The news that Goldman Sachs is looking to set up the first Wall Street Bitcoin trading operation is a significant chapter in the history of Bitcoin.
Since Bitcoin was first created in 2009 and traded in 2011, it has had a checkered history finding a foothold in the financial world. Early on was the Silk Road controversy, where the untraceable Bitcoin was found to be the currency of choice for criminals trading in illegal goods. Then came the theft of millions in Bitcoin from Mt Gox. These issues solidified the perspective that Bitcoin was primarily a haven for illegal activities. Ongoing wrangles with taxation authorities and a dedication to overthrowing centralized monetary policy, pushed Bitcoin further away from legitimacy. These issues continue until today, where warrants have been issued by the US SEC targeting cryptocurrency traders.
On the other side of the coin, the legitimacy of Bitcoin has continued despite these setbacks. Bitcoin has moved forward, being available and tradable to a multitude of users. It has increased its security to prevent another Mt. Gox. It has become integrated in futures, ETFs and managed funds. And it has responded to regulations and developed software to increase transparency and reporting.
The Wall Street banks represent the next step in the evolution of Bitcoin, which may have been driven more by market forces than legitimacy. Despite its ongoing issues, banks have their own reasons to be wary of Bitcoin and have ramped up the hyperbole, with CEO of JP Morgan Chase, Jamie Dimon, famously calling Bitcoin “a fraud” and focusing on the possibility that Bitcoin is in a bubble. The rejection from banks stems from the challenge Bitcoin represents to their hegemony on money and the threat of cryptocurrencies to their profit, but the hyperbole is also a reflection of very real issues associated with Bitcoin and cryptocurrencies. Despite the significant improvements in Bitcoin’s security, it is ultimately designed to allow the anonymous transfer of currency. This allows it to be untraceable if needed. Despite the similarities to currency, it is ultimately a computer-generated token, with no “gold standard” backing or federal reserve sanctioning, making talk of a bubble and fraud not unsubstantiated.
But in response to the significant increase in value, the Wall Street banks have started to look at Bitcoin in a different light. One of Goldman Sachs’ executives involved in setting up the trading of Bitcoin, Rana Yared, said that “Goldman had concluded that Bitcoin is not a fraud”. Ms. Yared also noted that clients are interested in treating Bitcoin the same way they treat commodities since it is mined in limited quantity using a complex system. As a result, investment bank clients are looking to invest in Bitcoin futures as an instrument in the same way as other mined commodities.
Does This Confer a Legitimacy on Bitcoin?
I would argue not. Banks are looking for profit. If cryptocurrency trading represents a profit opportunity, the banks will wait until the risk/benefit is worthwhile and then start to profit. When their investment clients are expressing an interest in Bitcoin, offering Bitcoin is simply protecting their market share. Goldman Sachs’ move does represent a bold step towards dealing with cryptocurrencies, by clearing trades for customers trading on CME and CBOE exchanges and by pledging to use its own money to trade Bitcoin futures for clients. But if the involvement of an institutional player is the metric of legitimacy, then Bitcoin became legit when futures became available, or when the SEC applied its securities law to cryptocurrencies.
What this move has done is to strengthen legitimacy. Now that a Wall Street bank is trading Bitcoin, the others will likely follow, particularly if this step shifts investment dollars to Goldman Sachs. There is also now a trusted institutional player putting its investment dollars into Bitcoin. This gives other investors, particularly institutional ones, confidence to increase their own investment.
Bitcoin may have become legit before we even noticed, and Goldman Sachs just bought a ticket at the head of the Wall Street Bitcoin investment train.