A critical analysis of JPM coin

A few days ago, JP Morgan Chase NA, announced its plans to create its own digital coin for payments. In this article, let’s take a critical look at what it is , what it is not and what is the whole point of creating a digital coin.

What is JPM coin?

JPM coin is a digital coin (or token) representing a fiat currency (USD). It is based on blockchain technology. It enables instantaneous transfer of payments between institutional accounts held with JPM. JPM-coin is aimed at creating an internal distributed-ledger based settlement system within JPM.

How does it work?

1. JPM client deposits money to a designated account and receives equivalent JPM coins
2. JPM clients use these coins for transactions over the JPM blockchain network with other JPM clients.
3. Holders of JPM coins can redeem them for USD at JP Morgan bank.

Is JPM coin real money?

No, it is not, and does not represent legal tender. It is only a digital representation of fiat currency held in institutional accounts within JP Morgan Chase NA. It has zero intrinsic value outside of the JPM ecosystem. (unlike let’s say Bitcoin). But within JPM bank, one JPM coin has a value equivalent to 1 USD.

What are the use cases of JPM coin?

Primary use case: Settle cross-border payments between institutional clients instantaneously. This falls under wholesale payments business where JPM currently moves over $6 trillion daily as part of this business. This is essentially a replacement for the age-old wire transfer mechanism. Settlement times can be cut from days to just minutes (or even seconds). Bank’s institutional customers can transfer cross-border payments in real-time. Also, SWIFT payments are known to have error rates of 10% or more. This results in payment disputes which can be avoided with JPM coin by having a verifiable immutable log of transactions that can be verified by the respective parties.

Secondary use cases:

JPM also is considering using it for other scenarios such as

• Instant settlement for securities issuance,
• Replace US dollars held internationally by subsidiaries of major corporations using JPM’s treasury services. This in itself constitutes a huge volume as US companies are holding over $2.6 trillion in overseas earnings outside the country (though I think much of it is for taxation reasons).
• Corporate debt issuance . Here I think it does not refer to issuing corporate bonds for retail investors, but more of private placement (where bonds are issued to qualified investors such as banks, financial institutions , funds etc).

Does JPM coin have US regulatory approval?

Not yet. They are working on it. JPM coin is still only a prototype.

Who is this targeted at?

It is available for institutional customers who hold accounts with JP Morgan Chase NA for business to business money flows. It is not available to individual consumers. It is not available to institutions that are not customers of JP Morgan.

Is JPM coin a cryptocurrency?

No, it is only a digital currency, not cryptocurrency, though it uses blockchain technology. It is only used privately between clients of JPM . JPM coin differs from cryptocurrency in the following ways:

• Cryptocurrencies operate on the public blockchain networks, they have a predetermined monetary policy and trade at market rates.
• Unlike cryptocurrencies, not everyone can buy/sell/own JPM coin, it is only issued to permissioned customers having designated accounts.
• Using a cryptocurrency introduces market risk due to its inherent volatility, so in that sense using a stable coin is more appropriate than cryptocurrency for such corporate payments use cases.

Also JPM coin is different from other fiat-backed stable coins (such as Tether, Circle’s USD coin, Paxos standard tokens , Gemini dollar), in that JPM coins are not publicly tradeable. It is not clear how collateralized JPM coin is going to be in comparison with other stable coins, so I’m not commenting on that for now.

What is the technology behind JPM coin?

JPM coin will be issued on Quorum, an enterprise version of Ethereum. This is a permissioned network that requires prior identification and authorization by JPM for clients to use this feature. JP Morgan has said they plan to support other blockchain networks and other fiat currencies at a later date.

Why couldn’t this be done with a regular database?

Technically, JP Morgan can still issue JPM coins and store the ledger data in a relational database. They can then show the available token balances against the corporate client accounts, and allow them to transfer tokens to their counter-parties. The settlement can happen behind the scenes. Holders of JPM coin tokens can approach their nearest JP Morgan bank if they want to redeem them for USD.

But what’s the point of this? What exactly do clients gain additionally from such an arrangement?

Another option for JPMorgan could have been to develop a new private interbank settlement network without any coin, that lets its customers instantly transfer dollars deposited at JPM.

So, why did JP Morgan bring in blockchain here for a payment settlement system that involves only its own customers? Here are two guesses:

1) First possibility is that JP Morgan’s large corporate customers could be asking the bank for a blockchain solution to speed up transaction settlements. If JP Morgan had provided another intermediated real-time settlement solution without blockchain, JPM would be hard-pressed to explain why it did not do it earlier. Now everyone is happy with a blockchain-enabled solution.

2) The other possibility is that JP Morgan wants to position this as a dis-intermediated private network-as-a-service, where corporate clients can participate (for a small fee) to do peer-to-peer (or should I say B2B) transactions with other JPM clients. In this scenario, JPM does not even need to be a party to a payment transaction between two of its corporate clients, except when the money needs to be exchanged from token to USD and vice versa. Corporate clients will be able to publicly verify all transactions. The ledger itself , being based on Quorum, would be immutable.

Now this argument would hold water if and only if the validators on the quorum network are not all controlled and run by JP Morgan. Otherwise, the whole purpose of having a decentralised blockchain solution is lost.

Is JPM coin a new idea?

Well, not really. Ripple has been selling this idea to financial institutions for years, that cross-border payments can be handled cheaper and quicker through crypto-payments . Banks such as Citi, UBS, Deutsche have been working on this kind of a ‘utility settlement bank coin’ for a couple of years now.

But what is unique about JPM idea is that it eliminates the volatility associated with a cryptocurrency such as XRP by issuing a stable coin which is pegged to USD. But on the flip side, the banks and corporate customers will have to trust JPMorgan, as opposed to trusting a larger consortium run by Ripple for its peer-to-peer payments. And also the JPM coin is worthless outside JPM.

Is JPM Coin safe compared to Ripple/XRP?

Here the question arises as to how decentralised the network is.

Ripple operates a consensus mechanism with 150 validator nodes that validate new ledger entries every few seconds. Ripple itself runs just 7 of these nodes and does not have control over the other nodes (or so they claim).

But in case of JPM Coin, it’s not clear who will run these validator nodes . If they are all going to be run by JPMorgan, then customers are bound to feel uneasy.

Also JPMorgans’ competitors are not likely to trust this. Nor are they likely to use or promote JPC coin as could mean routing business away to JP Morgan.

Some of the other unanswered questions regarding JPM coin in my mind include:

1. Will JP Morgan be required to hold reserves to cover their coins?
2. Can US businesses use this as a vehicle to to trading with prohibited countries ?
3. How decentralised will the JPM coin private network really be?

In summary, JPMorgan experimenting with blockchain for a real-time settlement system for its own customers is a shot in the arm for blockchain technology adoption, at least in terms of perception and messaging. But, it is not entirely clear whether the technology is really being used in the right way for this solution.

I invite you to share your views and perspectives on the topic.