Is JPMCoin a cryptocurrency and what should SWIFT do about it?

It’s not often that the Twittersphere I watch lights up in deep conversation, but a long one started last week thanks to JP Morgan’s announcement of the JPM Coin. Here’s a decent piece of coverage on CNBC:

(JPM Coin) will be one of the first real-world applications for a cryptocurrency in banking. The industry has mostly shunned the asset class as too risky. Last year, J.P. Morgan and two other lenders banned the purchase of bitcoins by credit card customers. And Goldman Sachs reportedly shelved plans to create a bitcoin trading desk after exploring the idea.

Dimon bashed bitcoin

Though holders of digital currencies may seize on the news that a major financial institution is issuing its own crypto as bullish for the asset class, retail investors will probably never get to own a JPM Coin. Unlike bitcoin, only big institutional clients of J.P. Morgan that have undergone regulatory checks, like corporations, banks and broker-dealers can use the tokens.

There are other key differences between the bank's crypto and bitcoin, which J.P. Morgan CEO Jamie Dimon has bashed as a fraud that won't end well for its investors. (To be clear, he and his managers have consistently said that blockchain, as well as digital currencies that were regulated, hold promise.)

Each JPM Coin is redeemable for a single U.S. dollar, so its value shouldn't fluctuate, similar in concept to so-called stablecoins. Clients will be issued the coins after depositing dollars at the bank; after using the tokens for a payment or security purchase on the blockchain, the bank destroys the coins and gives clients back a commensurate number of dollars.

Real-time settlement

There are three early applications for the JPM Coin, according to Farooq.

The first is for international payments for large corporate clients, which now typically happens using wire transfers between financial institutions on decades-old networks like Swift. Instead of sometimes taking more than a day to settle because institutions have cut-off times for transactions and countries operate on different systems, the payments will settle in real time, and at any time of day, he said.

The second is for securities transactions. In April, J.P. Morgan tested a debt issuance on the blockchain, creating a virtual simulation of a $150 million certificate of deposit for a Canadian bank. Rather than relying on wires to buy the issuance — resulting in a time gap between settling the transaction and being paid for it — institutional investors can use the J.P. Morgan token, resulting in instant settlements.

The final use would be for huge corporations that use J.P Morgan's treasury services business to replace the dollars they hold in subsidiaries across the world. Unseen by retail customers, the business handles a significant chunk of the world's regulated money flows for companies from Honeywell International to Facebook, moving dollars for activities like employee and supplier payments. It generated $9 billion in revenue last year for the bank.

It’s a mistake to call it a cryptocurrency as it is clearly described by the bank as a ‘digital coin’, and that they do not endorse cryptocurrencies per se.

Anyways, regardless, there was a long thread started by my friend Ajit Tripathi on twitter that caught my attention. It began with a not so innocent remark by Ajit that this should have SWIFT worried:

So far the only entity that I think needs to be freaked out about #JPMCoin is @swiftcommunity not @coincenter #blockchain@ConsenSysAndrew @MonicasSinger @colingplatt @sytaylor @dgwbirch @Chris_Skinner @FinTechInsiders @AnthonyMacey

— Token Artist (@chainyoda) February 15, 2019

Which sparked a great debate online, particularly between Ajit and Colin Platt. For those who don’t know, Ajit was leading blockchain developments at Price Waterhouse Coopers, but is now the FinTech lead at Consensys, whilst Colin is an independent and co-host of our very own Blockchain Insider podcast with Simon Taylor of 11FS.

The gist of their debate was whether SWIFT should be worried, with Ajit saying they depend on volume of messaging over their network and JPM Coin threatening to remove a great deal of that traffic which would mean lower revenue and less long-term viability of the SWIFT network. Colin argued that SWIFT depends on subscriptions and not traffic, and is a low value business already generating under$1 billion in revenues per year.

Then there was Mr. Birch’s comment.

“The JPM Coin isn’t money per se. It is a digital coin representing United States Dollars held in designated accounts at JPMorgan Chase N.A.” https://t.co/g3pnvBLkz1

— Dave “Straight Outta Woking” Birch (@dgwbirch) February 16, 2019

Dave is a very clever and deep learning person at the bowels of financial technologies and knows what he’s talking about. He went on to question exactly what JPMorgan has announced, as he claims it doesn’t make any sense.

Ah well, I suggest you read the whole chain and the announcement itself, and make up your own mind.

Meantime, some think that Ripple should be the ones to worry but Ripple operates for multiple counterparties, not as an internal settlement coin, so it addresses a different space. Could JPM Coin take over from XRP longer term would purely be down to whether counterparties trusted JPMorgan more than Ripple, and I suspect the latter can maintain attraction as an independent system, rather than as one owned by a potential competitor.