JP Morgan Deploys First U.S. Bank-Backed Cryptocurrency
The first cryptocurrency created by a major US bank is here – and it’s from JP Morgan Chase.
The lender moves more than $ 6 trillion around the world for businesses every day as part of its huge wholesale payments business. In trials set to start in a few months, a tiny fraction of this 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 foundations of global capitalism, from cross-border payments to corporate debt issuance, will 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 transfer money at the breakneck speed at which these smart contracts closed, rather than relying on old technology like wire transfers.
“So whatever is in the world right now, as it moves to blockchain, would be the payment leg for this transaction,” said Umar Farooq, head of blockchain projects at JP Morgan. “The applications are frankly pretty endless; anything that has a distributed ledger involving companies or institutions can use it.”
For some, JP Morgan’s new currency may be an unexpected development for technology emerging from the rubble of the financial crisis and supposed to disrupt the established banking world.
When international payments are tested, it will be one of the first real applications for a cryptocurrency in the banking industry. The industry has mainly avoided the asset class as too risky. Last year, JP Morgan and two other lenders banned the purchase of bitcoin by credit card customers. And Goldman Sachs reportedly abandoned plans to create a bitcoin trading desk after exploring the idea.
Dimon attacks bitcoin
While holders of digital currencies may grasp the news that a large 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 checks, such as businesses, banks, and brokers, can use tokens.
There are other key differences between crypto and bank bitcoin, which JP Morgan CEO Jamie Dimon has called a fraud that won’t end well for his investors. (To be clear, he and his managers have always said that blockchain, as well as digital currencies that were regulated, held promise.)
Each JPM Coin is exchangeable for a single US dollar, so its value should not fluctuate, similar in concept 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 customers a commensurate number of dollars.
There are three top applications for JPM Coin, according to Farooq.
The first is international payments for large corporate clients, which now typically occurs 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, 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 blockchain debt issue, 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 gap between the transaction’s settlement and its payment, institutional investors can use the JP Morgan token, resulting in instant settlements.
The end use would be for large companies that use JP Morgan’s treasury services business to replace dollars they hold in subsidiaries around the world. Invisible to retail customers, the company handles a significant portion of the world’s regulated money flow for businesses from Honeywell International to Facebook, moving dollars for activities such as employee and vendor payments. It generated $ 9 billion in revenue last year for the bank.
“Money is flowing around the world in a big company,” Farooq said. “Is there a way to ensure that a subsidiary can represent cash on the balance sheet without having to transfer it to the unit?” That way, they can consolidate their money and possibly get better rates for it.
Looking further ahead, 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 pioneering status and significant market share in corporate payments – it funds 80% of Fortune 500 companies – will give its technology a good chance of adoption, even if others banks create their own coins.
“Almost all the big companies are our customers, and so are most of the big banks in the world,” Farooq said. “Even if this was limited to JPM clients at the institutional level, it should not hold us back.”
– With report of Kate Rooney of CNBC