By now, the pattern is familiar to many in the cryptocurrency community: big banks and financial institutions publicly decry Bitcoin and question the intelligence of anyone who invests in cryptocurrency, while simultaneously boast about “leading the way” in blockchain technology. With regulators stepping in throughout the world and financial products like Bitcoin futures starting to emerge, many banks, firms, and other major financial institutions appear to be warming up to cryptocurrency, or at least starting to take it seriously.

Within the crypto community, two general opinions seem to prevail. On the one hand, there are those who feel that involvement with major existing financial institutions is exactly what Bitcoin needs to truly break into the mainstream. On the other hand, there are those who fear that too much involvement from major institutions will ultimately be a step backwards, and that the technology will be co-opted by the very systems from which Bitcoin was originally designed as an alternative. Both points of view offer valid insight and are worth exploring further, particularly as interest from traditional finance continues to grow.

Major Financial Institutions, Bitcoin, and the 2008 Global Financial Crisis

Any discussion of big banks and Bitcoin needs to start with the Global Financial Crisis of 2008. Today, a great deal of energy and focus is devoted to evaluating the market behaviour and price movement of Bitcoin. That’s understandable- it’s exciting to watch! However, let’s not forget what Bitcoin actually represents. Literally the first sentence of the original Bitcoin whitepaper explains, “A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution.”

Stratfor, one of the world’s leading geopolitical intelligence platforms, described the risk to traditional banking posed by cryptocurrencies in surprisingly blunt terms in a recent piece. “Wary of the solvency of banks — especially in the wake of the 2008 financial crisis — and unable to safely store wealth in physical cash, more and more people have reasons to turn to bitcoin or one of its numerous derivatives. Governments may as a result lose the ability to influence the money supply for the first time since they granted central banks a monopoly on the issue of bank notes and coins.” As central banks, securities exchanges, the BIS, and other intercontinental financial institutions appear to reverse their stance on Bitcoin or adopt one for the first time, it is worth asking why.

Keep Your Friends Close, But Your Enemies Closer?

In late 2017, the CEO of one of the largest banks in the world called Bitcoin a fraud. A few short months later, that same bank, JP Morgan, released its annual report, which identified cryptocurrencies as a threat to its business model. “Both financial institutions and their non-banking competitors face the risk that payment processing and other services could be disrupted by technologies, such as cryptocurrencies, that require no intermediation,” the report said.

Goldman Sachs, another major multinational investment firm headquartered on Wall Street, has also begun to engage seriously with Bitcoin. As the New York Times reported earlier this month, the bank has announced plans to open a Bitcoin trading desk. The article simultaneously noted, “Goldman is known for pushing the envelope in the trading of complicated products. The firm faced significant criticism after the financial crisis for its profitable trading of so-called synthetic derivatives tied to the subprime mortgage markets.” The irony here is a bit too palpable. As another Times piece by Nathaniel Popper put it, “The idea was to replace the existing banking structure with an online alternative that couldn’t be controlled by a handful of powerful organisations. But instead of being replaced, the old banks are beginning to assert their own role in the unorthodox financial world of virtual currency, sometimes called cryptocurrencies.”

Popper’s article revealed that the Intercontinental Exchange (ICE), the parent company of the New York Stock Exchange (NYSE), is working to build, “an online trading platform that would allow large investors to buy and hold Bitcoin.” NASDAQ’s CEO Adena Friedman has also expressed interest expanding into cryptocurrency markets. “I believe that digital currencies will continue to persist…it’s just a matter of how long it will take for that space to mature. Once you look at it and say, ‘do we want to provide a regulated market for this?’ Certainly, Nasdaq would consider it,” Friedman said.

What’s Next?  

As traditional financial institutions scramble to adapt to circumstances increasingly defined by digital currencies and blockchain technology, there are signs that the real test for Bitcoin may be yet to come. Stratfor’s Worldview points out, “Hoping to contain the threat posed by private cryptocurrencies…  several central banks, including the Bank of England and the U.S. Federal Reserve, have begun research into whether to issue digital currencies.”

The prospect of central banks issuing their own digital currencies raises important questions both for Bitcoin and for commercial banking. “The rollout of central bank digital currencies could introduce a giant rival into the banking market and compel commercial banks to become ultracompetitive in their lending practices,” Stratfor explains, emphasising the role of regulation to maintain stability and control over this space. While almost everyone agrees that it is too early to tell precisely how the dynamic between decentralised cryptocurrencies like Bitcoin, financial institutions, and the traditional economic system will play out, it seems clear that the reality of “mainstream adoption” warrants careful consideration for those who see cryptocurrency as a force for financial control and independence from third-parties. One thing is clear, however: cryptocurrency is forcing big banks to adapt and respond to innovation. As Stratfor put it, “The structures of the new era will become clearer in time, but, whatever form they take, digital currencies will be here to stay.”