JP Morgan Chase CEO Jamie Dimon described the situation in the simplest terms. "Silicon Valley is coming," he said.
In his annual letter to shareholders this past spring, Dimon warned the Wall Street old guard that their way of doing things was under siege from "hundreds of startups with a lot of brains and money." Traditional banking was facing a world of more "seamless and competitive" alternatives. JP Morgan, he said, would work to modernize its own services and, if need be, partner with those same Silicon Valley startups striving to undermine the way the banking industry has long done business.
His warning, it turns out, did not go unheeded. Over the past several months, Wall Street has embraced the new wave of Silicon Valley fintech with remarkable speed. The latest example: earlier this week, a small San Francisco outfit called Chain said it had received $30 million in funding from such names as Nasdaq, Citi Ventures, Capital One Financial, and Visa.
Chain helps build financial systems based on the blockchain, the online public ledger that underpins the bitcoin digital currency, a technology that could bring more efficiency and security not only to the way we exchange money, but to the way we trade other financial assets, including stocks, bonds, and futures. Nasdaq, the company behind the Nasdaq stock exchange, is already partnering with Chain to build a digital marketplace for shares in private companies, and Chain CEO Adam Ludwin says that other investors are using the company's tech to create their own systems atop the blockchain idea.
"All of our investors are either existing partners with commercial engagements, or they are serious prospective commercial partners, where we had already had discussions about engagements," Ludwin says. It's telling, he says, that six big financial institutions have bought into a high-risk, early-stage startup at the same time. "They don't just want ROI on an investment. They want to build."
Meanwhile, the New York Stock Exchange has invested in the San Francisco bitcoin infrastructure company Coinbase. Goldman Sachs has backed bitcoin consumer services company Circle Internet Financial. And Digital Asset Holdings, an outfit led by former J.P. Morgan Chase exec Blythe Masters, is developing a "cryptosecurity" systemsimilar to the one fashioned by Nasdaq and Chain. In the world of bitcoin alone, Wall Street is pushing forward in myriad ways.
The blockchain is essentially an online ledger governed by cryptographic algorithms. In the case of bitcoin, this ledger tracks the movement of digital currency, but it can also oversee, well, anything else that has value. The hope is that in bringing things like stock trading onto this cryptographically secured online database, we can streamline the markets in enormous ways.
In applying the blockchain to the Nasdaq Private Market, Nasdaq and Chain aim to provide a better way for companies to manage their shares before going public. Typically, pre-iPO companies do this in ad hoc ways (think: computer spreadsheets). The blockchain can provide a more efficient way of trading stock and auditing trades. Georgetown professor of finance James Angel, who specializes in the nuts and bolts of trading systems, calls private stock markets "the perfect application for the blockchain."
But as Nasdaq's chief technology officer Brad Peterson says, this is merely a first step. The company indicates it will eventually use the blockchain protocol to overhaul its public stock market as well. In creating a need cryptosecurity outfit called TØ.com, online retailer Overstock.com is already well down this path. At the same time, it's building a blockchain-based system that oversees stock loans (another enormous market).
The flip side is that the bitcoin blockchain isn't always as secure as some would lead you to believe---and it's doesn't operate at speeds suited to the public equities markets. But these are the kinds of things Chain aims to fix. In essence, it offers technology that lets companies run their own private blockchain networks and connect their network to each other in faster and more secure ways.
Amid the rise of systems from Nasdaq, Overstock, and others, the prevailing trope is that the blockchain is reinventing the equities markets, but not necessarily the way we exchange currency. But Ludwin downplays this characterization.
"What we've built---and only work on with most of our partners---are blockchains that can issue assets of many different kinds," he says. "You have to be able to trade not only one security for another, but for currencies. What you will see are networks that can handle transactions involving all currencies as well as other types of financial instruments."
In should be said, however, the equities markets are particularly ripe for change. Trades on the public stock market take as many as three days to settle, and the blockchain can potentially remove this seemingly anachronistic lag time. Today, stock settlement is overseen by an organization called the DTCC, and it's telling that even the DTCC is publicly singing the praises of the blockchain. Silicon Valley is coming. And the arms of Wall Street are open.
