Dimon on bitcoin, HSBC forex trader trial and the Equifax hack
Patrick Jenkins and guests discuss the head of JPMorgan Chase's latest comments on bitcoin, HSBC's forex trader trial and the Equifax security breach.
Presented by Patrick Jenkins and produced by Fiona Symon
Welcome to "Banking Weekly" from the Financial Times with me, Patrick Jenkins. Joining me in the studio today are Laura Noonan, our investment banking correspondent, Caroline Bynum, our financial regulation correspondent, and also, down the line from the US, we have Ben McClanahan, our US banking editor. Our guest here in the studio this week is "FT Alphaville" blogger Isabella Kaminska.
Today, we'll be looking at Jamie Dimon, the chief executive of JPMorgan, as he takes a swipe at Bitcoin, calling it a fraud and as bad as tulip mania in the 17th century. We'll also take a look at HSBC as a trial of its forex trader begins, and finally look at Equifax. This is the US credit checking agency which suffered a hack recently, and is now being investigated from all sides. First, though, to Jamie Dimon.
Well, he's well-known to many people for speaking his mind on all manner of topics. Well, this time he's hit out at Bitcoin. Let's just start by hearing what Jamie Dimon had to say at a conference a few days ago.
Why is Bitcoin a fraud?
Yeah. So separate blockchain, which is a technology, from Bitcoin, the currency. And now there are multiple currencies. And so I'm talking about not Bitcoin per se, I'm talking about currencies. You know, the first-- and the reason-- and I'm not saying go short, because I know [INAUDIBLE]. You know, Bitcoin can tell $100,000 of Bitcoin before it goes down. So this is not an advice on what you do. My daughter bought some Bitcoin, it went up, and she thinks she's a genius now. But it's-- I did refer to it as like the tulip bulb crisis of the 1700s, whatever.
But here's the reason-- governments, the first thing they do is form a currency. They like to control the currency. They control it through a central bank. They also like to know who has it, where it is, where it's going. OK? And you saw China is just closing down the Bitcoin exchanges. And all I ever said is at Bitcoin, the bigger these things get, the more governments-- right now, they look at is as a novelty.
You know, they love in Washington [INAUDIBLE] technology, without technology-- Wait until someone gets hurt. Wait until it's used for illicit purposes, which it is somewhat used for illicit purposes. They close it down. That's my point. So it's not-- you can argue there's-- and I also think there's a good reason for it. If you were doing-- if you were in Venezuela or Ecuador or North Korea, you're better off probably using Bitcoin than using their currency. That can't possibly be true in the United States, unless you're speculating. And that isn't a reason to say something has value, because other people would speculate.
And that's what I was saying. So I don't think-- and also, like I said, the other reason it goes down is because it's used for illicit purposes. And so it's just not a real thing. And eventually, it'll be [INAUDIBLE].
So I see, you are a world authority on Bitcoin, I think it's fair to say. You've written extensively on it and researched it. Do you agree with Jamie Dimon?
I think personally-- and when you say I'm a world authority, it really depends who you speak to. There's an entire cabal of Bitcoiners who think I'm an utter idiot on it. But I would agree with Jamie. I think for sure he's absolutely right about the regulatory intervention risk, about the idea that these currencies are immune from government intervention. He's absolutely right.
Where I differ with him is that he still differentiates between Bitcoin the currency and the technology, the blockchain technology. And I'm more cynical, sceptical about that part of it, because actually if you look at Bitcoin, it is innovative. And the key bit about Bitcoin's innovation is this concept of the proof of work function. And all the blockchain inventions that are being invested in by the banks, they all strip that out on the basis that they don't need it because they're regulated institutions. But once you strip that out, you then have to wonder is there really anything innovative left apart from synchronising databases, which is less sexy, basically.
Talking about central bank's role in this, some central banks have actually embraced the whole idea, haven't they, including the Bank of England, but some Scandinavian central banks. They're trying to kind of hedge their bets on the future of cryptocurrencies. How do you see that playing out?
You know, my perspective is is that central banks can't be seen to be close-minded to innovation. So it's very sexy now doing consultations about blockchain or cryptocurrency. And yes, they've been researching it. As yet, I haven't seen any definitive findings that definitely say that blockchain is gonna be superior to the current systems we have. To the contrary, a lot of the reports that are coming out of the central banks show that there are major tradeoffs. And it's a bit of a naive assumption that blockchain can be a panacea to all the problems we have with settlement today.
OK. Laura, maybe put Jamie's outburst on Bitcoin into a bit of context for us.
Yeah. So I guess the first thing to say is this isn't the first time Jamie has zeroed in on Bitcoin. This, obviously, had a big impact on the price of Bitcoin last week, but Jamie has been warning about the dangers of Bitcoin for quite some time. In December, he said that he thought Bitcoin was going nowhere, but that he could be dead wrong. In fact, he turned out to be dead wrong. The value has increased more than six-fold since then, which probably explains why in his comments last week he said, even though he thought Bitcoin was ultimately going to implode, he would not at this stage try to short it, because it could go far, far higher before it does. So he has been a long-term sceptic around Bitcoin.
And the other interesting kind of nugget from history is that JPMorgan did try to create something that looks a lot similar back in 2013. They filed a patent for what they said was a new paradigm for effectuating electronic payments, and this was going to facilitate payments in much the same way as Bitcoin does. They haven't managed to actually get that patent approved, despite 175 different attempts and modifications of it.
The other thing is that, if you think about a bank the size of JPMorgan Chase, on the investment bank side they do have a lot of relationships with the Bitcoin industry, and with people who trade it. So there was a story out I think earlier this week about the fact that, despite Jamie Dimon saying Bitcoin is effectively fraud, JPMorgan Chase does continue to trade Bitcoin on behalf of its own clients who are looking to trade Bitcoin.
So Izzy, just to bring you in in a final concluding note on this, is this an inconsistent approach for Jamie Dimon to take, then?
Certainly I think the biggest hypocrisy, if there is one, is, you know, it's an executive of a money creation entity that is moaning about money creation elsewhere. But fundamentally, yes, there are other conflicts. For sure, they bank Bitcoin companies, but the difference is that when you're banking Bitcoin companies, you're doing it within a regulatory context. And one of the problems Bitcoin companies are having is that all that regulation is preventing their key customers, the dark markets, from using their services. And it turns out that when you can't service those clients, there isn't all that much of an advantage to using Bitcoin, other than speculation.
And on the speculation point, yes, you know, some people are very puristic about it. If it goes up, that suggests it's a success. But from a currency perspective, this sort of volatility that we're seeing in Bitcoin, and this rampant appreciation, makes it increasingly less useful as a currency. And that shouldn't be forgotten about.
The tulip analogy is quite accurate in that sense, isn't it? Very good. Thank you very much.
Well, let's move on to our second topic of the day. And Caroline, you've been monitoring the start of HSBC's trial in the US, where one of their former senior foreign exchange traders has gone on trial.
That's right. So in Brooklyn, the trial of Mark Johnson is now underway. He was the head of global forex for HSBC, and as you might remember was arrested at JFK airport last year. Also charged was his former colleague Stuart Scott. But he is still in the UK and resisting extradition to the US, so the trial of Mr. Johnson has gone ahead without him.
So essentially what's being alleged is that he front-ran a very large currency trade that one of HSBC's clients, Ken Energy, was about to undertake. It's a $3.5 billion trade. So essentially, with full knowledge that was happening, the prosecutors allege that Mr. Johnson bought sterling and tipped off his colleagues. And that's made $8 million profit.
I see. Put this in the context of other forex legal actions.
Yeah. So the context of this is that, as you'll remember, both the US and the UK prosecutors were looking at forex rigging in 2014, 2015. The UK [INAUDIBLE] office dropped its case, so that really only left the US Department of Justice. Now, what's interesting about Mr. Johnson's case is that it's not actually about forex rigging as we know it, as we have reported it. It's more about this kind of quite basic alleged crime of front-running, which we see in all kinds of different financial markets. And it's essentially a fraud case.
There are three other British traders that have been charged by the US as being part of an alleged cartel. They were the trio that gained newspaper headlines all over the world for their alleged role in the forex rigging scandal. They haven't fought extradition, and their court case is just at sort of pretrial hearings in New York right now.
I think the other thing that's quite interesting is that this comes quite hot on the heels of a couple of decisions that haven't painted transatlantic investigations in the best light. A couple of convictions against rapid bank traders in the libel rigging scandal, which preceded the forex scandal, had to be quashed in the summer. And that was because of the way that DOJ had relied on compelled testimony that the FCA in the UK had got, and then shown it to one of its key witnesses. So the two rapid bank traders that ended up getting convicted had those convictions overturned a couple of months ago. So obviously, DOJ is looking to win their next fight. And of course, it should go without saying that Mr. Johnson denies the charges, and his jury trial continues.
Thanks very much for that, Caroline. Well, let's move on to our third topic, which we'll stay in the US for a look at Equifax. This is the credit checking agency which suffered a major hack recently. And Ben is on the line to tell us the latest. Ben, thanks very much for joining us. This breach of security at Equifax happened last week, I think. But it's been fast-moving over the last few days. Bring us up-to-date with what's been happening.
Well, the very latest, our colleague in DC, David Lynch, is investigating an investigation by the Justice Department slash FBI into the breach. But I think it's too early to say what exactly, or who exactly could be on the dock on that one. But that's a criminal investigation.
Also, the SEC is reportedly-- we haven't been able to stand this one up yet, but the SEC is likely to be investigating the insider stock trading in which three top executives, including the CFO, Mr. John Gamble-- appropriate name, perhaps-- sold stock just days after the company learned that the hack had occurred. The company says that these three guys had no knowledge of the intrusion when they sold about $1.8 million worth of stock, but as you can imagine, the timing doesn't look good.
And the background to this is, as I said, a giant hack. What do we know about when that happened? How many individuals have been affected? Because this isn't just a US customer phenomenon, is it? It's affected clients all around the world.
There's people in Canada. It's up to 400,000 people in the UK. The details keep dribbling out from Equifax. The latest pertinent information came out on Friday, in which they said the attack occurred on May 13th. And at the time, this peculiar vulnerability in the framework, known as Apache Struts, that had been known about for a couple of months. And lots of companies had taken urgent action to fix that particular leak.
Equifax didn't. It said it was aware of it. I suppose we'll find out the truth in time. But over that period, between May 13th and July 29th, when they said they discovered the hack, whatever defences they tried to erect were obviously not good enough, so that the hackers got in then. And until July 29th, they were undiscovered.
So why, Ben, was there this gap, then, between the end of July and now before there was public disclosure of this? Because presumably that's exacerbated the danger for Equifax's clients.
That's right. Yeah. There are no hard and fast rules on this, no federal laws. State by state, you have to have certain disclosures within a certain period. And most states have about 45 days between discovery of the breach and disclosure of the breach. And Equifax is within that, at about 40 days.
But as you say, this breach was so vast, and 143 million US consumers affected. That's more than half the adult population. So questions have been asked, you know, why didn't we hear about this more quickly. Equifax hasn't said why it chose to disclose this on September the 7th. Of course, it could have been working very closely with the FBI during that period. It certainly had a top cyber security firm called Mandiant in there immediately after the hack. But yeah, it's a very good question, why investors were allowed to keep trading the stock not knowing that a 36% crash was just around the corner.
Well, the impact on investors is already evident. The impact, I guess, on customers will only become evident as and when this data potentially gets misused. But in the meantime, thanks very much for joining us, Ben.
Well, that's it for this week. All that's left for me to do is to thank Laura and Caroline here in the studio, as well as Isabella Kaminska from the FT's "Alphaville." Also Ben in New York, and also thank you for listening. Remember, you can keep up-to-date with all of the latest banking stories at ft.com/banking. "Banking Weekly" was produced by Fiona Simon. Until next week, goodbye.