WHY THIS MATTERS IN BRIEF
Bitcoin may have its critics, but noone can argue the impact that cryptocurrencies have had on the world, and now one of the US’ biggest banks is jumping on the bandwagon.
With talks of China creating the first blockchain based national cryptocurrency and Ohio recently becoming the first US state to accept business taxes in Bitcoin, we now have another blockchain first in the form of the world’s first cryptocurrency created by a major US bank. And it’s from none other than JP Morgan Chase. The lender moves more than $6 trillion around the world every day for corporations in its massive wholesale payments business, and in trials set to start in a few months, a tiny fraction of that will happen over something called “JPM Coin,” the digital token created by engineers at the New York-based bank to instantly settle payments between clients.
JP Morgan is, it says, “preparing for a future in which parts of the essential underpinning of global capitalism, from cross-border payments to corporate debt issuance, move to the blockchain,” a distributed database technology that was made famous by its first application, Bitcoin. But in order for that future to happen, the bank needed a way to transfer money at the dizzying speed that those smart contracts closed, rather than relying on old technology like wire transfers.
“So anything that currently exists in the world, as that moves onto the blockchain, this would be the payment leg for that transaction,” said Umar Farooq, head of JP Morgan’s blockchain projects, using rhetoric that increasingly makes it sound as though the company has its eye on becoming the next SWIFT network, the financial network that today is used by tens of thousands of banks to move money around the world, and whose CEO as few years ago said blockchain was an existential threat to their business. “The applications are frankly quite endless; anything where you have a distributed ledger which involves corporations or institutions can use this.”
For some, JP Morgan’s new currency may come as an unexpected development for a technology that rose from the wreckage of the financial crisis and was supposed to disrupt the established banking world.
When the international payments system is tested, it will be one of the first real-world applications for a cryptocurrency in banking despite the fact that the industry has mostly shunned the asset class as too risky. Last year, for example, JP Morgan and two other lenders banned the purchase of Bitcoins by credit card customers, and Goldman Sachs reportedly shelved plans to create a bitcoin trading desk after also exploring the idea.
Though holders of digital currencies may seize on the news that a major financial institution is issuing its own crypto as bullish for the asset class, retail investors will probably never get to own a JPM Coin. Unlike Bitcoin, only big institutional clients of JP Morgan that have undergone regulatory checks, like corporations, banks and broker-dealers will be able to use the tokens.
There are other key differences between the bank’s crypto and Bitcoin too, which JP Morgan CEO Jamie Dimon has bashed as a fraud that won’t end well for its investors, but to be clear, he and his team have consistently said that blockchain, as well as digital currencies that were regulated, hold promise.
Each JPM Coin is redeemable for a single US dollar, so its value shouldn’t fluctuate, similar in concept I talked about a while ago called Stablecoins, which are now being backed by Google and friends. Clients will be issued the coins after depositing dollars at the bank, after using the tokens for a payment or security purchase on the blockchain, the bank destroys the coins and gives clients back a commensurate number of dollars.
There are three early applications for the JPM Coin, according to Farooq.
The first is for international payments for large corporate clients, which now typically happens using wire transfers between financial institutions on decades-old networks like SWIFT. Instead of sometimes taking more than a day to settle because institutions have cut-off times for transactions and countries operate on different systems, the payments will settle in real time, and at any time of day, he said.
The second is for securities transactions. Last April JP Morgan tested a debt issuance on the blockchain, creating a virtual simulation of a $150 million certificate of deposit for a Canadian bank. Rather than relying on wires to buy the issuance, which results in a time gap between settling the transaction and being paid for it, institutional investors can soon use the JP Morgan token, resulting in instant settlements.
The final use would be for huge corporations that use JP Morgan’s treasury services business to replace the dollars they hold in subsidiaries across the world. Unseen by retail customers, the business handles a significant chunk of the world’s regulated money flows for companies from Honeywell International to Facebook, moving dollars for activities like employee and supplier payments, and that alone generated $9 billion in revenue last year for the bank.
“Money sloshes back and forth all over the world in a large enterprise,” Farooq said. “Is there a way to ensure that a subsidiary can represent cash on the balance sheet without having to actually wire it to the unit? That way, they can consolidate their money and probably get better rates for it.”
Looking further out, the JPM Coin could also be used for payments on internet-connected devices if that use for blockchain catches on, Farooq said.
JP Morgan is betting that its first mover status and large market share in corporate payments, it banks 80 percent of the companies in the Fortune 500, will give its technology a good chance of getting adopted, even if other banks create their own coins, which they likely will now.
“Pretty much every big corporation is our client, and most of the major banks in the world are, too,” Farooq said. “Even if this was limited to JPM clients at the institutional level, it wouldn’t hold us back.”