Bankers are quietly shaping crypto innovations for their own use

When Elon Musk revealed this year that he had invested $1.5 billion of Tesla's corporate funds into Bitcoin, many adult financiers cringed. No wonder.

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

But something striking is quietly happening on Wall Street these days: some mature bankers are starting to offer some crypto-focused solutions to these conservative treasurers too.

Take JPMorgan. This year, Umar Farooq, head of the bank's Onyx project (which created a JPMorgan crypto 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 make deals with partners via a shared computer ledger on autopilot, using 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 adopting 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 value tied to other assets - including old-fashioned fiat currency.

However, 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 give another example, this week HSBC and Wells Fargo revealed plans to use blockchain to settle foreign exchange transactions between financial institutions.

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

Second, treasury transactions typically take a few hours (if not days) to settle, especially cross-border. This causes a third problem: 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 legacy financial systems became more automated and enabled faster execution and settlement. This is happening to some extent now, as the competitive threat of crypto (belatedly) forces 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 broader business leap into digitalization leaves companies drowning in cross-border micropayments. The “programmable money” project is trying to offer a workaround, for example by allowing a micropayment to be made immediately and settled at the moment of “sale” and offset against other transactions in a company account, JPMorgan hopes.

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 it. Companies such as DBS, Standard Chartered and HSBC also have digital initiatives.

However, some non-financial corporate experiments have been less successful. Back 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 the project "really didn't go the way we thought" and was retracted. The reason, it seems, was that it is cumbersome to update a shared computer ledger with current blockchain technology – i.e. “Blockchain is not yet a great 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 if it can scale yet. We also don't know how regulators will react; The devil is in the digital details.

Still, there are already three important lessons that investors should keep in mind. First, while enthusiasts once assumed crypto innovations would dismantle legacy institutions, the establishment is fighting back. Second, while crypto enthusiasts also once touted the idea of ​​“public,” permissionless blockchains (i.e., those that anyone can join without asking), the real measures for businesses are “private” chains (i.e., those where access is controlled).

This focus on private chains may 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 big companies and banks want to use blockchain for payments is not anonymous, but for flexibility, automation and speed. Crypto is no longer (just) a tool to create trust where none exists or to undermine authority.

This subtle twist might startle libertarians. But it's also a sign that the crypto world is coming of age. All eyes are now on how regulators and corporate treasurers respond to the idea of ​​“programmable money”; even if it's not as easily tweetable as Musk.

gillian.tett@ft.com