March 7, 2019
If you were online on February 14 this year, you couldn’t have missed what many in the FinTech industry claimed was the announcement of the year – the launch of JPMorgan’s new digital currency, dubbed JPM Coin. Here’s what is interesting: right after the announcement, the cryptocurrency market saw a massive upward spike that analysts believe was a reaction to the launch of JPM Coin. Since then, it has been written about a lot. If you’re confused about why this is such a big deal, read on.
JPM Coin is powered by blockchain technology; in particular, by Quorum which is a distributed ledger platform jointly developed by JPMorgan and a few of its partners.
Unlike the publicly-traded Bitcoin or Ethereum, JPM Coin is private or permissioned, which means, it will be controlled by and traded within JPMorgan. Initially, it will be made available to the bank’s institutional clients, primarily larger firms.
JPM Coin is a stablecoin, pegged to the US dollar. This is exciting, given the increasing popularity of fiat-collateralized stablecoins, such as Tether, Dai, and Gemini dollar, which combine the best of blockchain’s speed and transparency, leaving out the risk of volatility inherent to major, public blockchain cryptocurrencies. JPM Coin, in this context, comes as a new and relatively safer option based on private blockchains.
The move to introduce JPM Coin as a stablecoin makes a whole lot of sense when one looks at the Binance research report that illustrates how the total share of stablecoin volume continues to increase relative to total volume across the entire cryptoasset market. This, in turn, reflects the increasing demand to manage volatility inherent in other cryptoassets.
How the coin works is actually quite straightforward – clients deposit a certain sum of dollars at the bank, against which they are issued a proportionate number of JPM Coins. Once the client uses the tokens for purchases or payments on the blockchain, JPMorgan ‘burns’ or destroys the tokens, letting the client redeem their dollars.
Source: JP Morgan Chase
Going forward, as Internet-connected devices get onto blockchain networks, JPM Coin could well become the standard for payments. As JPMorgan is open to the possibility of making its token operable across standard blockchain networks in the future, it’s also likely that the digital coin will extend beyond the US dollar to other major currencies.
**What are some of the use cases at this initial stage? **JPMorgan shares that its digital currency will help speed up payments that might otherwise be delayed due to the nature of wire transfers, citing cross-border payments, along with securities transactions and consolidation of large corporate transactions as three early applications for JPM Coin.
The bank remains confident that even though it’s only making JPM Coin available to clients at the institutional level for the moment, scaling up will not be a problem. According to JPMorgan’s Head of Blockchain, Umar Farooq, Pretty much every big corporation is our client, and most of the major banks in the world are too… It shouldn’t hold us back.
Some of the major players in cryptocurrency today include Bitcoin, Ethereum, Qtum, TRON, and so on. Over the past decade, cryptocurrency has caused massive disruption within banking. It’s undeniable that the introduction of JPM Coin has stirred things up. In fact, it has been deemed a direct competitor to Ripple, currently the third-largest cryptocurrency (XRP) by market cap.
Ripple CEO Brad Garlinghouse, while acknowledging JPMorgan’s entry onto the cryptocurrency landscape as a positive development, dismissed JPM Coin as a viable solution. His argument was based on the view that by making its own stablecoins (or analogs thereof), a bank runs the risk of recreating problems that Distributed Ledger Technology (DLT) was initially meant to resolve.
However, owing to the high level of transparency inherent to blockchain, JPM Coin can drastically reduce costs for institutional clients, enabling the execution of transactions between institutional clients without pre-established trust. This establishes JPM Coin as a worthy competitor to Ripple. Here’s a comparison:
Experts seem to agree that JPM Coin is set to provide stiff competition to Ripple. According to Tom Shaughnessy, Principal at Delphi Digital, a crypto research boutique in New York, The JPM Coin is a stable coin whereas XRP is anything but stable,’’ said Shaughnessy. That’s going to be a very contentious point for banks who don’t want the currency in which they make payments to be volatile.
Keep in mind that JPMorgan has already planned for three initial applications of JPM Coin – cross-border payments, securities transactions, and consolidation of large corporates’ transactions. JPMorgan is already working with giants, such as the National Bank of Canada, Honeywell, and Facebook, who might adopt JPM Coin for their transactions. All this will combine to have a significant impact on financial services as well as the FinTech industry at large.
Going back to stablecoins, if we look at the evolution of stablecoin iterations over time, we’ll find two distinct generations:
The first generation of stablecoins came with Tether. It sought to create a blockchain-based digital currency that could be free from the volatility of cryptocurrency price swings. It was the first version of cryptocurrency pegged at the US dollar.
The second generation of stablecoins was led by players like Dai, bringing greater transparency to cryptocurrency transactions with audit releases.
JPM Coin is now set to lead the third wave, with one significant difference: it caters to financial institutions, which previous generations of stablecoin refrained from. Built on private blockchains, this series of stablecoin has a business model built to address specific use cases for businesses.
Furthermore, it is important to remember that JPMorgan is among the world’s biggest banks, with a balance sheet of USD $2.6 trillion. This is noteworthy because even if a small percentage of the bank’s total assets are locked as fiat collateral for its digital currency, it would potentially become the largest stablecoin issuer on a blockchain with regard to total market cap and circulating supply.
JPMorgan isn’t alone in envisioning a future where digital coins can become mainstream to the extent of being highly profitable – Facebook has been working towards developing something similar, a centralized digital currency pegged to the US dollar. The company plans to initially focus on the Indian market, making domestic as well as international remittances easier for over 200 million WhatsApp users in the country.
In a way, blockchain is still in its infancy; after all, what’s a decade in the world of finance? While it continues to gain trust and increase in popularity, cryptocurrency hasn’t yet seen the kind of commercial success that would make it viable on a truly large scale. One of the reasons for this is that blockchain hasn’t yet found the necessary kind of backing, from larger institutions.
JPMorgan’s offering in the cryptocurrency space comes at the right time; its foray into cryptocurrency could have the effect of other large financial institutions following in the wake of JPM Coin, moving to create their own stablecoin on a proprietary blockchain network. Should more private banks align to develop their own blockchain-based settlement and clearing solutions, players like Ripple could see significantly higher competition than they have at present. JPM Coin is ideally positioned to compete with major players in the cryptocurrency space by leveraging the power of private blockchain in a world that has been largely reliant on public networks.
Backed by the significant experience, resources, and reputation of JPMorgan, JPM Coin will open up newer, speedier, and vastly more secure avenues for transactions and other financial services – that is something you can definitely bank on.