Today JP Morgan announced it plans to start trialing JPM Coins to make instant payments using blockchain. It will only be used to transfer money between JP Morgan accounts held by other institutions such as banks, broker-dealers and corporates.
It’s Valentines Day today, not April Fools. This is the same bank where the CEO Jamie Dimon famously called Bitcoin a “fraud”. Issuing a JPM Coin is not inconsistent with that statement.
Transfers between accounts at the same bank are pretty quick. So what’s the point?
Blockchain enables the instant transfer of assets, whether that’s stocks, bonds, derivatives, currencies or others. But what’s needed is immediate payment as well. Otherwise, there is the risk that one side delivers the asset, but then a bank account payment fails. By having a digital coin, particularly a bank coin, the exchange of the asset and payment are simultaneous. In banker lingo, the legal construct is Delivery versus Payment (DvP).
The counterparty risk is shifted from the institution making the payment to JP Morgan. And JP Morgan settles $6 trillion in payments daily.
So the purpose is to make on-chain payments for transactions executed on a blockchain.
As an example, last year JP Morgan was the sole dealer for a Certificate of Deposit issued by the National Bank of Canada. The issuance was done on JP Morgan’s Quorum blockchain which is also being used for JPM Coin. Ideally, when a buyer purchases a bond, it should make the payment instantaneously with a coin rather than a slow bank transfer.
How it works
For any clients participating in the testing of the prototype, when they deposit money in a special account, it will be converted into coins. When they make a payment to JP Morgan or another trial participant, it will be instant. And once the transfer is complete, whether that’s for a money transfer or a payment for securities, the coins are converted back to a normal account balance.
JP Morgan was keen to differentiate JPM Coin from cryptocurrencies and stablecoins. It’s only available to institutional customers, and it is currently only available on JP Morgan’s permissioned blockchain Quorum, though it will be available on other permissioned blockchains in future. The purpose is to use it for payments within blockchain applications. It’s not for investment. Initially, a JPM Coin represents US dollars, but it will add other currencies over time.
The wording used re collateral is interesting. Some naive customers have the illusion that banks keep all the money they deposit waiting to be withdrawn. Of course they don’t because they make loans. So instead of saying there is 1:1 fiat or USD collateral, JP Morgan says it is 1:1 redeemable in fiat currency held by JP Morgan.
The bank also differentiated between its Interbank Information Network (IIN), and JPM Coin. IIN is about exchanging data between its 157+ plus member banks, it’s not making the payment itself.
What if Wells Fargo had a WF Coin, could you swap them for JPM Coins? Would they interchangeable of fungible? Well, that depends. Right now assuming you have confidence in both banks, yes they probably would be interchangeable. But in a financial crisis when people start to have concerns, that situation could change, and it’s conceivable that the exchange rate may not be 1:1.
On the face of it, a JPM Coin is the most stable and trustworthy coin one could imagine. That’s likely true in comparison to some stable coins. But two alternatives could have even greater trustworthiness.
The most trustworthy coin of all would be a Central Bank Digital Currency (CBDC). But significant economies are rightly taking a cautious approach as the economic impact is unclear.
Another alternative is for a coin to be backed by bank deposits held at a central bank. That’s the Utility Settlement Coin (USC), the project supported by 17 major financial institutions including Barclays, BNY Mellon, Canadian Imperial Bank of Commerce, Credit Suisse, Deutsche Bank, HSBC, ICAP, MUFG, NEX, Santander, State Street and founder UBS. The technical partner is Clearmatics, and it plans to launch next year.