Mixed response to JP Morgan’s digital currency launch

Last week, JP Morgan Chase became the first major U.S. bank to rollout a digital coin when it launched its JPM Coin, a digital set-up designed to make instantaneous payments.

The digital currency is based on blockchain technology, the decentralized public ledger of transactions that offers more speed because it doesn’t rely on a central record keeper. Exchanging value, such as money, between different parties over a blockchain requires a digital currency, hence the creation of the JPM Coin.

Umar Farooq, head of digital treasury services and blockchain at the bank, commented in a Q&A: “Many of our clients move money in different ways and they’re looking for a more real-time way to move value around.

“When one client sends money to another over the blockchain, JPM Coins are transferred and instantaneously redeemed for the equivalent amount of U.S. dollars, reducing the typical settlement time.”

Farooq added that, over time, JPM Coin will be extended to other major currencies. The product and technology capabilities are currency agnostic.

“We have always believed in the potential of blockchain technology and we are supportive of cryptocurrencies as long as they are properly controlled and regulated,” Farooq added. “As a globally regulated bank, we believe we have a unique opportunity to develop the capability in a responsible way with the oversight of our regulators.

“Ultimately, we believe that JPM Coin can yield significant benefits for blockchain applications by reducing clients’ counterparty and settlement risk, decreasing capital requirements and enabling instant value transfer.”

A mainstream move?

While JP Morgan’s foray into digital currency is not ground breaking in terms of technology, it could be the first real sign that these types of currencies (whether it’s a cryptocurrency is a matter for debate, as I’ll discuss later) is becoming mainstream. Crucially, JPM Coin has been developed in response to customer demand, usually the sign that technology is about to make a true breakthrough. Then there’s the scale of JP Morgan’s business. With the bank moving more than $5 trillion in wholesale payments every day, even at this early testing phase this is big news in the world of payment technology.

Crucially, analysts say it could build trust in the concept of tech-led payments. It could also help other banks gain traction with their offerings and prompt others to follow close behind, which could make 2019 a watershed year for digital payment technologies.

Santander, for example, will be hoping to build on the success of its blockchain-based One Pay FX international payments service. HSBC meanwhile is testing blockchain payment tech on a soybean shipment with the help of ING and agricultural firm Cargill.

The Bank of Ayudhya, Thailand’s fifth largest bank, completed a successful pilot in May 2018 where it accepted blockchain technology for money transfer between an oil firm in Thailand and its marketing ally in Laos.

Playing catch-up

Another forerunner in digital payment tech is Signature Bank, the New York-based full-service commercial bank, who unveiled its digital payments platform, Signet, recently. Designed to enable real-time payments for its commercial clients. The platform will leverage blockchain technology in its architecture, allowing Signature Bank’s commercial clients to make payments in U.S. dollars 24-hours a day, seven days a week, 365 days a year – and has already attracted dozens of corporate clients. The bank says that its far ahead of JP Morgan and the big bank is playing catch up.

Chief Executive Officer Joseph DePaolo is quoted as saying Signature has seen daily volume in the tens of millions of dollars since the coin’s debut. When asked how Signet compares to JPM Coin he answered: “There’s no difference other than we’re up and running and we already have regulatory approval. They’re trying to do the same thing we are.”

Not cryptocurrency at all

While JP Morgan has been making headlines with its ‘cryptocurrency’, critics of the technology point to the fact that it’s not actually a cryptocurrency.

The main difference is all about public versus controlled, ‘private’ access. Cryptocurrencies such as Bitcoin, Ethereum and Monero are all about decentralized control. Multiple computers work together to agree on the state of the shared ledger (blockchain) that keeps track of everybody’s money. Anybody can join in without asking for permission, making them public, whereas JPM Coin, runs on a “permissioned” blockchain called Quorum with limited participants that must first be approved by JP Morgan Chase.

A comment by FT Alphaville’s Jemima Kelly, sums the situation up very well. A permissioned blockchain of the kind JPM Coin uses is essentially a database managed by its owner, JP Morgan Chase, the article argues. Add to this the fact that the digital token simply represents money already, literally, in the bank, and one begins to wonder whether a blockchain by any definition is needed at all.

“In fact, some might argue JPM Coin already exists and that it’s just a JPM deposit by another name,” Kelly wrote.

So, while JP Morgan’s JPM Coin is big news – and a welcome development in the world of payment technology and treasury – but by definition it’s designed around it’s own customers and permission and therefore not a global solution. Nor is it a challenge to ‘true’ cryptocurrencies.