Banking & Payments
Why ConsenSys bought J.P. Morgan’s Quorum
The deal says a lot about the future of how financial institutions will access blockchain networks.
On August 25, in New York, ConsenSys announced it is acquiring Quorum, the blockchain developed by J.P. Morgan.
Financial terms of the deal were not disclosed but J.P. Morgan will take a seat on ConsenSys’s board of directors.
What’s the logic behind this deal? Both ConsenSys and Quorum operate blockchains based on Ethereum, which is the first protocol to use smart contracts. But there are important differences.
Public versus private
ConsenSys builds open-source infrastructure around the Ethereum blockchain; the company’s founder, Joe Lubin, is a co-creator of Ethereum. That means anyone can contribute to the source code or develop projects, like applications, that are open to anyone to use, such as the ether cryptocurrency.
Quorum is also built on Ethereum, but on an enterprise basis that is private; users are admitted as either developers or users like in a club, and it comes with heavy security and audit features.
Charles D’Haussy, director at ConsenSys, says the vision of the deal is to bring public and private blockchains together, to enable interoperability.
“Banks today are operating on five, ten or more blockchains. That’s a lot of connectivity, and a heavy burden to maintain,” he said. The industry is facing fatigue and resisting adding more.
This is one reason why ConsenSys believes private and public blockchains need to be made interoperable, so that users need only a handful of connections.
Aiming for Web 3.0
The analogy is to the creation of the Internet. Initially the online world was just a series of corporate, government and academic intranets. The World Wide Web was invented to unite these, and then browsers like Netscape’s Navigator allowed the public to surf it.
ConsenSys has already headed down the road of compatibility by backing Hyperledger Besu, an Ethereum client that is building enterprise-friendly solutions for public blockchains. Buying Quorum attacks the problem from the opposite direction, preparing a private blockchain for the day when the equivalent of the World Wide Web will dominate.
“ConsenSys is a leader in public access to the Ethereum mainnet, and Quorum is a strong permissioned-based, private blockchain,” D’Haussy said. “Web 1.0 was static pages, Web 2.0 was social media, and Web 3.0 will be the decentralized Internet. We want to offer dual capability.”
The reason this matters, D’Haussy says, is that ultimately it is the public blockchains will gain the scale to be commercially sustainable. Financial institutions that want to access the global market will need to begin at the public level and then drive customers to their protected networks. Right now no such universe exists.
JPM Coin and other apps
Applications that currently run on Quorum will not be affected, however, so it’s not yet clear what exactly interoperability will mean in practice. The vision, though, is to create a single access point for multiple blockchains, so that banks do not face a clutter of nodes and connections across the industry.
ConsenSys and J.P. Morgan have an existing relationship, with ConsenSys providing support for Quorum, such as digital asset functionality and documentation.
One application on Quorum is J.P. Morgan’s Interbank Information Network (IIN), a peer-to-peer cross-border payments nexus of over 400 financial institutions – a sort of SWIFT alternative that uses a native token called the JPM Coin to facilitate transactions. The bank will continue to operate these applications for its customers (although ConsenSys is buying its Quorum development team).
J.P. Morgan employees that work on ConsenSys-related projects will stay with the bank and be redeployed to other areas of blockchain, a bank spokeswoman says. (The bank declined to be interviewed.)
J.P. Morgan’s interest in the transaction is to support Quorum-based businesses with a pure-play tech provider, and the two firms already work together: they are both co-founders of Enterprise Ethereum Alliance, a consortium for building business apps on the protocol.
What other use cases could lie in the future for Quorum under ConsenSys ownership? DigFin asked about central-bank digital currencies. D’Haussy said that is a separate development.
But he did note that ConsenSys has participated in a number of government initiatives, including Singapore’s Project Ubin (as has Quorum), and a proof of concept with the Reserve Bank of South Africa.