Investment Banks and Cryptocurrency: An Analysis and Insight
Investment banks have varying opinions on cryptocurrency, but many view it as a speculative investment. Charles Schwab, for instance, suggests that clients approach cryptocurrency investments with caution, considering them as speculative and suitable only for trading purposes outside of a traditional portfolio. Some investment banks are cautious due to the lack of regulation, high volatility, and risks associated with cryptocurrency investments. However, others see potential in the technology and innovation behind cryptocurrencies like Bitcoin.
The Role of Banks in Cryptocurrency
Banks are not exactly thought leaders in this space. Not because they are clueless, though. It's just that it is more difficult to innovate as a firm with 50k employees and a deeply vested interest in maintaining the status-quo. Banks and regulators are naturally very aware of the strengths and weaknesses of the existing system and definitely not blind to any threats to their existing business models.
For instance, according to a decent article from Coindesk, which referenced a paper from the Reserve Bank of Australia, Bitcoin is seen as limited in its risk to payment systems. Furthermore, SIFI banks such as Barclays, DB, UBS, and Citi, who have significant operations in the payments system, are all studying the short- to long-term implications of cryptocurrencies. Their efforts in the short term will largely be aimed at blocking further development by preventing conversion between fiat and crypto-currency, rendering it practically useless until the market for BTC is more liquid. They also aim to lobby regulators to block it on their behalf, much in the same way they got regulations like Dodd-Frank and EMIR watered down into mostly bureaucratic nonsense.
Government Regulations on Cryptocurrency
The main obstacle is that there is no incentive for banks to embrace a system which would cannibalize their existing businesses at least, not one that is obvious to many observers. This would logically leave it to governments to look after. While some governments have come in early and banned it outright, US regulators understand the potential. For instance, Federal Reserve Chairwoman Janet Yellen has made several statements about the importance of cryptocurrency. Additionally, offices of the NY and CA Fed have published papers on Bitcoin, highlighting the potential it holds for the future.
These statements suggest a mixed approach from regulatory bodies in the US. For example, the IRS treatment of Bitcoin as property has made implementing commercial systems around Bitcoin unnecessarily complicated. However, underlying this complexity is the potential for a significant economic boost to the country if they can align their policies and regulations to be more supportive of cryptocurrency.
The Future of Cryptocurrency
The crypto-currency model of an online centralized ledger would be a truly massive leap forward from the existing patchwork of antiquated systems in today's financial world. It has the potential to drastically reduce the cost and friction of doing business for everyone. For example, as a payments system alone, its potential to enable trade is probably on par with that of the internet. This is why many investors believe it's not too late to make a lot of money with Bitcoin.
In conclusion, while investment banks may have varying opinions on cryptocurrency, the potential benefits and the growing interest from governments and regulatory bodies suggest that the future of this technology is promising. As the regulatory landscape continues to evolve, it will be exciting to see how cryptocurrency evolves and impacts the financial industry.
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