Blockchain’s most prominent use case to date is facilitating cross-border payments. This goes back to its first use case, Bitcoin, which was designed to be both digital cash as well as a transfer mechanism for cheap and fast payments – supposedly bypassing the bank middlemen.
Deployment at scale has been missing, though. Banks were slow to acknowledge blockchain because of its initial association with Bitcoin, and top executives like Jamie Dimon of J.P. Morgan dismissed crypto-currency.
It was no surprise, then, that J.P. Morgan created buzz and derisory snorts when, in February this year, it announced the creation of JPM Coin.
Bankers from rivals have told DigFin that JPM Coin will never be broadly adopted. This is not only because, as competitors, they won’t process it. It’s also because, they argue, that it doesn’t solve any problems if it can’t build a network at an industry level.
Naveen Mallela, the bank’s head of digital treasury services for Asia Pacific, says the coin is intended for internal use – for the moment. Only pre-approved J.P. Morgan clients can use it or redeem tokens.
“The initial rollout of JPM Coin will be available to our institutional clients who have been properly on-boarded after we conducted the necessary checks,” Mallela told DigFin. “For now, we do not plan to expand JPM Coin beyond our institutional customers.”
Such a limited use will nonetheless make a real impact because J.P. Morgan banks many of the world’s largest corporations.
JPM Coin is not a crypto-currencyNaveen Mallela, JP Morgan
Today cross border transactions are cumbersome even within a single, global institution. No bank can move money instantly, 24/7.
For example, moving money from U.S. dollars to Indian rupees can’t settle in one day, partly because of time-zone differences, and partly because of the status quo in how foreign-exchange transactions are processed. (Banks give different forex rates to different customers.)
JPM Coin will make for a faster and more flexible payments rail. (The bank is still working with regulators worldwide to get approval to deploy JPM Coin.) The bank changes the customer’s U.S. dollars (say) into JPM Coins, which are on Quorum, the firm’s proprietary blockchain. Then, in close to real time, the customer can request the bank redeem those coins in an Indian branch, where J.P. Morgan will deposit the equivalent in rupees.
Database VS settlements
In other words, JPM Coin will be more than a shared database or message protocol. It will actually settle payments – something that no one has provided at scale, says George Harrap, co-founder and CEO of BitSpark, a Hong Kong fintech promoting stable coins and decentralized token trading for the unbanked.
He cites, for example, Ripple, which was the first to market token-based cross-border payments. It has two products. “One is xCurrent, which is a database used by many banks,” Harrap said. “The other is xRapid, which uses XRP [the company’s digital asset] for settlements, and nobody uses it.”
That’s not quite true: Ripple says now 10 of the over 200 financial institutions using xCurrent are using xRapid, for corridors between the U.S. and Mexcio, and USA-Philippines. But the general argument is valid: banks using xCurrent can’t settle the final payment at the end of the day without turning to SWIFT or a central bank’s payment rails.
Harrap argues the only successful blockchain-based tool for cross-border payments is Bitcoin. “We use bitcoin and we’re able to send money around the world, with zero banks involved,” he said. There’s no need for bankers to track who owns what or execute final settlement: those things are baked into the nature of Bitcoin, which is itself a unit of value.
This is what private enterprise blockchains all lack.
Banks don’t want tokens that are themselves units of value. Bitcoin, XRP and the rest are too volatile. JPM Coin is designed to leverage blockchain infrastructure while avoiding the market and regulatory headaches of crypto-currency.
Nonetheless, the industry has been moving to crypto in fits and starts. For example, earlier this year IBM announced the launch of Worldwire, its cross-border blockchain platform that uses two currencies, Stronghold USB (a stablecoin) and Lumens, the coin of Stellar, a Bitcoin-like network. As with XRP and JPM Coin, these tokens are used to clear and settle trades, not as investment tools.
In theory, JPM Coin should enjoy wider acceptance than Worldwire or xRapid or fintechs like BitSpark using stablecoins. That’s because a stablecoin is exposed to two credit risks: the institute issuing the coin, and the custodian of the cash or capital that is backing that coin. Tether, a stablecoin affiliated with crypto exchange Bitfinex, has come under criticism because it turns out that Bitfinex isn’t backing it fully as it had initially promised.
JPM Coin, on the other hand, is to be issued against J.P. Morgan’s vast deposit base and its “fortress” balance sheet. In other words, there is only one creditor involved, and because it’s J.P. Morgan, there is virtually no risk of it not making good on any claims. Coin holders can go to any J.P. Morgan branch and redeem it for the full equivalent in local currency.
Before launching the coin, however, J.P. Morgan needs the blessing of regulators in any market where it will create an FX corridor, including the U.S. Mallela says the bank hasn’t heard “no”s from any jurisdictions, because JPM Coin is not a cryptocurrency.
“JPM Coin is not a crypto-currency,” Mallela said. “It’s similar to a regular deposit liability except that it moves on the blockchain…Central banks have actively done PoCs [proofs of concept] in this space, so we think they’ll be open to the idea [of JPM Coin].”
There are other jurisdictions that have been friendlier to blockchain-based payments. Canada Payments (affiliated with its central bank) and the Monetary Authority of Singapore have both been experimenting with cross-border payments via blockchain; earlier this month they began testing their respective platforms together, without using third parties.
J.P. Morgan is among the banks working with both projects, with the goal of leading innovation and adoption. One day this will lead to revenues.