JPM Coin went live last week when it was used by a large unnamed JP Morgan tech client to send payments around the world. Woohoo!
Why am I so excited about the JPM Coin?
A 150-year-old bank with a $3tr balance sheet that processes $6tr worth of payments every single day is using blockchain technology to power its payment rails. If ever there was proof that blockchain is moving from the shadows to the mainstream, this is it. There couldn’t be a better candidate endorsing this technology.
Cryptocurrencies have been this mysterious math-cloaked asset that one buys hoping its value will go up as more people start believing in the fiction (just like they believe in the fiction that US Dollar has value or diamonds have value). JPM Coin is a real-world use case of blockchain technology like precision engineering is a real-world use case for diamonds.
Let us start by clarifying what JPM Coin is not:
* It is not a regular cryptocurrency. Actually, it isn’t a cryptocurrency at all.
* It has certain features of a stablecoin but it isn’t that either. (We explain in detail later)
* It is not an investment asset. One doesn’t buy it hoping its value will climb.
* It is not available to retail individuals. You and I can’t buy it.
What is a JPM Coin then?
JPM Coin is the core of a faster, cheaper, and more secure payment system that has the potential to save hundreds of millions of dollars in processing fees.
=> It is a private digital coin, pegged to the US$, that uses blockchain technology to instantly transfer payments between JP Morgan’s institutional clients.
How does JPM Coin work?
* Institutional clients buy JPM Coin by depositing funds into a designated account.
* They use JPM Coins to make payments on the JPM payment processing blockchain.
* They can redeem their JPM Coin for US dollar once they're done.
So does that make it a stablecoin like USDC, Libra or Tether? Let’s compare
* USDC is pegged to the US Dollar, and backed by US Dollar i.e. 1 USDC = 1 USD and there is a bank account somewhere that holds an equivalent amount of USD as there are USDCs in circulation to maintain the peg. You can go to the bank and redeem your USDC for USD if you so desire.
* If Libra ever sees the light of day, it will be pegged to several individual global currencies and will be backed by cash and cash equivalents.
* Tether is pegged to USD but no one is clear on how well Tether is secured. It is suspected that Bitfinex used the funds backing Tether to cover almost $850mn of lost funds in the Bitfinex Exchange. (I’m still scratching my head as to why Tether has the highest circulation among stablecoins and is the 3rd largest cryptocurrency by market cap.)
=> JPM Coin is pegged to USD but is not backed by hard cash. It is backed by the $3 trillion balance sheet of JP Morgan. Nothing beats having actual cash back a stablecoin. However, JP Morgan with its 150-year history as a trustworthy bank sounds like adequate protection.
Why do we need a blockchain-based payment tool? What is wrong with the current system of payments?
The current payment system is highly convoluted- It requires way too many intermediaries (issuing bank, beneficiary bank, 2 sets of correspondent banks, clearinghouses, Fedwire, Swift, etc) and each intermediary adds to the processing complexity, cost, and time.
=> Let’s say that someone in the US needs to make a payment to someone in France. First, a SWIFT message is sent to the sending bank (Bank A), which sends a payment request to its correspondent bank (Bank B) via Fedwire, which in turn sends a SWIFT message to its correspondent bank in Paris (Bank C) which in turn transmits the value using SEPA to the recipient bank (Bank D) and finally the recipient bank credits the supplier's account.
Fintech players have built on the legacy payment rails instead of replacing the payment rails - The many new (innovative?) FinTech players that we hear of, have mainly built on the infrastructure of legacy systems. They’ve built user-friendly apps and user interfaces that plug into the ACH system. They’ve replaced user account numbers and routing numbers with phone numbers and email ids that are already saved in phones. They’ve made payments through QR codes possible that removes the need to enter all details as is required for online payments.
=> Post all this innovation, the backend has remained the same. The new FinTech players have taken 1 part of the payment process and made it easier but the layers have increased and the intermediaries involved have grown.
=> A blockchain-based payment system is an overhaul of the entire payment process as opposed to a tweak of the payment system. Here the only intermediary involved in the blockchain network and hence the only intermediary that must be paid is the blockchain operator. No intermediaries, no delays, no unnecessary fees.
Working with Regulators
Being a regulated bank, JP Morgan is likely to ensure that JPM Coin abides by all banking laws including but not limited to Anti-Money Laundering (AML) and Know-Your-Customer (KYC) requirements. This clearly helps with blockchain's reputation with regulators.
JPM Coin is not the only blockchain-based payment system
Visa has been working on Visa B2B Connect, a platform based on distributed ledger technology to facilitate cross-border B2B payments since 2018. IBM announced World Wire payments network in 2019. Even SWIFT has launched a proof-of-concept trial with R3’s blockchain-based Corda platform