Bankers form quiet crypto innovations for their own use

When Elon Musk revealed this year that he had invested $ 1.5 billion of Tesla's company funds in Bitcoin, many adults winced. No wonder.

The world of corporate treasury management is said to be a death boring place where security prevails. Nobody expects treasurer to dance with the crypto kids.

But these days, something striking is happening on Wall Street: Some adult bankers begin to offer these conservative treasure masters some cryptofocussed solutions.

Take JPmorgan. This year Umar FarooQ, head of the bank's onyx project (which has created a JPMorgan cryptosystem), has coin and blockchain platform in Ethereum style), announced that it developed so-called "programmable money" for corporate customers. This should enable treasurers to close business with partners through a shared computer Ledger on Autopilot, with an innovation that is known as an "intelligent contracts".

It sounds futuristic. But the bank is ready to announce that one of the largest industrial groups in the world will take over this crypto innovation. No, this is not the same as Musk's adventure with Bitcoin: Instead of using crypto as a value preservation means (ie investment), the JPMorgan initiative uses it as a payment method to transfer values ​​associated with other assets-including the old-fashioned Fiat currency.

This second use of crypto will almost certainly be far more important for the business world than Bitcoin, not least because other banks also run over the development of crypto innovations. To give another example: This week, HSBC and Wells Fargo revealed plans to use the blockchain to process foreign exchange transactions between financial institutions.

The impetus behind these experiments is the knowledge of financiers that treasurer is faced with at least three big headaches. The first is that companies need armies of employees to carry out (and check) treasury transactions, which is expensive and, with increasing transactions, carries the risk of human errors.

Secondly, the handling of treasury transactions usually takes a few hours (if not days), especially cross-border. This causes a third problem: In order to compensate for these explanation delays, companies and banks need large liquidity buffers to cover delays and risks.

Theoretically, these three problems could be solved (or reduced) if older financial systems were better automated and would enable faster execution and processing. This is now happening to a certain extent, since the competition threat of crypto (with delay) forces traditional systems to be up to date. The saga around the Swift messaging system is a typical example.

In practice, however, it is often very difficult to upgrade legacy systems, and a broader business leap into digitization has companies drown in cross-border micro payments. The “Programmable Money” project therefore tries to offer a workaround, for example by enabling a micro payment to be carried out immediately and handled at the moment of “sales” and offset with other transactions on a company account, JPMorgan hopes.

Will it work? It remains to be seen. JPMorgan already has some successes with the use of blockchain and its own cryptocurrency Coin for bank-to-bank transactions; With over 400 banks that use them. Companies such as DBS, Standard Chartered and HSBC also have digital initiatives.

Some non -financial corporate experiments were less successful. BP and other energy companies already presented a blockchain-based system for the oil trade in 2018. But at the beginning of the year, Karen Scarbrough, Senior Technology Associate at BP, admitted that the project "really didn't go as we thought" and was withdrawn. The reason, it seems, was that it is tedious to update a common computer Ledger with the current blockchain technology-so "Blockchain is not yet an excellent tool for tracking and tracing".

crypto enthusiasts reply that blockchain is now much more efficient due to technical upgrades. But we just don't know whether it can scale. We also do not know how the supervisory authorities will react; The devil is in the digital detail.

Nevertheless, there are already three important lessons that investors should consider. Firstly, while enthusiasts used to assume that crypto innovations would dissolve legacy institutions, the establishment is resisted. Second, while crypto enthusiasts used to be the idea of ​​“public”, without permission (i.e. those who can join those who can join in without asking), are the real measures for companies “private” chains (ie access to which access is checked).

This focus on private chains can be temporarily. The Internet was created in the form of private “intranets”, which were later connected to a public network. But the increase in private - not public - chains throws a third important point: the reason why large companies and banks want to use blockchain for payments is not anonymous, but for reasons of flexibility, automation and speed. Crypto is no longer (only) a tool to create trust where there is none or to undermine authority.

This subtle turn could be frightened by libertarians. But it is also a sign that the crypto world is growing up. All eyes are now focused on how regulatory authorities and corporate treasurer react to the idea of ​​"programmable money"; Even if it is not as easy tweetable as Musk.

gillian.tet@ft.com