A Curious Moment for Currencies, Old and New

The perils of jurisdiction, technology on display

Tim Bourgaize Murray, deputy editor, Buy-Side Technology

The past few weeks witnessed a couple of landmarks for trading in currencies ─ both real and virtual ─ while exposing tech challenges of two very different kinds.

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.

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.

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