Right after downplaying cryptocurrencies in early stages, banks are trying out them more and lobbying regulators for guidelines to deny crypto lenders ” unfair” advantages (Emily Flitter/New York Times)

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Digital payments technology is forcing the economic climate to evolve. Banks feel their power waning and wish to regain control.

In 2014, as regulators in Nyc were exploring methods to control Bitcoin, executives at Wall Street’s biggest banks fretted that regulating cryptocurrencies would also legitimize them — and that could threaten the finance industry. So they tried to sow doubt.

At the World Economic Forum in Davos that year, Jamie Dimon, the chief executive of JPMorgan Chase, the nation’s largest bank, called Bitcoin a “terrible” store of value which was also being used for illicit purposes. At a meeting to discuss violations of Iran sanctions, H. Rodgin Cohen, the finance industry’s pre-eminent lawyer, warned the state’s regulators that the federal government was “very worried” about Bitcoin and its use.

Those efforts failed. New York’s Department of Financial Services began issuing licenses for Bitcoin businesses in 2015. There are now more than 75 million users of Bitcoin, up from around three million seven years ago, and the number of digital currencies has exploded. Globally, 220 million people use cryptocurrencies, based on a July report by Crypto. com.

“Most people agree that in the future — it might be 10 or 20 or years or it might be sooner — effectively all assets are going to be in a digital format, ” said Thomas Olsen, a partner at Bain & Company who advises financial firms on cryptocurrencies along with other digital asset matters.

Now the banking industry is racing to catch up. Banks want to compete in this new world and profit from it. Their approach is two-pronged: experimenting with cryptocurrency offerings and lobbying regulators to create rules that work in the banks’ favor. Some are offering cryptocurrency investments to their wealthy customers. Others are weighing trading desks for Bitcoin. JPMorgan even started its own digital currency in 2019.

And in place of warning regulators from cryptocurrencies, banking industry representatives now complain that regulators never have acted quickly enough and that their inaction is costing banks valuable time inside their mission to compete.

But their initial skepticism has cost them time. An alternative financial world is springing up round the traditional banking industry. Cryptocurrency start-ups are beginning to offer bank cards and loans. People and businesses all over the world are embracing digital currencies at an immediate pace. Even governments are getting involved. El Salvador recently said it would accept Bitcoin as legal tender . And the Federal Reserve, following in the footsteps of central banks around the globe, is evaluating launching an unique digital currency .

The traditional bank operating system held sway for years and years. Banks have long helped governments get a handle on the flow of money in their local economies by taking deposits, then lending a few of that money to other customers. With the rise of secondary markets for loans, banks could lend even more against the deposits they had by trying to sell the loans to investors after they were made and freeing space on their balance sheets to do more lending. At every step of just how, they made money.

When Congress relaxed regulations in 1999 to let commercial banks enter the fray on Wall Street, their power increased again. They could now make markets in most situations, like oil, wheat or government bonds, aiding sales and purchases of all kinds even as they helped everyday Americans make and receive payments, buy houses and begin businesses.

Digital currencies, which let individuals bypass banks in money transfers, sales and business collections by connecting people immediately without an intermediary, are threatening to eliminate that central role banks play.

Outwardly, top executives at the biggest U. S. banks show little enthusiasm for digital currencies. Mr. Dimon continued to be skeptical, calling Bitcoin a “fraud” in 2017. More recently, that he declared it “worthless. ” And 3 years ago, Bank of America’s chief executive, Brian Moynihan, barred the giant company’s wealth managers from putting any client money into cryptocurrency-related investments.

But some individual bankers were getting curious. After spending years privately ridiculing Bitcoin, Thomas Montag, Bank of America’s chief operating officer, asked a friend of his for a tutorial on cryptocurrencies and spent hours hearing lectures, reading books and meeting with executives from cryptocurrency companies, according to a person acquainted with the discussions who spoke on the healthiness of anonymity.

Zack DeZon for The New York Times

Last year, engineers at Bank of America filed the biggest quantity of patent applications in the bank’s history, including hundreds involving digital payments technologies. It’s unclear how exactly the bank plans to use its technology, but it was partly driven by the desire to keep clients within the bank’s systems rather than lose them to scrappy cryptocurrency start-ups that allow them to transfer money free.

“The bank sees potential in blockchain, and we’re currently a leading patentholder in the space with more than 160 patents, ” a Bank of America spokesman, Mark Pipitone, said. “But we still haven’t found an use at scale to really make the financial lives of customers and customers better. ”

Other big banks are embracing more direct contact with cryptocurrencies. Bank of Nyc Mellon and Northern Trust are working on offering custodial services to their clients — essentially bank is the reason other banks — that would hold Bitcoin. On Oct. 5, U. S. Bank announced that it might offer cryptocurrency custody services to money managers.

Just as it does for stock and bond prices, Goldman recently began posting digital asset prices on its Marquee platform for big customers like hedge funds, preparing for a time if the bank might be able to support trading in cryptocurrencies.

In 2019, an unit of JPMorgan called Onyx introduced JPM Coin , a digital currency backed by the dollar that ran on Quorum, an internal technology that mimicked the structure of blockchain. But the bank controlled Quorum, unlike Bitcoin’s blockchain, which is decentralized. It recently spun off Quorum to a software start-up.

JPMorgan also started an all-digital system that mimics the traditional “overnight repo” market, where banks exchange short-term U. S. government debt securities for cash. These transactions used to take greater than a day to complete — hence the “overnight” label — but JPMorgan’s platform does them in just quarter-hour, reducing risk. It has only three users so far, and two are JPMorgan’s own businesses. Goldman this year became its first outside participant. If more banks join, JPMorgan could end up controlling one of the more crucial short-term funding markets in the world.

Igor Pejic, a professional on cryptocurrencies, said JPMorgan was certainly one of a few major banks whose experimentation with blockchain — the technology underlying digital currency transactions — has made them digital pioneers poised to profit later on from systems they’re testing now because, he said, “they are setting up an infrastructure which by the end of the day they control. ”

But soon after JPM Coin went live, regulators began calling, said a person knowledgeable about the matter who was maybe not authorized to speak publicly. They worried that the movement of the coins around the financial system might lead to a buildup of risk because they were tied to the dollar, sparking a panic and leading to the 21st century version of a bank run. The bank had to cut back on the scope of JPM Coin’s use.

Now, JPM Coin cannot be used to transfer value outside JPMorgan’s internal systems. Bank customers may use it to move dollars and other assets backwards and forwards inside the bank very quickly, but it is meaningless in the wider world.

Regulators have also trained their sights on smaller banks trying to build cryptocurrency businesses. In 2018, the New York-based Quontic Bank, with just $1 billion in assets, asked the top U. S. banking regulator, work of the Comptroller of the Currency, for feedback on its plans to launch a debit card program that gave customers rewards denominated in Bitcoin.

Quontic’s chief executive, Steven Schnall, wanted to be able to offer his customers rewards that might increase in value as Bitcoin did.

Jason Binn/WireImage

Mr. Schnall said that he was surprised by the intensity of the questioning that he and other top executives received from regulators. The O. C. C. lawyers envisioned an almost endless listing of problems. What if Quontic customers lost their Bitcoins? What if the lender account holding them was owned by way of a trust and not a person? How would they be divided if someone died? The deliberations took two years, and by the end there was no clear green light.

“They just forced us through a process to make sure that they had plainly identified all of the risks, ” Mr. Schnall said. Quontic went ahead with this system. It chose to count on an outside firm to take care of everything related to Bitcoin so that Quontic wouldn’t normally actually have to “touch” the cryptocurrency.

Regulators, who were caught off-guard by the rapid adoption of cryptocurrencies, are scrambling to create new rules governing their use. And banks see a fresh chance to lobby regulators on writing rules in a manner that benefits them.

Bank lobbyists are pushing regulators hard for uniform rules around cryptocurrency-focused lenders and other companies that will transfer money and provide services similar to financial, arguing that unless of course they are subjected to exactly the same controls banks encounter, the newer companies will enjoy an unjust advantage.

United states banks are also having a stand against the Government Reserve’s exploration of its digital currency. The particular American Bankers Organization, which represents the biggest U. S. banking institutions, warned members of the home Financial Services Committee earlier this summer that the undesirable consequences of creating the central bank electronic currency “could end up being severe. ” The particular association said generally there did not seem to be the pressing need for a single because “the buck is largely digital nowadays. ”

Mr. Cohen, older chairman of lawyer Sullivan & Cromwell, who years previously warned New York government bodies off Bitcoin, is just one of those pushing meant for greater regulation.

“We need a regulating approach to cryptocurrency, ” Mr. Cohen stated in an interview with Bloomberg Tv last month. Producing new rules will be “very difficult, ” he said, “but that really should be a prod rather than an excuse. ”

Lananh Nguyen <! — and Kate Kelly led reporting.

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