Are Banks Losing Big by Ignoring Cryptocurrency?

Cryptocurrency’s ongoing relationship with traditional banks can be referred to as “lukewarm at best”. But it shouldn’t be that way according to Daniel Masters, who thinks that banks are foregoing an enormous opportunity to innovate. Masters, a former top trader at J.P. Morgan, has criticized banks for “[having] absolutely failed to innovate in any way, shape or form,” in reference to banks’ slow adoption of cryptocurrency and its underlying blockchain technology.

Masters, who ran J.P. Morgan’s New York energy trading business in the 1990s before leaving to establish his own commodities fund, pivoted his firm’s focus to digital currencies in 2014. In a recent interview with Business Insider, Masters touted the “true revolution” that he believes cryptocurrency represents as an example of “trench warfare” between “analog financial service companies and digital financial services companies”.  

Traditional banks have typically characterized cryptocurrency as a type of scam. High-profile detractors abound – since the beginning of 2018, World Bank president Jim Yong Kim and European Central Bank executive board member Yves Mersch have described it as a Ponzi scheme. Bank of Settlements general manager, Augustin Carstens, went a step further calling it a “combination of a bubble, a Ponzi scheme, and an environmental disaster” while lecturing at Frankfurt University. Charlie Munger, the 94-year-old vice chairman of Berkshire Hathaway, has referred to bitcoin as a “noxious poison”, and J.P. Morgan CEO Jamie Dimon called it a fraud (though he later apologized for his comments, and the company’s attitude seems to be warming as evidenced by a recent J.P. Morgan research report on cryptocurrency).

Masters believes that cryptocurrency’s foundational principle of decentralization, coupled with its removal of middlemen, is threatening to legacy bankers. Regulations have created too much friction to previously facilitate innovation, and they are now paying the price. "Banks have sat on their laurels for 30 years,” Masters said. “I just threw out my checkbook, it looks exactly the same as it did in 1985. Why should I still have it when I'm doing Uber instead of cabs, Airbnb instead of the Sheraton?”

Despite traditional financial institutions’ collective misgivings, as well as a rough start to 2018, bitcoin’s 1,500% rise in value in 2017 has forced financial service providers to take notice. Exchange operators Cboe and CME have begun offering bitcoin futures trading, and Goldman Sachs indicated on a recent earnings call that they are considering opening bitcoin trading desks. Meanwhile, Global Advisors, which owns a 75 percent stake in fellow fund Coinshares, announced in January that they collectively manage more than $1 billion in assets – numbers that would have seemed outrageous in the recent past.

Masters thinks 2017’s gains represent a well-earned victory for the first-wave of cryptocurrency investors, who weathered significant ups and downs as the market found its footing. He characterized the landscape as “the fog of war”: “You might be able to see the few people around you, you can see the hill over there, but very few people can see the whole landscape. We're in a very fortunate position because we touch so many different parts of it. For us, it is abundantly clear that we are in the midst of a true financial revolution." Traditional banks would be wise to get a piece of action should he prove to be correct.

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