On 14 February, JPMorgan Chase & Co. announced that it has created and tested the JPM Coin, a new digital representation of US dollars redeemable at a 1:1 ratio in fiat currency, this despite CEO Jamie Dimon having slammed bitcoin as a fraud in the past .
The JPM Coin is for now a pilot offered to select client banks, broker-dealers and other corporations.
As Forbes pointed out this week, JPM Coin is NOT a classic cryptocurrency!
Would JPM Coin simply be a digital currency, rather than a cryptocurrency? If JP Morgan’s new coin operates privately and is only used for money transfers between the lender and its clients, it would not operate on a public network in the same way that cryptocurrencies such as bitcoin or ethereum do.
In addition to this, cryptocurrencies operate on public networks that anyone can join without permission and while in this case, it means that the many computers working together on the shared ledger is said to improve security (according to a recent Motherboard article), JPM coin will run on a blockchain network called Quorum, which requires permissions and users must be approved by JP Morgan.
Moodys says that although still at an early stage, the digital coin breathes some life back into blockchain technology, which was criticized during 2018 for falling short of proving tangible use cases. For value to be exchanged among participating members over a blockchain, a unit of account in digital format is needed. Consequently, the JPM Coin is designed to allow the bank’s clients to transfer value between participating members. The exchange from fiat to JPM Coin and vice versa would be done at a value equivalent to $1.00, but it promises to be instantaneous, reducing settlement time. Given that JPM Coin is currently offered only to JPM’s institutional clients, should the test prove successful, it could motivate new clients to join the JPM platform to benefit from its features. It is not clear how, or if, JPM will make the feature available to non-JPM clients.
The offering can potentially help the bank expand its ecosystem, allowing firms seeking instant value transfer to use this highly sought feature in the global movement of money and payments in securities transactions.
At its investor day last year, JPM guided for around $10.8 billion in technology spend for 2018. The combination of a highly profitable
franchise and a dedication to technology reinforces JPM’s ability and willingness to innovate and defend its core payment franchises
against disruptive threats.
Although a first-mover among US banks in the creation and testing of a digital coin, JPM Coin’s concept is not unlike fiat-backed “stable coins” that exist within the cryptocurrency sphere. Examples of stable coins include Tether and Coinbase’s USDC, which operate as digital coins designed to bypass the volatility inherent among cryptocurrencies. However, volatility is not the only risk that the JPM Coin promises to avoid: it also sidesteps counterparty risk. Stable coins offered by start-up crypto exchanges and platforms offer digital coin redemptions back into fiat currencies. However, a transfer back into fiat is only possible to the extent the platforms are capable of supporting the redemptions, which exposes the holders of stable coins to counterparty risk. Common concerns around the platforms’ creditworthiness revolve around the lack of confidence that the digital coin is in fact backed by an inventory of fiat currencies.
An ecosystem sponsored by JPM, with a counterparty risk rating of Aa1(cr) may garner higher trust than competing ecosystems. Operational risks have also plagued start-up digital currency exchanges that have often faced bankruptcy (Mt Gox, QuadrigaCX), fraud (Bitconnect) or cyberattacks (Coincheck).
In October 2017, JPM launched the Interbank Information Network (IIN), which currently has 157 banks signed up. The IIN is designed to facilitate the transfer of information using blockchain technology and aims to reduce costs for correspondent banks when dealing with wholesale payments, particularly when it comes to sharing of information to resolve payment delays. While IIN addresses information sharing, JPM Coin is designed to test the actual transfer of value.
