Ready or not, Wall Street is coming for Bitcoin. Intercontinental Exchange, the owner of the New York Stock Exchange and one of the largest infrastructure providers for financial markets in the US, said recently that it plans to launch a regulated digital asset exchange. This could change Bitcoin immensely, though—and depending on whom you ask, perhaps not for the better.
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For those who would like to see Bitcoin achieve more mainstream adoption, this is a huge development. Besides the NYSE, Intercontinental Exchange owns more than 20 (PDF) exchanges, market services, and clearinghouses. It is, to put it mildly, very influential in the world of finance. With its move into Bitcoin, institutional investors—hedge funds, family offices, sovereign wealth funds, and other entities looking to invest large sums of money—are likely to follow. Many of these firms have been interested in investing in Bitcoin and other cryptocurrencies but have hesitated because there was no conventional market infrastructure.
There may be reason for Bitcoin boosters to be concerned, however. According to Caitlin Long, a longtime Wall Street veteran turned Bitcoin aficionado, the financial industry’s embrace could have negative repercussions, particularly if Wall Street firms treat the currency the way they do most conventional assets. The potential problems arise from the fact that Bitcoin and Wall Street have “fundamentally different systems” for handling assets, says Long, who spent 22 years working for various Wall Street firms and most recently served as chairman and president of Symbiont, an enterprise blockchain company.
The difference boils down to two key factors. First, whereas Bitcoin’s assets (bitcoins) are directly owned and controlled by individual holders of their corresponding cryptographic keys, people who buy a stock or other conventional asset generally don’t own it—a centralized institution like an exchange, a custodian, or a clearinghouse does. What you actually “own” is an IOU from your broker or another financial institution.
Second, whereas Bitcoin’s blockchain is engineered to prevent more than one person from owning a single asset, Wall Street firms routinely use their clients’ assets to back their own transactions and trades, for example by using them as collateral in order to borrow from another firm. This type of practice is “standard operating procedure” on Wall Street, says Long, who adds that as a result, financial markets systematically “create more claims to an underlying asset than there are underlying assets.” The ledgers used to track these claims can get out of sync—shareholders in Dole Foods, for example, once went to claim their rewards after a successful class-action lawsuit against the company and found they owned 33 percent more shares than there were actual shares.
This kind of situation is “antithetical” to Bitcoin, argues Long, since it would offset the currency’s algorithmically-enforced scarcity. (New bitcoins are created at a controlled rate, via the system’s resource-intensive mining process, and the total supply will never exceed just over 21 million.) That could suppress its price, and it’s why Long is convinced that if Wall Street firms choose to treat Bitcoin as “just another asset they can trade” using their existing models for doing business, they’ll be making a big mistake.