities for savvy traders.
Such interest from institutional investors has propelled the bitcoin market to a size that merits banks’ attention. About $US750 million of bitcoin trades on exchanges every day, on par with the daily trading volume of shares of Caterpillar Inc., the equipment maker.
Already, a handful of nonbank finance firms, such as DRW Holdings LLC’s Cumberland Mining and Genesis Global Trading Inc., broker bitcoin trades for institutional investors that want to buy or sell larger amounts than exchanges could handle.
That is a role that banks could easily step into. Wall Street firms also offer leverage to juice trading returns and hold assets on clients’ behalf. So far, though, none of the big banks have dealt directly in bitcoin.
For starters, bitcoin is highly volatile. After doubling in price between July and early September, bitcoin lost 35pc of its value in two weeks. That exposes dealers to the risk of big, quick losses.
But it also offers an opportunity for quick-footed traders to profit by anticipating price moves and facilitating panicked trading. Volatility has been sorely missing lately in traditional markets, leading to a slump in banks’ trading revenue.
Goldman, once known as the nimblest trader on Wall Street, has struggled more than peers. Revenue in its fixed-income division fell 21pc from last year through June, dragged down by poor performance in commodities and currencies.
Already, some of the infrastructure for trading bitcoin is cropping up. The Commodity Futures Trading Commission this summer approved the first derivatives exchange for cryptocurrencies. LedgerX, founded by two former Goldman traders, will clear options and futures that would allow dealers to protect themselves from drastic price swings and lock in profits.
Many prominent financiers, including Mr. Dimon, believe central banks such as the Federal Reserve will move to shut down digital currencies before they go mainstream enough to rival government-backed notes.
Morgan Stanley Chief Executive James Gorman recently took a nuanced view. He said bitcoin is “obviously highly speculative, but it’s not inherently bad.”
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IMF Head: Cryptocurrency Could Be the Future. Really.
Christine Lagarde sees a path ahead for cryptocurrency.
The managing director of the International Monetary Fund, or IMF, talked up the potential of virtual currencies to supplant traditional monies in coming decades on Friday. Cryptocurrencies, or virtual currencies, are a new class of digital assets powered by blockchains, distributed ledgers that made their name underpinning networks like Bitcoin and Ethereum.
Unlike JPMorgan Chase CEO Jamie Dimon and billionaire hedge fund founder Ray Dalio, who have recently disparaged Bitcoin, the world’s most well known cryptocurrency, Lagarde shared a rosier vision of the general technology’s future with attendees of a Bank of England conference in London. “In many ways, virtual currencies might just give existing currencies and monetary policy a run for their money,” she said.
“It may not be wise to dismiss virtual currencies,” Lagarde told the audience. “Instead, citizens may one day prefer virtual currencies.”
Lagarde devoted a third of her talk, which envisioned how financial tech may reshape the world by the year 2040, to the subject of cryptocurrency. She noted that digital money could gain popularity as engineers work through technology issues related to processing more payments through blockchain networks in the future.
“Why might citizens hold virtual currencies rather than physical dollars, euros, or sterling? Because it may one day be easier and safer than obtaining paper bills, especially in remote regions,” Lagarde said. “Virtual currencies could actually become more stable.”
Lagarde couched her predictions with the pretense of sci-fi (“Are you ready to jump on my [hovering drone] pod and explore the future together?” she said), but her forecast matches the view of other big-name optimists, like Fidelity CEO Abigail Johnson. “I’m a believer,” Johnson said at an industry conference earlier this year about digital currencies.
Other topics Lagarde touched on included the possible disruption of the traditional banking business model by fintech upstarts as well as the advent of artificial intelligence.
You can read Lagarde’s prepared remarks in full here, or read on for the segment about cryptocurrency, below.
1. Virtual currencies
Let us start with virtual currencies. To be clear, this is not about digital payments in existing currencies—through Paypal and other “e-money” providers such as Alipay in China, or M-Pesa in Kenya.
Virtual currencies are in a different category, because they provide their own unit of account and payment systems. These systems allow for peer-to-peer transactions without central clearinghouses, without central banks.
For now, virtual currencies such as Bitcoin pose little or no challenge to the existing order of fiat currencies and central banks. Why? Because they are too volatile, too risky, too energy intensive, and because the underlying technologies are not yet scalable. Many are too opaque for regulators; and some have been hacked.
But many of these are technological challenges that could be addressed over time. Not so long ago, some experts argued that personal computers would never be adopted, and that tablets would only be used as expensive coffee trays. So I think it may not be wise to dismiss virtual currencies.
Better value for money?
For instance, think of countries with weak institutions and unstable national currencies. Instead of adopting the currency of another country—such as the U.S. dollar—some of these economies might see a growing use of virtual currencies. Call it dollarization 2.0.
IMF experience shows that there is a tipping point beyond which coordination around a new currency is exponential. In the Seychelles, for example, dollarization jumped from 20 percent in 2006 to 60 percent in 2008.
And yet, why might citizens hold virtual currencies rather than physical dollars, euros, or sterling? Because it may one day be easier and safer than obtaining paper bills, especially in remote regions. And because virtual currencies could actually become more stable.
For instance, they could be issued one-for-one for dollars, or a stable basket of currencies. Issuance could be fully transparent, governed by a credible, pre-defined rule, an algorithm that can be monitored…or even a “smart rule” that might reflect changing macroeconomic circumstances.
So in many ways, virtual currencies might just give existing currencies and monetary policy a run for their money. The best response by central bankers is to continue running effective monetary policy, while being open to fresh ideas and new demands, as economies evolve.
Better payment services?
For example, consider the growing demand for new payment services in countries where the shared, decentralized service economy is taking off.
This is an economy rooted in peer-to-peer transactions, in frequent, small-value payments, often across borders.
Four dollars for gardening tips from a lady in New Zealand, three euros for an expert translation of a Japanese poem, and 80 pence for a virtual rendering of historic Fleet Street: these payments can be made with credit cards and other forms of e-money. But the charges are relatively high for small-value transactions, especially across borders.
Instead, citizens may one day prefer virtual currencies, since they potentially offer the same cost and convenience as cash—no settlement risks, no clearing delays, no central registration, no intermediary to check accounts and identities. If privately issued virtual currencies remain risky and unstable, citizens may even call on central banks to provide digital forms of legal tender.
So, when the new service economy comes knocking on the Bank of England’s door, will you welcome it inside? Offer it tea—and financial liquidity?
Written by Fortune
Industrial Revolution 2.1: How Blockchain Can Finish What the Internet Started
People often make the mistake of thinking that the Industrial Revolution (the catalyst for modernity and the driving force behind geopolitics to this day) was a phenomenon that took place all at once, in a vacuum, around the world. In fact, it took decades for inventions like the steam engine and cotton gin to spread, improve their functionality, and make a major impact in the lives of everyday people around the globe.
The steam engine itself is just one example. Although rudimentary versions of steam engines existed as far back as the early 1700s, it wasn’t until a century later that the technology powered the British Isles to world conquest.
Fast forward another two centuries, and the wave of digitalism that began in the late 20th century, one that we are all still experiencing, has been equated by many notable scholars as something of an “Industrial Revolution 2.0.”
As the world created by that first revolution looks ready to lurch into another future age, increasing jobs in technology, the shared economy, and online platforms show the way forward. The one thing that unifies them all is the Internet.
The digital revolution
The first wave of internet-based employment innovations brought websites like Monster and Indeed, online job applications and remote work. The second wave, where we’re at now, is comprised of digital workspaces like Slack and app-based employment.
Uber, Fiverr, Upwork and others all offer particular twists on how people can make money in their spare time with their skills. The online job economy is still fraught with shortcomings for everyday people looking for work. Just google Uber!
Thankfully, this digital revolution is by no means over. We are still improving. Just as it took many years to perfect the inventions of the Industrial Era, the online job market now finds itself as an ideal candidate for one final upgrade: Blockchain. Taking that next step and adopting Blockchain technology could actually make good on the promise of horizontalized, decentralized, free, open and fair work that was promised by the Industrial Revolution all those centuries ago.
Internet job portals
Right now in the Blockchain space, there are a number of job portal innovations that, although still in their infancy, claim they can bring us to “Industrial Revolution 2.1.” Two platforms lead the way.
Ethlance is a job portal built on the Ethereum network that is underutilized outside of the very finite scope of digital currency fanatics. Although it was a pioneer, it may have entered the fray before a critical mass could be reached.
Chronobank, another option, aims to be a recruitment portal and disrupt Human Resources departments around the world by undermining the status quo. Chronobank, for now, has a strict focus on certain professions like warehouse staffing and construction, so it may not provide the solution for everyone.
A platform aimed at students
A recent and particularly notable development in the space is Israel-based startup bitJob. Aimed at students specifically, bitJob has identified the ideal demographic ready to experiment with new technology, one with skillsets perfect for the internet age, and ready to take on part-time or online jobs as they go about their schooling.
With a complete ecosystem built on their own STU Token (for which the token sale is currently underway), bitJob is a global endeavor, leveling the playing field for students around the world to earn fair value from their talents quickly and directly. Further, the ecosystem is said to include marketplaces with deep STU discounts on school gear and travel for users, and perhaps most importantly, bitJob offers Paypal functionality that can turn students’ digital currencies into cold, hard cash, just in time for the weekend.
In one hundred years’ time, when they write articles about “The Digital Revolution,” it’s likely that Blockchain will be remembered as the final piece of the puzzle towards a truly digital era. With every new project that develops on the ideas of prior generations, we get closer to a world where fair work earns fair pay all around the world.
Written by Cointelegraph
BTC-e Fallguy Denies Wrongdoing as Trial Starts in Greece
Alexander Vinnik began his trial in a Greek court last Friday, still denying he played any part in the charge of allegedly laundering $4 bln. Russia seeks to extradite the mysterious employee of the former Russian exchange BTC-e.
The collapse of BTC-e and capture of Vinnik
In July, Vinnik was arrested in Greece while on holiday, at about the same time that BTC-e stated it was closed for “unscheduled technical work.” Users of BTC-e were soon met with an FBI take over page, thus having their biggest fears confirmed.
Vinnik was charged with money laundering, computer hacking, fraud and drug trafficking. It is still uncertain of his role at BTC-e, as no one will furnish those details. Law enforcement assumes that he was CEO, so Vinnik is taking the brunt of the allegations.
Vinnik has publicly stated his innocence and even offered to help Vladimir Putin as a digital technology specialist
The trial which began in Greece last week seems to be a precursor to the real issues being adjudicated, as it still remains to be seen where Vinnik will be charged. As a Russian national, he may be brought back home to stand trial, especially since he’s already wanted in Russia to face charges of fraud.
A panel of judges is expected to examine that request this week, which Vinnik’s lawyer has said he will not challenge.
A wall of denial
Vinnik continues to deny all allegations of wrongdoing.
Vinnik told a panel of judges that he did not run the digital currency exchange, and said he had not transferred any Bitcoins. Asked by the judge why the system went down after his arrest, the suspect replied it could have been a coincidence and said he did not know who ran the exchange.
“How can one man have done all this alone?” he asked, noting he was fighting the extradition request to the U.S. because he had “nothing to do” with the charges against him.
Written by Cointelegraph
The race to create the Amazon or Instagram of cryptocurrency
What will be the first native app that taps into the power of the blockchain, cryptocurrencies and tokens?
That’s the provocative question posed last week by venture capital investor Chris Dixon and Coinbase co-founder Fred Ehrsam in Andreessen Horowitz’s tech podcast “Why Crypto Tokens Matter.”
Although the extreme hype around blockchain and cryptocurrency today attracts hucksters and scammers, Dixon and Ehrsam argue that the significance of the rise of cryptocurrencies is undeniable.
The analogy they use to explain the significance is this: in the way that the web allowed for the programmability of information for the first time, cryptocurrencies and tokens allow for the programmability of money or value for the first time.
The development of the web allowed for new businesses operating at a global scale which the world had never seen before. They believe cryptocurrencies will offer the same potential.
However, Amazon didn’t become a $500 billion business overnight. It’s taken over 20 years to get to its current size. Dixon and Ehrsam argue that it required the development of a whole ecosystem around Amazon and other web companies – including web servers, databases, logistics, and payment systems – for them to maximize their potential. There will be the same need for a massive build out in infrastructure for cryptocurrencies and tokens to reach the same potential.
But the most intriguing idea in the podcast is how both Dixon and Ehrsam agree that the companies which have the greatest chance to capture the most value with every big wave of technology – such as web, mobile, and now crypto – are the ones who “burn the boats” to yesterday’s technology and go all-in on being the first native app for the new wave.
For instance, Amazon set the example when it came to native web apps for e-commerce. Unlike Barnes & Noble, they didn’t try to keep one foot in traditional retail with their brick-and-mortar stores and one in the web world. They showed the world what a total focus on e-commerce looked like.
The mobile-only world arrived 10 years ago with the unveiling of the Apple iPhone. However, the initial mobile apps were modeled after websites – cramming a large amount of data fit for a web page on to a tinier mobile screen. Flickr was the dominant photo site in 2007. It created a mobile app for itself but still was geared to you going to your computer and uploading photos.
It wasn’t until Instagram came along when the world saw what a mobile-only photo app looked like. For a long time, there wasn’t even a webpage for Instagram. Users flocked to it, and Facebook bought it for what seems like a bargain price of $1 billion in 2012. It’s still the dominant photo-sharing app today
What this business might look like
So what will be the first “blockchain-only” native business?
Dixon and Ehrsam don’t have any predictions of what that business will be or when it will arrive. But it’s helpful to think about what such a business could look like, if you’re an investor like me and interested in keeping your eyes open to find out what to look for.
To me, what’s most interesting about the whole advent of cryptocurrencies in the past year is Etheruem and how it allows for “smart contracts” to program the relationship of money between parties. The basic idea is that, if something happens, then someone should get paid automatically. You can imagine intricate conditional patterns that allow for people to be generate value for themselves automatically while stripping out a bunch of intermediaries which have existed up until now taking out a toll at every step along the way. The businesses that can pop up, go after big markets, and put these old intermediaries out of business should have a big leg up on future competition.
Here are some ideas of possible businesses to look for in the years ahead (and invest in if you’re lucky):
- The first all-blockchain insurance company that only issues policies in smart contract form.
- Human futures. On my recent podcast with Balaji Srinivasan, he spoke about the company Upstart. It was founded a few years ago with the idea of actually allowing you to invest in an individual’s potential future income stream. You could decide to lend to them based on their background and ask for a share in their upside career (almost like an agent). Smart contracts would make that business model feasible. Upstart pivoted away from that model a few years ago but it will be possible in the future.
- We already have have online law firms like LegalZoom which allow you to more easily incorporate your business for example. What about a law service only focused on creating smart contracts without a lot of expensive overhead of top laywers running around billing by the hour?
- Why not a LinkedIn career service focused on matching short-term gigs that tap in to your specific expertise and pay you in some cryptocurrency?
- The first institutional investment bank allowing only blockchain-based trading of securities with immediate settlement. They could also finally crack the IPO code for the perfect “dutch auction” of new issues with a perfect matching of buyers and sellers to the optimal amount of money raised goes to the issuer, instead of the investment banking clients.
- The first blockchain-based rewards system that rewards participants with special offers if they allow advertisers see when they perform certain tasks or reach certain levels.
- The first blockchain-based mortgage lender or credit card issuer.
- With the whole Equifax scandal of the past few weeks, why not a blockchain-based (hyper secure) credit bureau to replace the status quo credit bureaus of today with a promise of better confidentiality and better credit information?
We need to get beyond the Jamie Dimon type of discussion about bitcoin being a fraud or the speculative bubble around cryptocurrencies. Instead, we need to look at the underlying technology around these currencies, especially smart contracts that are programmable and enforceable. These contracts will allow for many new disruptive businesses to be formed on top of them.
If you find the first new “native app” to be built on top of the blockchain in a big product category, it’s likely that you’ll find an attractive long-term investment.
Commentary by Eric Jackson at CNBC, . You can follow Eric on Twitter@ericjackson .
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