Why Almost Everybody Is Missing the Big Picture with the JPM Coin?

The recently announced JPM coin found many in the industry unprepared. To me this prototype sounds not like a creation of a new cryptocurrency or a stablecoin, however a step in the right direction for further adoption of the permissioned blockchain technology in the financial services, trade, retail and consumer payments.

Quite early in 2019 JPMorgan Chase was portrayed by Fortune as the‘World’s Most Admired Megabank’ . There should be a reason for it.

Why JPM Coin is Neither ‘A Cryptocurrency’, Nor ‘A Stablecoin’?

Taxonomy they say is the art of practice and science of classification. With the blockchain as moving target, there is not yet consensus on the taxonomy for all projects and what exactly is a cryptoasset or a cryptocurrency. The review article in Vol 4 (2019) of The Ledger, called A Taxonomy of Blockchain Technologies: Principles of Identification and Classification states that:

“Standards can emerge naturally because of market adoption (industry-driven) or can be imposed by institutes and organisations. In the first group, we may include initiatives like the Accord Project, the ChinaLedger or R3. In the second group, we may refer to the initiative conducted by the International Organization for Standardization (ISO) with the establishment of the technical committee ISO/TC 307 on Blockchain and Distributed Ledger Technologies.”

By chance, I was just appointed by the SBS to provide technical expertise to the projects currently under development under ISO/TC 307 and therefore I have to pay special attention and even scrutinise the terminology in the field.

The most completed paper with classification I have seen yet is by the industry body GDF in the Global Digital Finance Taxonomy for Cryptographic Assets. Based on it we can qualify JPM Coin as ‘A Payment Token’, issued by a commercial bank on a permissioned network:

“Payment Tokens are cryptoassets that have intrinsic features designed to serve as a general purpose store of value or medium of exchange. By “general purpose,” we mean that these tokens are intended to serve as a medium of exchange for generally any goods, services, or assets, and thus are similar to more traditional currencies in that respect.
Such general-purpose Payment Tokens could be created and distributed by any number of organisations or methods, including:
1. Central banks or other government departments
2. Commercial banks
3. Companies issuing something akin to card-based payment instruments (e.g. Apple Pay)
4. New models and distributions — e.g. a decentralised network creates, distributes and operates a crypto payment token, as was the case with Bitcoin.”
Global Digital Finance, Code of Conduct — Taxonomy for Cryptographic Assets From the Perspective of General Global Regulatory Standards, 10 October 2018.

There are several reasons not to qualify the recently announced JPM Coin as ‘A Cryptocurrency’or ‘A Stablecoin’:

  • It is relatively centralised because of the usage of a proprietary forked copy of the Ethereum (a project, called Quorum);
  • It is dependent on the central banks and banking operations in general;
  • By regulation funds on the JPM Coin network would still be subject to restriction and confiscation;
  • It is not publicly tradeable or exchangeable. It is designed to enable ‘instantaneous transfer of payments between institutional accounts’;
  • It is 1:1 redeemable in fiat currency held by J.P. Morgan (e.g., US$), however on a permissioned network, developed by JPMorgan Chase.

So Why Bother with the JPM Coin?

What many industry observers are missing in the big picture is the line in the JPM Coin announcement for its primary users: ‘Blockchain use cases involving payments’. This could mean a lot — an impact on custody, clearing, and settlement, but probably an impact on the retail industry.

By far this is the most interesting in the announcement. Intentionally or not, JPM opened the door for trade and retail opportunities. In all fairness consumer payments is an area where the blockchain technology has not yet provided a viable business model and my personal beliefs are that very soon this area will become very hot.

Retail and the Future of the Blockchain Technology for Consumer Payments. International Trade.

It will certainly take time, many developments and tests before the permissioned distributed ledger systems enter the world of retail. What we see now with projects like JPM Coin is putting the puzzle together:

  1. A retail or supply chain where each party is a “known party”.
  2. Banking that works 24/7 with as little as possible friction.
  3. Blockchain and DLT to become potential successor to electronic data interchange (EDI) for quickly and seamlessly transmitting contractual information between trading parties.

It is important to know that these thoughts are no longer theoretical. In 2018 a consortium, formed of AB InBev, Accenture, APL, Kuehne + Nagel, and the European Customs Organisation successfully tested a blockchain solution that can eliminate the need for printing shipping documents and save freights and logistics hundreds and millions annually. In the UK a recently founded Retail Blockchain Consortium, led by MonoChain, UCL & Oracle aims to facilitate collaboration, the pooling of resources and platforms, knowledge transfer, and mitigation of risks in the adoption of DLT for its members. The impact of the Blockchain on international trade was discussed in the European Parliament with a report by Emma McClarkin, MEP and in All Party Parliamentary Group on Blockchain.

The size of the market is big and if players have the skin in the game, there will be a room for many DLT projects like Voltron (digitalising letter of credit) and Marco Polo (providing payment commitment solutions like guarantees and open account trade finance solutions such as receivable discounting and factoring). For sure Permissioned Blockchain Solutions will further seek adoption in the institutional private space and this is the main focus of the company I am managing — the blockchain technology solution provider INDUSTRIA.

To me, JPMorgan Chase is building an extension to other business lines including trade and retail.

Without any doubt, JPM Coin aims to cut the slack, reduce the baggage and friction in the existing systems. The interesting part of the projects is that with just an announcement, JPMorgan Chase displayed the enormous potential for innovation in areas like trade and retail. Every major player from every industry is now thinking ‘coins’ and ‘tokens’ on private blockchains. Ironically even experts who ‘lost faith in private blockchains’ had missed the big picture are now praising the DLT technology.