JPM Coin's focus on B2B breaks the bitcoin mold

JPMorgan Chase CEO Jamie Dimon has never been shy about his disdain for bitcoin and similar cryptocurrencies, calling them everything from dangerous to "fraud."

The newly unveiled JPM Coin — a digital coin prototype for institutional clients and business-to-business money flows that represent U.S. dollars held in Chase accounts — isn't a change of heart.

By design, JPM Coin won't go on the wild ride of bitcoin's up-and-down value; one JPM Coin is always worth $1. JPM Coin is not meant for consumer payments, but rather is a specific technology for a specific use case that the bank controls. Its value comes not from JPM Coin's appeal, but from JPMorgan's titanic wholesale payments business that processes more than $6 trillion daily.

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"Our wholesale payments business includes our Treasury Services business, which processes about $5 trillion daily, and our Merchant Services business, which adds more than $1 trillion daily," JPMorgan spokesman Brian Marchiony said.

In practice, the movement of JPM Coin won't look substantially different from other money flows.

A JPMorgan client putting deposits in a designated account receives an equivalent number of JPM Coins, which are used for transactions over a blockchain network with other JPMorgan clients. Ultimately, the holders of JPM Coins redeem them for U.S. dollars at JPMorgan.

"We have always believed in the potential of blockchain technology and we are supportive of cryptocurrencies as long as they are properly controlled and regulated," Umar Farooq, JPMorgan's head of digital treasury services and blockchain, said in a presentation.

The JPM Coin will be issued through the bank's Quorum Blockchain, and plans are in place to extend it to other platforms. Because it is linked to the U.S. dollar, the JPM Coin is designed to instantaneously transfer value rather than information, as seen in the Interbank Information Network, the bank said.

Crypto's course correction
As the cryptocurrency markets have matured, it's become increasingly clear that bitcoin hasn't lived up to its promise of becoming an everyday payment mechanism. While niches such as gun shops have seen value in accepting cryptocurrencies, much of the attention has instead focused on how bitcoin's underlying distributed ledger technology, blockchain, can improve the process of moving large amounts of money across vast distances.

Some speculated that the coding behind bitcoin could replace the messaging network that Society for Worldwide Interbank Financial Telecommunication has provided for decades. Swift responded to that threat with its Global Payments Innovation, a process for tracking payments that keeps legacy systems relevant and essentially gets all member banks operating and communicating with similar processes and standards.

Possibly taking its cue from its neighbors in Canada and the Project Jasper research, JPMorgan has taken a cautious approach to cryptocurrency and blockchain up to now.

The Project Jasper coalition of Payments Canada, the Bank of Canada and the R3 blockchain consortium has tested the crypto and distributed ledger process for nearly two years now, and determined that banks need to seriously study the potential costs and return on investment before converting legacy systems to blockchain.

In the past two years, banks have emphasized the security and tracking capabilities of blockchain. Barclays, Credit Suisse, Canadian Imperial Bank of Commerce, HSBC, MUFG and State Street joined UBS, BNY Mellon and other financial institutions to continue development of a "utility settlement coin" as partners to take advantage of blockchain.

JPMorgan seems to be on the same track in bringing JPM Coin to banks, brokers and corporations. Companies like Square — which supports bitcoin only in its consumer-facing Cash app — are increasingly the outliers.

Bitcoin for business
JPM Coin is currently in a pilot phase to explore the advantages it gives clients over other currency settlement processes.

"It does seem to give some form of cash-on-ledger for digital assets managed by 'smart contracts,' which would indeed be useful since you wouldn't have to rely off-chain into the legacy system every time you wanted to settle something on-chain," said Tim Swanson, CEO of Post Oak Labs, a tech advisory firm. "Having a real 'settlement asset' on-chain is necessary for actual adoption."

JPMorgan will run into some risks, that they are most certainly aware of, Swanson added. One of those is JPM Coin is backed by commercial money, and isn't backed by central bank reserves.

"Because it isn't sovereign money, it's a corporate debt issuance as it's backed by corporate liability, not central bank assets," Swanson said.

Plus, even though JPM Coin is built on an open-source process, it is implemented only through the bank's Quorum blockchain. "So, you effectively have vendor lock-in with JPMorgan," Swanson added.

"The main point is that it's commercial bank money," he said. "Transacting in JPM Coin is basically JPM as settlement agent."