J.P. Morgan to launch a U.S. dollar-backed cryptocurrency

JPM Coin, the first of its kind from a major bank, will initially be used to transfer funds over a blockchain network internally and between internationally between institutional clients.

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J.P. Morgan Chase plans to launch what is considered to be the first cryptocurrency backed by a major bank, a move that could legitimize blockchain as a vehicle for fiat cryptocurrencies.

JPM Coin, as the bank is calling its new cryptocoin, is considered fiat currency because it's backed by U.S. dollars in accounts designated at JPMorgan Chase N.A.

One JPM Coin has the equivalent value of one U.S. dollar. Trials for the new cryptocoin are expected to begin in the next few months, according to a CNBC report.

In the crypto industry, an instrument like JPM Coin is known as a "stablecoin" because it has an intrinsic value, unlike Bitcoin or Ethereum's ETH coins, whose value is based on supply and demand of virtual money.

"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," JPMorgan said in an online FAQ. "The JPM Coin is based on blockchain-based technology enabling the instantaneous transfer of payments between institutional accounts."

collateralization blockchain chart J.P. Morgan Chase

How JPM Coin differs from other cryptocurrencies.

In short, JPM Coin is basically a way of using a permissioned blockchain ledger to keep track of balance transfers within the bank's business and internationally between institutional clients. 

J.P. Morgan clients would purchase JPM Coin, using the tokens in lieu of actual funds to make payments and transfers; JPM would then facilitate the recipient receiving the commensurate number of dollars, according to Dayna Ford, a Gartner research director focused on payments within electronic and mobile commerce.

"As such, if institutional clients would like to move foreign funds into a different institution, it would need to involve [J.P. Morgan] as an intermediary bank," Ford said. "Once the funds are converted to a local currency within [J.P. Morgan], they would ride existing rails, such as wire or SWIFT, between the two banks in-country, at least initially."

J.P.. Morgan Chase did not respond to Computerworld queries as to whether the bank is considering using a cryptocurrency in its retail business.

Even if only used for its wholesale business, JPM Coin amounts to a public endorsement of distributed ledger technology (DLT) and its practical functionality for business – something enterprises have sought from blockchain-based solutions for years, according to Kevin McMahon, executive director of emerging technologies at digital technology consultancy SPR.

"While the direct impact will be limited to JP Morgan and their institutional clients, the optics and endorsement of the technologies will ripple beyond the financial services industry," McMahon said, "meaning the outcome of this JPM Coin experiment will be watched closely by those considering distributed ledger technologies for their own purposes."

McMahon noted nuances with other cryptocurrencies, saying JPM Coin isn't exactly crypto but a "financial instrument that leverages blockchain technologies.

jp morgan collateralization blockchain ledger chart J.P. Morgan Chase

"Just like Bitcoin, JPM Coin can be thought of as an application written on top of a blockchain platform," McMahon added. "JPM Coin is looking to streamline the institution's business-to-business money movement flows by reducing counterparty and settlement risk and enabling instant money transfers amongst their institutional clients."

In 2017, J.P. Morgan's CEO, Jamie Dimon, called Bitcoin a "fraud" that will "blow up."  McMahon noted that view isn't inconsistent with the company's launch of JPM Coin because it isn't a true cryptocurrency.

"It's not intended to replace or even compete with cryptos like Bitcoin," McMahon said. "This is an application of [DLT] to improve specific business cases that JP Morgan and their institutional clients have."

Within the world of digital commerce payments, JPM Coin won't have much of an impact on legitimizing cryptocurrencies, Ford added.

"JPM has stated that it will not be available to retail investors but only to their large institutional clients, which means it won't be in the hands of individuals and won't be used for commerce or even for investing," Ford said. "It wouldn't be particularly applicable for speculative investing anyway, since its value is tied to the U.S. dollar."

The benefit from using JPM Coin comes with blockchain's DLT, which has the potential to speed funds transfers, "most notably international funds transfers" compared to existing banking rails or messaging networks such as SWIFT.

SWIFT relies on legacy platforms designed around daily cut-off times and batch processing, Ford said.

While JP Morgan Chase could have partnered with a crypto-backed, real-time settlement system such as Ripple rather than build its own, the company has signaled an appetite for controlled pilots with selected clients, and their own private network was likely the best way to achieve that, Ford noted.

While J.P. Morgan may be the first major bank to announce a cryptocurrency backed by fiat money, it's certainly not the first to propose crypto-backed assets.

The original idea behind bitcoin was to create a decentralized electronic currency for everyday purchases; however, it has rapidly become a speculative asset, with a volatile value over the past year; it skyrocketed to nearly $20,000 in value only to plummet below $3,500.

The head of the People's Bank of China's (PBoC) new Digital Currency Research Institute wants that nation's central bank to create a cryptocurrency, which he claimed would provide stability to China's fiat money.

In a blog, "Fedcoin: On the Desirability of a Government Cryptocurrency," David Andolfatto, an economist for the Federal Reserve Bank of St. Louis, argued that government-backed cryptocurrencies would provide greater transaction transparency.

A government-backed, blockchain-based digital token would offer the benefits of an international currency usable for settlement of global trade and holdings. And it would be one with lower fees because it would require less administration through the use of smart or self-executing contracts.

In order to be viable, a state-issued digital token would need the backing of the government itself or a central bank, such as the U.S. Central Bank, the Bank of England, or the Monetary Authority of Singapore, for example. Such stablecoin cryptocurrencies are tied directly to a country's fiat money or backed by a commodity  such as gold.

For example, OneGram is a gold-backed cryptocurrency that backs each digital coin with a gram of gold. Each transaction of OneGram Coin (OGC) generates a small transaction fee which is reinvested in more gold (net of admin costs), thus increasing the amount of gold that backs each OneGram, according to a white paper explaining how OGC works.

The U.K's Royal Mint has begun selling cryptocurrency tokens against bars of gold, and has even called its Royal Mint Gold, "The New Digital Gold Standard."

While they're still nascent, new start-ups are launching applications that allow users to convert cash, property and digital assets into cryptocurrency that can be tracked and kept in a blockchain immutable ledger.

DLT has the ability to take anything, from a piece of artwork to gems and real estate, and represent them as cryptographically hashed assets on a peer-to-peer, open electronic network that has no central authority, such as a bank, governing their trade or sale. The cryptocurrency market capitalization is estimated to be $211 billion, according to a report from auditing and business services firm KPMG.

Cryptocurrencies have gained significant attention for their ability to solve problems in the global financial world, such as feeless cross-border payments, and it has diversified to include different types of assets such as stablecoin.

KPMG pointed to a wave of start-ups and established financial services firms, such as Fidelity Investments, launching various crypto products and services for the emerging tokenized economy. The firm suggested that a tokenized economy will likely be one of the more significant innovations enabled by cryptoassets like bitcoin, Litecoin and Ether.

While J.P. Morgan's JPM Coin isn't likely to directly disrupt the payments industry, it does provide a blueprint for how other centralized, digital payments could be constructed within a permissioned blockchain network, according to SPR's McMahon.

"The challenges and problems that JPM Coin was designed to solve don’t necessarily overlap with those of the traditional payment processors or industry, as these banks and institutions aren’t using the traditional payments ecosystem for settlement and transfers," McMahon said. "However, the technologies and approach used to implement JPM Coin provides insight into what digital payments might look like on other networks, such as social networks, or platforms, such as gaming systems."

Copyright © 2019 IDG Communications, Inc.

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