JP Morgan Deploys America’s First Bank-Backed Cryptocurrency to Transform the Payments Industry

  • The lender’s engineers have created “JPM Coin”, a digital token that will be used to instantly settle transactions between customers of its wholesale payment business.
  • Only a tiny fraction of payments will initially be transmitted using cryptocurrency, but the trial represents the first real use of a digital coin by a major US bank.
  • While JP Morgan’s Jamie Dimon called bitcoin a “fraud”, the bank’s chief and his officials have always said that blockchain and regulated digital currencies hold promise.

Hugh’s son

The first cryptocurrency created by a major US bank is here – and it comes from JP Morgan Chase.

The lender moves more than $6 trillion around the world every day for businesses in its massive wholesale payments business. In trials expected to begin in a few months, a tiny chunk of that will happen on something called “JPM Coin,” the digital token created by engineers at the New York-based bank to instantly settle payments between customers.

JP Morgan is preparing for a future in which parts of the essential foundation of global capitalism, from cross-border payments to issuing corporate debt, move to blockchain. It is the database technology made famous by its first application, bitcoin. But for that future to happen, the bank needed a way to move money at the breakneck speed at which those smart contracts were completing, rather than relying on older technologies like wire transfers.

“So whatever exists in the world right now, as it moves to blockchain, that would be the payment leg for that transaction,” said Umar Farooq, JP Morgan’s head of blockchain projects. “The applications are frankly pretty endless; anything that has a distributed ledger involving businesses or institutions can use it.”

For some, JP Morgan’s new currency may be an unexpected development for a technology that emerged from the ravages of the financial crisis and was meant to disrupt the established banking world.

When international payments are tested, it will be one of the first real applications of a cryptocurrency in banking. The industry has mostly avoided the asset class as being too risky. Last year, JP Morgan and two other lenders banned the purchase of bitcoins by credit card customers. And Goldman Sachs reportedly scrapped plans to create a bitcoin trading desk after exploring the idea.

Dimon beat bitcoin

Although digital currency holders may seize the news that a major financial institution is issuing its own crypto as bullish for the asset class, retail investors will likely never be able to own a JPM coin. Unlike bitcoin, only large institutional clients of JP Morgan who have undergone regulatory scrutiny, such as corporations, banks and brokers, can use the tokens.

There are other key differences between crypto and bank bitcoin, which the CEO of JP Morgan Jamie Dimon exposed a fraud that will not end well for its investors. (To be clear, he and his managers have always said that blockchain, as well as regulated digital currencies, hold promise.)

Each JPM coin is exchangeable for a single US dollar, so its value should not fluctuate, a concept similar to so-called stablecoins. Customers will receive the coins after depositing dollars in the bank; after using the tokens for a security payment or purchase on the blockchain, the bank destroys the coins and returns a proportional number of dollars to customers.

Real-time settlement

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

The first is international payments for large corporate customers, which are typically done using wire transfers between financial institutions over 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, payments will be settled in real time and at any time of the day, a- he declared.

The second concerns corporate actions. In April, JP 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 wire transfers to purchase the issue – resulting in a time lag between trade settlement and payment – ​​institutional investors can use the JP Morgan token, resulting in instant settlements.

The end use would be for large corporations that use JP Morgan’s treasury services business to replace dollars they hold in subsidiaries around the world. Invisible to retail customers, the company manages a significant portion of the world’s regulated money flows for businesses, from Honeywell International to Facebook, moving dollars for activities such as employee and vendor payments. He generated $9 billion in revenue last year for the bank.

“Money comes and goes all over the world in a big business,” Farooq said. “Is there a way to ensure that a subsidiary can represent cash on the balance sheet without having to transfer it individually? That way they can consolidate their money and probably get better rates for it. “

Looking further, the JPM Coin could be used for payments on internet-connected devices if this use for blockchain spreads, Farooq said.

JP Morgan is betting that its first-mover status and large market share in corporate payments – it has 80% of Fortune 500 companies – will give its technology a good chance of adoption, even if other banks create their own pieces.

“Almost all major corporations are our customers, and so are most of the major banks in the world,” Farooq said. “Even if this was limited to JPM’s clients at the institutional level, that shouldn’t hold us back.”

— With report by CNBC’s Kate Rooney

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