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Today JP Morgan announced that it intends to start testing 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 companies.
Today is Valentine’s Day, not April Fool’s Day. This is the same bank where CEO Jamie Dimon famously called Bitcoin a “fraud”. The issuance of a JPM coin does not contradict this statement.
Transfers between accounts at the same bank are pretty fast. So what’s the point?
Blockchain allows for the instant transfer of assets, be it stocks, bonds, derivatives, currencies or otherwise. But what is also needed is immediate payment. Otherwise, there is a risk that one party will provide the asset, but then the payment of a bank account fails. Having a digital currency, in particular a bank money, the exchange of the good and the payment are simultaneous. In bankers’ parlance, the legal construct is Delivery versus Payment (DvP).
Counterparty risk is passed on by the institution making the payment to JP Morgan. And JP Morgan deposits $ 6 trillion in payments every day.
So the purpose is to make on-chain payments for transactions performed on a blockchain.
For example, JP Morgan was the sole licensee for a Certificate of Deposit issued by the National Bank of Canada last year. The issue was made on JP Morgan’s Quorum blockchain which is also used for JPM Coin. Ideally, when a buyer buys a bond, they should pay out instantly with a coin rather than a slow bank transfer.
How does it work
For all customers participating in the prototype test, when they deposit money into a special account, it will be converted into coins. When they make a payment to JP Morgan or another test participant, it will be immediate. And once the transfer is complete, whether it’s a money transfer or a securities payment, the coins are converted back into a regular account balance.
JP Morgan wanted to differentiate JPM Coin from cryptocurrencies and stablecoins. It is only available to institutional clients and is currently only available on JP Morgan’s Authorized Blockchain Quorum, although it will be available on other Authorized blockchains in the future. The purpose is to use it for payments within blockchain applications. It is not for investment. Initially, a JPM coin represents US dollars, but it will add other currencies over time.
The wording used for collateral is interesting. Some naive customers have the illusion that banks keep all the money they deposit waiting to be withdrawn. They obviously don’t do this because they grant loans. So instead of saying there is a 1: 1 fiat or USD guarantee, JP Morgan says it is 1: 1 refundable 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 more than 157 member banks, it doesn’t make the payment itself.
Fungibility
And if Wells Fargo had a WF coin, could you trade it for JPM coins? Would they be interchangeable or fungible? Well it depends. Right now, assuming you trust both banks, yes, they would probably be interchangeable. But in a financial crisis, when people start to worry, the situation could change and it is conceivable that the exchange rate is not 1: 1.
At first glance, a JPM coin is the most stable and reliable coin imaginable. This is probably true with respect to some stable coins. But two alternatives could have even greater reliability.
The most reliable currency of all would be a central bank digital currency (CBDC). But significant economies are rightfully taking a cautious approach as the economic impact is unclear.
Another alternative is for a currency to be backed by bank deposits held with a central bank. This is 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 plans to launch next year.
