By Jemima Kelly and Anjuli Davies
LONDON (Reuters) - The blockchain technology behind bitcoin was designed to do away with banks. In an ironic reverse, investment banks are now racing to make it work for them - but cash-strapped European players risk falling behind their Wall Street rivals.
Blockchain was developed eight years ago, enabling transactions using the digital currency to be processed and settled on a public network without the need for a third party.
Now banks are seeking to apply it to private networks they run, to save costs by reducing settlement times and automating systems that are still paper-based, like in trade finance.
About 80 percent of top global banks will have launched blockchain projects by next year, the World Economic Forum (WEF) said in August, describing the technology as the future "beating heart" of the financial sector. A survey of 200 top global banks by tech firm IBM last month found that 15 percent will have rolled out commercial blockchain products by the end of 2017.
But there is likely to be a transatlantic imbalance in bringing out such products, given the costs involved in developing new technology. While U.S. investment banks moved quickly to restructure and recapitalize after the financial crisis, European players are still struggling with cost-cutting and shoring up their balance sheets.
Dozens of patent applications have been filed in total by Goldman Sachs <GS.N>, JPMorgan <JPM.N>, Wells Fargo and Bank of America <BAC.N> for blockchain-based products, but there is a record of only one being filed by a European bank - Switzerland's UBS <UBSG.S>.
"The European banks are cost-focused,whereasU.S. banks like Goldman Sachs and JPMorgan are likely trying to generate revenue, because they're in different market conditions," said Simon Taylor, who was in charge of blockchain product development at Barclays for two years until he left in June to co-found London fintech consultancy 11:FS.
"Reading between the lines, that says: 'we want to profit from this, we want to build the thing,'" he said of American banks.
Taylor said that dynamic was playing out not just in terms of the amounts of investment in blockchain projects, but also in how U.S. banks are seeking to develop their own products while European banks are taking a more collaborative and less aggressive approach.
No leading bank has publicly said how much it has invested in blockchain. The six global banks approached by Reuters for this story - in the United States and Europe - declined to say how much they had spent.
The WEF estimates a total of about $1.5 billion has been invested in blockchain by all industries, including financial institutions and tech companies.
The UBS "fintech lab" on the 42nd floor of One Canada Square tower in London's Canary Wharf financial district does not look much like a bank office. Ideas are scrawled onto walls in pen and Post-It notes adorn a see-through dividing panel.
UBS is regarded in the industry as one of the most innovative European banks. It radically restructured its investment banking arm in 2012 - earlier than most of its European competitors - to focus more on wealth management, but it faces the same cost-cutting pressures.
"There's constant pressure to deliver," said the bank's blockchain lead Alex Batlin, who is leaving for BNY Mellon - which until recently has not appeared very active in its work on the technology but now seems to be on a spending spree, recently advertising 37 open positions on Blocktribe.com, a website dedicated to blockchain jobs.
"I always saw this as a Columbus mission – we go out and look for gold, we don't know what's going to happen, but if we do discover something it could be massive and therefore it's worth investing in," Batlin said, adding that he was always careful to deliver "shareholder value".
Banks are investing in blockchain in different ways: some invest directly in start-ups or have "incubator" programs where they work with start-up staff, others - like UBS - have "labs" in which they experiment with the technology. Some take all of these approaches.
They are also working together on the technology in consortia in order to come up with common standards and systems, with the most notable of these being New York-based R3, which includes most of the world's biggest banks.
Adam Ludwin, CEO of Chain, a San-Francisco-based blockchain start-up that is working with firms like Citi and Nasdaq, said it would be foolish for banks to spend too much at this point, as the technology was still in an experimentation phase.
"You could spend tens of millions but you'd probably be doing it wrong if you were spending hundreds of millions right now," he said. "The nature of new innovation and software development is that you invest incrementally."
IN THE GAME
In Reuters interviews about tech innovation with banks, blockchain consortia and consultancies, the name of one U.S. investment bank came up more often than any other: Goldman Sachs, which posted a 58 percent jump in third-quarter profits on Tuesday.
The bank, which has a history of developing new platforms internally that it then sells to the marketplace, as well as investing in start-ups, recently filed a patent application for a platform for trading foreign exchange via blockchain.
"There are some banks – Goldman Sachs being the epitome of this – that ... recognize the future of banking as being more and more a question of technology," said Charley Cooper, managing director of the R3 blockchain consortium.
But while they might be held back by cost pressures, Europe's lenders are trying to keep up with their U.S. peers on the tech front.
Earlier this month when Dutch bank ING announced plans to cut 7,000 jobs, it also said it would invest 800 million euros in its technology platform.
As Deutsche Bank's share price was sliding towards a 30-year low last month on concerns over a fine from the U.S. Department of Justice, it announced that its new "digital factory" would be staffed by 800 specialists by 2018.
"We're advising our clients that they would be frankly foolish not to be experimenting (in blockchain technology)," said Deloitte global financial services industry leader Bob Contri. "If you're not in the game and if you're not experimenting then you're falling behind."
(Reporting by Jemima Kelly and Anjuli Davies; Editing by Pravin Char)