Bitcoin startup Xapo recently announced that three financial eminences had signed on as advisory board members: former US Treasury Secretary Larry Summers, former Citibank Chief Executive Officer John Reed and Visa founder Dee Hock.
The news signalled that Wall Street is taking bitcoin seriously, which may surprise those who have followed the electronic currency's decline.
Starting late last year, bitcoin-related headlines were uniformly grim. My Bloomberg View colleague Mark Gilbert noted in December that the value of a bitcoin had fallen more than 56 per cent since January, beating out the Russian ruble and the Ukrainian hryvnia for the title of worst performing currency of 2014. Quartz wrote that bitcoin's fall was steeper than the collapses of crude oil and the ruble. By the beginning of this year, publications had declared that people had lost faith in bitcoin. Columnists wrote that it was at death's door.
The news of bitcoin's death, it seems, is greatly exaggerated, especially now that the banking world is taking the digital currency seriously. Last fall, two US banks agreed to use software created by Ripple Labs, whose real-time, cross- border payments product is based on bitcoin technology. In January, a startup called Coinbase, which essentially stores people's bitcoins for them, said it had received $75 million from investors, including the New York Stock Exchange, the Spanish bank BBVA, former Citigroup CEO Vikram Pandit and former Thomson Reuters CEO Tom Glocer.
In April, Goldman Sachs Group led a $50 million investment in bitcoin startup Circle internet Financial. And in March, Blythe Masters, the former JPMorgan Chase executive who pioneered the use of derivatives, became the CEO of Digital Asset Holdings, a software company that is building a trade- settlement platform for digital currencies and digitized versions of more commonly used financial assets such as traditional currencies.
The first time they heard about it, they thought it was a joke. Now they see it's not going away and they want to learn about how the technology works. It's been a very gradual process.
Then last week came the Xapo (pronounced zappo) news, with Hock, Reed and Summers lending their pedigrees to a bitcoin storage company about which few have heard.
Wences Casares, Xapo's co-founder and CEO, says there was no watershed event that convinced Wall Street executives to take bitcoin seriously. Rather, he says, the financial services world has been tracking bitcoin since it started to gain attention a few years ago.
During this winter's Davos conference, Casares spent his days in one-on-one meetings with policy makers and bankers who wanted to know more about bitcoin. "The first time they heard about it, they thought it was a joke," says Casares. "Now they see it's not going away and they want to learn about how the technology works. It's been a very gradual process."
Banks are also under tighter scrutiny and recognise they're in no position to take on new risks. Investing in and working with tech startups gives them entree to products they may not be in a position to develop, says Casares, who divides Wall Street's bitcoin interest into several buckets.
Some institutions are interested in the technology that allows two parties to exchange something of value without third-party verification. Others are interested in how the technology could remove counter-party risk from transactions. And some asset managers have bought bitcoins as a speculative investment for customers' portfolios.
Masters, the former JPMorgan banker, is interested in bitcoin's potential to fill the first two buckets - as a technology to make faster, safer transactions. She told the Wall Street Journal that her company doesn't think of bitcoin as "being a store of value or an alternative currency or an investment." Rather, it regards bitcoin as a technology advance that could become an important "medium for exchange and a mechanism for recording information."
Her company, Digital Asset, is building a tool that lets customers convert securities into digital form so they can trade and settle in real time and bypass middlemen.
As the price of bitcoin fell last year and skepticism about the currency's demise rose, critics failed to see that some of the world's most powerful institutions were intent on learning more about how bitcoin could work for them. And that interest might help bitcoin to survive - and thrive.
- Katie Benner is a tech columnist with Bloomberg View.