Bitcoin: 4 Factors Holding the Banks at Bay

For a number of reasons, major banks haven't seized the opportunity to get involved with bitcoin. Banks like to participate in size, compliance has restrictions, and bosses don't understand it. But these hurdles will be overcome in 2015.

While the world took notice of Bitcoin in 2014, the banks-- normally jumping out of their seats at opportunities to make a profit -- have sat on their hands. Individual financial advisors are eager to take part in the burgeoning opportuinity-- as made clear by the hundreds of such professionals that have taken courses on Bitcoin at the Digital Currency Council. But the firms writing their paychecks are more conservative.

In December 2013, Bank of America's David Woo wrote the first report on Bitcoin by a major financial institution, with many of its peer firms following suit in the 12 months since. The Bank of England, in a quarter four 2014 report, noted that Bitcoin is "a significant innovation" with "far reaching implications." The most senior executives at the financial giants are discussing Bitcoin and many have launched internal Bitcoin task forces to give due consideration to the opportunity and the risks.

What's holding the banks at bay? No question the banks see an opportunity to profit. So why are they sitting on their hands? Here are four reasons:

1. Banks are in denial about Bitcoin's impact on their existing businesses The banks have been capitalizing on the inefficiencies in the current monetary system for years. They've developed businesses that charge high rents for use of their infrastructure. The heads of those businesses aren't going down without a fight. I would imagine there was a similar reaction from the managers of Blockbuster Video's retail stores when Netflix arrived on the scene. At some stage, assuming they don't want to join Blockbuster, Kodak, and other incumbents who took denial to the grave, these banks will have no choice but to stop denying and start adopting.

2. The bosses don't yet understand it Bitcoin is a new technology, financial instrument, and network protocol and requires time (a scarce resource at banks) to learn and understand. Recent statements by the CIO of UBS suggest a belief that the benefits of the Blockchain can be de-coupled from the use of bitcoin the currency -- a suggestion that has been compared to separating the world wide web from the internet, a virtual impossibility. Executives are seeking out training that will ensure a full and complete understanding of the technology and its applications to their respective businesses, along with the opportunities and risks of participation.

3. There are not yet ways to put institutional capital to work in size The total value of the bitcoin asset class has fluctuated greatly, but currently stands at about $5 billion and just over $250 million of venture capital has entered the ecosystem companies in 2014. Compared to other asset classes, there simply hasn't been an opportunity to write checks of the size to which the major financial institutions are accustomed. But that won't last, with regulated investment vehicles now available and at least one and perhaps two ETF's likely to be listed in 2015. Forward thinking financial entrepreneurs are developing products suitable for inclusion on private banking and asset management platforms.

4. Compliance departments are blocking participation Compliance departments across Wall Street are charged with keeping their institutions out of trouble. Understandably, given the Bank Secrecy Act and the Patriot Act, which require that banks undertake a "know your client" process and implement "anti-money laundering"procedures, the executives in these departments are throwing up their hands at the first mention of Bitcoin. Yet, encouraged by the business lines, these same compliance officers, supported by their government relations team and the entrepreneurs building new financial products for their banks, are having discussions with regulators. They are seeking clarification of existing regulations -- which simply never envisioned instruments like Bitcoin -- and considering new asset class specific regulation that will govern their dealings in Bitcoin.

How to overcome the obstacles? Each of these factors are holding the banks at bay... for now. But each of these factors is also likely to be overcome in 2015.

Executives will find ways to utilize the technology to bring efficiencies to their legacy businesses, either passing that savings on to consumers or more likely keeping it for themselves. Bank executives will take the time to get educated and come to a fuller understanding. Financial products will be developed that will be suitable for the sizeable investments that move the needle for institutional investors. And compliance departments -- in conjunction with regulators and entrepreneurs -- will develop best practices that will allow for their institutions to participate and comply with the law.

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Bitcoin: 4 Factors Holding the Banks at Bay