Yes, its announcement had considerable comedy value. Umar Farooq, head of digital treasury services and blockchain at JPMorgan, must have struggled to keep a straight face while asserting “we have always believed in the potential of blockchain technology and we are supportive of cryptocurrencies,” given his boss’s previous dismissal of Bitcoin as a fraud.
But make no mistake. JPM Coin, the token representing US dollars created by the largest bank in the US to enable instantaneous transfer of value between client accounts across its own Quorum blockchain platform, is a big deal.
It suggests that JPMorgan is not convinced by the efforts of Swift to ensure much faster cross-border payments across existing rails for money transfer.
It increases the likelihood that blockchain will have a central role in securities markets. Bonds and equities are already being transferred on blockchain but associated payments are not yet. That may change now.
It shows development along these lines will likely progress in closed, permissioned, regulated networks, utterly inimical to the ideals of the founders of the first bitcoin blockchain.
It raises once again fundamental questions about the nature and role of money and the function of the banking system, even after early experiments such as at Citi with its Citicoin for internal transfers seemed to have fallen by the wayside.
|Umar Farooq, |
For now, of course, JPM Coin remains just a prototype, first tested between a client account and a JPMorgan account and now in a pilot among a small number of institutional clients with plans to expand later this year.
Farooq says: “As we move towards production, we will actively engage our regulators to explain its design and solicit their feedback and any necessary approvals.”
Euromoney struggles to take this at face value. Yes, we can see the process is that a client deposits dollars at the bank, receives tokens representing those dollars that it can now shift instantly across the blockchain as transfer of cash or as payment for securities or other assets, and that a recipient can take those tokens off the blockchain at the other end and exchange them with JPMorgan back into dollars.
Other stablecoins have at times struggled to maintain parity to their anchor currency. Forget the collateral for a moment, JPM Coins will stay at 1:1 to the US dollar, essentially because JPMorgan says they will.
To Euromoney’s mind this is not so much competing with Ripple and its XRP tokens, rather this is much closer to becoming a private issuer of US currency. While the bank explains the collateral backing for coins, it can’t help but also point to its own financial strength: “With a $2.6 trillion balance sheet, JPMorgan will redeem each JPM Coin in fiat currency. In other words, one JPM Coin represents $1.”
No, we know it is not legal tender, but JPMorgan seems to be promising to pay the bearer on demand, just so long as the bearer is not a retail customer for now. Yes, the Fed has a bigger balance sheet at $4 trillion but it's carrying a big concentration risk and JPMorgan's is not only much better diversified, it also threw off $32.8 billion of net income last year.
Presumably, the bank has had long and detailed discussions with its regulators already and they have seen an advantage in new rails for the movement of money being built within the regulated banking industry and used between institutional customers subject to know-your-customer and anti-money laundering identity and compliance checks.
Who will use it? Perhaps many institutional clients of JPMorgan. The bank claims that JPM Coin can reduce clients’ counterparty and settlement risk, decreasing capital requirements and enabling instant value transfer.
HSBC recently revealed that having settled three million FX transactions, and having made internal payments worth $250 billion using distributed ledger while realizing drastic increases in efficiency, it is now taking to external clients – specifically multinational corporations with multiple treasury centres and cross-border supply chains – the solution it calls HSBC FX Everywhere.
Whether or not other banks will accept and use JPM Coin remains to be seen. The starting point, no doubt, will be the 176 banks that rushed to join JPMorgan’s Interbank Information Network (IIN) for storing and accessing information on payments. These include many of its correspondent banks around the world.
Correspondent banking is under pressure, especially where it touches handling dollars, with non-US bank chief executives telling Euromoney they must now be extremely cautious about maintaining such relationships, even if that harms some customers.
Next big step
JPMorgan famously committed over $10 billion to technology spending in 2018 and its blockchain pieces – Quorum, IIN, JPM Coin – are now starting to fit together in intriguing ways. Will other banks follow its lead?
JPMorgan says that while JPM Coin will be issued on the Quorum blockchain, it will be extended to other platforms and eventually be operable on all standard blockchains. It also says that over time JPM Coin will be extended to other major currencies.
Digital coins designed to move money internally at the biggest international banks at greater speed and with lower error rates were the obvious initial efficiency play for blockchain technology, and a means to optimize balance-sheet usage.
JPM Coin is the next big step in taking this into wider circulation. It is also a reminder that digital twin assets will be much more useful than discredited native cryptocurrencies. It has obvious potential application as the payment leg on financial, energy and commodity exchanges but also as a means to fractionalize ownership of economic interest in and to liquify less traded assets such as real estate.