What the JPM Coin means for the Future of Payments

By David Goodwin, Eternic

After a few months of relative calm where blockchain has taken somewhat of a back seat, it was recently thrust back into the limelight with the announcement from JP Morgan that they’ve launched a digital coin, with the not so adventurous name of, yes, you guessed it — the JPM Coin.

In this blog, we´ll break through some of the hype and get to the bottom of exactly what JPM has launched and what it means for the future of cryptocurrency within financial services.

What exactly has JPM launched?

In short, it’s a pretty a simple concept. JPMs digital coin is designed to allow instantaneous payments between two parties using blockchain. The digital coin isn’t exactly money; however, each coin holds the equivalent value of 1 U.S dollar. The idea being that whenever a client sends money to another client over the blockchain, the transfer is instantaneous and redeemed for the equivalent amount of US dollars at the other end.

The coin will initially run on the Quorum platform, although it’s expected that the coin will be subsequently extended to run on other platforms. In addition, although the JPM coin is currently linked to the U.S dollar, its fully anticipated that the JPM Coin will be extended to other currencies.

It seems that the JPM Coin is still some ways off from launch, and to date, only limited testing has been carried out on the platform. JPM have stated they plan to run further prototype testing with a small number of institutional clients, with plans to expand the pilot program in late 2019. Interestingly, it appears JPM have only had limited engagement with the regulators regarding the rollout.

What is the JPM Coin trying to solve?

The current payments and settlement process (the crediting and debiting of bank accounts between two financial institutions) is expensive, inefficient and time consuming for banks, tying up a large volume of a banks cash for lengthy periods of time.

Any truly global bank will consistently hold simultaneous debit and credit positions with other counterparty banks across the world. Due to the complexities in the current system, banks are often unable to ‘net out’ their positions across the respective counterparty banks. As a result, they will hold collateral to cover their exposure. Tying up capital is costly for banks, in particular in the context of the demand from regulators for banks to increase their level of capital provisions.

By moving to a close to a real-time gross settlement model through blockchain, banks have the opportunity to minimize the issues they currently face with global settlement.

In addition, it offers the opportunity to remove a number of the third parties involved in international transactions, where each party takes a cut of the transaction, whilst the transaction takes days to execute as the money works its way through the different third parties.

Problem solved or just good marketing?

In reality, the JPM coin probably falls somewhere between the two. JPM is one of the largest banks in the world and financial service companies are notorious for relying on antiquated systems and technology. The fact they are starting to deploy blockchain applications in a financial services context is a huge step forward for both the bank and blockchain technology. The announcement from JPM helps to move the blockchain conversation forward. Now, it´s not a question of if, but a question of when blockchain will become a standard for global payments and settlement.

That said, JPM has used blockchain to solve an internal use case and their focus appears to be on reducing their own clients’ counterparty and settlement risk. By introducing their own coin through a closed network, it’s unclear how their solution will help anyone outside the immediate sphere of JPM. Within the press release, JPM emphasized the point that “only institutional customers passing J.P. Morgan KYC can transact with these coins.”

What the JPM Coin doesn’t address is how to solve the global challenges with counterparty risk, and how they will work with other banks and partners to homogenize what is currently, a very fragmented model for financial settlement. In order for the JPM coin to be a true success and a force for good, it needs other banks to be supportive of the project — which at this stage seems a long way off.

David Goodwin is the Senior Project Manager for Eternic. To learn more read: The Fluid Solution for Global Payments and Settlement