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Despite all the social media hype surrounding blockchain technology and other distributed ledger technologies, the CEO of JP Morgan, Jamie Dalton, called Bitcoin a fraud in 2017. This was despite the company researching the uses of the technology since 2015, while working on developing its own private blockchain on the Ethereum platform.
On February 14, 2019, the company launched the first prototype version of its cryptocurrency, called the JPM Coin. This marks an experiment in a new form of stablecoin, which will be dependent on private blockchains. This can be seen as a shift from an interest-based business model to a one that is aimed at optimising internal processes.
So, how will this impact the world of blockchain and cryptos? For that, we first need to know more about the JPM coin and whether it is truly indicative of crypto adoption.
The JPM coin is a prototype stablecoin. As the name suggests, stablecoins are a new type of cryptocurrency that provide price stability and can be supported by reserve assets. Recently, stablecoins have gained popularity, since they offer features such as security and fast processing, along with prices that are free of volatility.
The primary function of these coins is to allow global transfer of value in a cost effective and non-volatile manner.
The JPM Coin is designed with the purpose of decreasing counterparty and settlement risk for clients, while also reducing capital requirements and allowing quick value transfer. It will be backed by the fiat reserves of JP Morgan’s client accounts and will initially be available in US dollars (JPMUSD). If the experiment proves to be a success, it may be extended to other currencies, such a JPMEUR (euro-based) and JPMJPY (Japanese yen-based).
Being one of the most influential members of the Enterprise Ethereum Alliance, JP Morgan has developed a blockchain of its own, named Quorum. The Quorum blockchain is a permissioned network that consists of a separation between the public and private states and enables transfer of data between participants.
The JPM Coin project is aimed at targeting clients such as dealers, banks, brokers and other corporations for value transfer and settlement purposes. The company has made it abundantly clear that the main aim of this project is to test blockchain technology and stablecoins.
Although the mechanism through which the coins will be issued, transferred and ultimately redeemed is similar to that of other cryptocurrencies, the application areas are different from other fiat reserve-backed stablecoins.
The JPM Coin is expected to have various positive influences on the functioning of financial institutions:
The time involved in processing settlement and clearing operations is expected to be reduced by a great extent with the help of JPM Coin. When transactions are conducted on blockchain, they can be settled and cleared irrespective of business constraints. This can improve the overall efficiency of business operations.
System failures that occur in a centralised system can be decreased to a large extent. Recently, customers of one of America’s biggest banks, Wells Fargo, were unable to access their accounts due to such failure. This rarely happens in blockchain-based networks, since a number of nodes are involved in the process of validation. This means that any single point of failure cannot lead to complete shutdown of operations. In case a node is not functioning properly, other nodes still continue to work.
JPM Coin can also reduce the cost for transactions between institutional clients. The reason for this is that the transactions can be carried out without the need of pre-established trust, since blockchain architecture is known for its transparency and high auditability of transactions.
Accenture, which is one of the largest management consulting firms, has provided an estimate of the potential cost savings due to blockchain. According to their estimates, financial reporting costs can be lowered by up to 70% through optimisation of data quality and transparency due to blockchain. In addition, 50% savings can be achieved in centralised operations, such as client onboarding and KYC, due to data sharing across several financial institutions.
Expenses arising out of business operations, such as middle office, settlement and clearing activities, can be further decreased by 50%. There could also be a 30% to 50% decrease in compliance costs due to high transparency and ease of audit of financial transactions.
Considering that JP Morgan is one of the world’s largest banks, even a small part of assets dedicated as collateral for JPM Coin can enhance its position as the largest stablecoin issuer.
Although JPM Coin has the potential to impact the traditional financial services, such as clearing and settlement, it will not displace publicly traded, liquid stablecoins anytime soon.
Until the availability of JPM Coin extends to the larger market of commercial institutions, apart from existing JP Morgan clients, it would have limited impact on the cryptoasset market. But, in the long run, there is a possibility that JPM Coin, with support from future projects by other large banks, can have a huge impact on the global stablecoin industry. This can happen if the applications of JPM Coin are continuously upgraded.
However, any sudden development of a global decentralised economy is unlikely, given that most institutions are operating on public blockchains at present.
Banks currently are an integral part of the collateralised stablecoin system and these financial institutions can provide support for the funds of stablecoin providers. Taking things such as the strategic network, size and scope of large banks like JP Morgan into consideration, they can leverage their partnerships and large asset bases to increase the impact of the stablecoin services offered.
If this pilot crypto project proves to be a success, it could serve as a driving force for widespread adoption of private blockchain. Currently, it can be seen as an intermediate step for mass adoption of cryptocurrency.
