A Curious Moment for Currencies, Old and New
The perils of jurisdiction, technology on display
If you'd asked me around New Year which currency, the Swiss franc or Bitcoin, would have made splashier headlines in the first three weeks of the year, my answer would've been unequivocal: the latter.
History explains why. The Swiss franc dates back to 1798, when the short-lived Helvetic Republic sought a common currency among the various Swiss provinces, known as cantons. It has been in use continuously since the current Confederation's founding in 1850, for most of that time proving almost as reliable as the US dollar as a safehaven. And now, its trading is—to borrow ZeroHedge's characterization—recovering from a bloodbath.
Then there is Bitcoin, whose open source code reaches all the way back to ... well, January 2009, shortly after its mysterious creator, Satoshi Nakamoto, laid out the foundation for a virtual currency the previous fall (while, coincidentally, global markets were collapsing).
Not exactly a lot of heritage, then, but Bitcoin's generated more than enough news in its time, and usually of the lurid variety. From the collapse of Mt. Gox to Bitstamp's hack just last month, shenanigans and security breaches had seemingly become the standard.
Francogeddon
And yet in the past 10 days, we saw a pair of highly surprising news events that, while causally unrelated, saw my logic completely turn on its head.
The Swiss story is well-known. On January 15th the Swiss National Bank, or SNB, inexplicably cut the cord on a long-standing EUR-tethered ceiling, sending the FX markets into total chaos. The consequences are still playing out, but from a technology standpoint, a few things are already clear.
In the moments after the announcement, several major institutions with electronic FX platforms were left vulnerable, the strikes on screen not catching up quickly enough to the markets. That seems unbelievable, but it's not.
As my colleague Rob Mackenzie Smith reported in a great piece at FX Week, a couple of those banks went so far as to renegotiate trades with their counterparties, with Barclays even trying to cancel them outright, less than 10 minutes into the event.
Once the fracas is analyzed in the coming weeks and months, I have little doubt that high-frequency shops—steadily migrating to FX—will have had something to do with that outcome, and I plan on taking a close look at what actually went down in an upcoming feature for Waters in March.
Socially Acceptable
By contrast, Bitcoin's fortunes turned much brighter this week when major wallet operator Coinbase announced it would launch the first regulated and insurance-backed US exchange in the virtual currency, with regulatory approval from half of the 50 state financial authorities—including many of the largest—and more than $100 million in new funding.
That number may not seem like much, comparatively speaking, but where it's coming from is significant: NYSE, Spain's BBVA, former CEOs of Citi and Thomson Reuters, and VC funds like Andreessen Horowitz.
Tom Farley, NYSE's president, told the Wall Street Journal the new cash is meant to “keep an eye on bitcoin as it matures as a legitimate currency. Any currency relies on its acceptance, and this is an important step for the currency to become socially acceptable.”
Bizarro World
Whether that proves the case remains be seen. I've been at this long enough to avoid proclaiming any moment in Bitcoin's young existence the pivotal one—including any reports of its impending demise. Can exchange-grade technology (and presumably, security) help sell buy-side investors on BTC's relevance? We'll see.
Likewise, the mess in CHF could've happened with any other influential national bank making an abrupt policy decision; imagine the ECB not leaving its usual months-long trail of breadcrumbs ahead of a similar announcement. The lesson here is that traditional trading technology remains a major operational risk in the world's largest and increasingly electronic market. And now that risk is well exposed.
It's an odd situation, and one we could only see in 2015: the sometimes unpredictable consequences of state-centric prudential control on one hand, and the possibility of a bruised state-less currency, reinvigorated on the other. All in a matter of 10 days.
Only users who have a paid subscription or are part of a corporate subscription are able to print or copy content.
To access these options, along with all other subscription benefits, please contact info@waterstechnology.com or view our subscription options here: http://subscriptions.waterstechnology.com/subscribe
You are currently unable to print this content. Please contact info@waterstechnology.com to find out more.
You are currently unable to copy this content. Please contact info@waterstechnology.com to find out more.
Copyright Infopro Digital Limited. All rights reserved.
As outlined in our terms and conditions, https://www.infopro-digital.com/terms-and-conditions/subscriptions/ (point 2.4), printing is limited to a single copy.
If you would like to purchase additional rights please email info@waterstechnology.com
Copyright Infopro Digital Limited. All rights reserved.
You may share this content using our article tools. As outlined in our terms and conditions, https://www.infopro-digital.com/terms-and-conditions/subscriptions/ (clause 2.4), an Authorised User may only make one copy of the materials for their own personal use. You must also comply with the restrictions in clause 2.5.
If you would like to purchase additional rights please email info@waterstechnology.com
More on Emerging Technologies
S&P debuts GenAI ‘Document Intelligence’ for Capital IQ
The new tool provides summaries of lengthy text-based documents such as filings and earnings transcripts and allows users to query the documents with a ChatGPT-style interface.
The Waters Cooler: Are times really a-changin?
New thinking around buy-build? Changing tides in after-hours trading? Trump is back? Lots to get to.
A tech revolution in an old-school industry: FX
FX is in a state of transition, as asset managers and financial firms explore modernizing their operating processes. But manual processes persist. MillTechFX’s Eric Huttman makes the case for doubling down on new technology and embracing automation to increase operational efficiency in FX.
Waters Wavelength Ep. 294: Grasshopper’s James Leong
James Leong, CEO of Grasshopper, a proprietary trading firm based in Singapore, joins to discuss market reforms.
The Waters Cooler: Big Tech, big fines, big tunes
Amazon stumbles on genAI, Google gets fined more money than ever, and Eliot weighs in on the best James Bond film debate.
AI set to overhaul market data landscape by 2029, new study finds
A new report by Burton-Taylor says the intersection of advanced AI and market data has big implications for analytics, delivery, licensing, and more.
New Bloomberg study finds demand for election-related alt data
In a survey conducted with Coalition Greenwich, the data giant revealed a strong desire among asset managers, economists and analysts for more alternative data from the burgeoning prediction markets.
How ‘Bond gadgets’ make tackling data easier for regulators and traders
The IMD Wrap: Everyone loves the hype around AI, especially financial firms. And now, even regulators are getting in on the act. But first... “The name’s Bond; J-AI-mes Bond”