For marketing purposes, cryptocurrency packs a wallop for the world’s mega banks. Their PR departments carefully place announcements about crypto projects and blockchain trials with preferred, high-profile news outlets that run glowing stories about them.
There are reasons to be skeptical about these stories. Swiss stalwart UBS, along with 10 or so other financial institutions, has been working on a cryptocurrency for banks since at least 2015 (paywall). That project, which was supposed to have a limited launch in late 2018 (paywall), still isn’t live and has been mostly silent for nearly four years. Goldman Sachs’ bitcoin trading desk has reportedly been shelved. The US Federal Reserve has considered the viability of a Fed Coin and concluded that it wouldn’t make much sense. The combination of crypto and big financial institutions has been heavy on hype and low on results so far.
For that matter, what JPMorgan is proposing with “JPM Coin” isn’t that unorthodox. Although it’s less common now, commercial banks have a long history of printing their own notes. When we make payments with a credit card or app, we are exchanging digitized commercial-bank money. Nobody gets too excited about this, because it doesn’t use a blockchain.
Here’s what JPMorgan is up to: the lender says it is the first US bank to test a digital coin over a blockchain network that represents fiat currency. The idea is to use it to transfer money between institutional customer accounts. It won’t be available to consumers to buy or trade. Each token would represent a US dollar held by JPMorgan, the biggest US bank by assets.
The Wall Street bank says it could use JPM Coin for international payments between its large customers. Even when sending money between two of JPMorgan’s own legal entities—from JPMorgan New York to JPMorgan London, for example—there needs to be an audit trail, according to Peter Randall, president and founder of blockchain financial services company SETL. Right now that takes place via Swift, an interbank messaging cooperative.
If regulators sign off on it, JPMorgan might be able to replace Swift with a cryptographically secured ledger system that could be faster and save it money. “Right now that has to go through unbelievable levels of reconciliations,” Randall says. “Each of those banks is a legal entity with its own balance sheet, own regulations, and directors.”
For its part, Swift has been upping its game and says that blockchain isn’t able to process payments more quickly than other technologies. Among the remaining roadblocks to faster payments tend to be regulations that blockchain can’t erase, or things like one of the banks being physically closed when the transfer is sent (this could obviously be automated without a blockchain).
Perhaps, however, newfangled distributed computer networks could help bank executives sleep better at night. Last year, JPMorgan CEO Jamie Dimon said cyber risks are the financial system’s greatest vulnerability. By definition, the blockchain ledger is distributed among multiple parties, meaning it should be resilient against attack.
JPMorgan customers may be willing to use JPM Coin—they’re already relying on the bank to hold their money, after all. But it’s not clear that any other bank would want to accept it. It’s also far from settled whether the system could process transactions quickly enough to replace existing infrastructure. ”Unless Citi or Deutsche Bank or HSBC is prepared to accept JPM Coin, you can’t use it outside the closed loop,” says Randall, whose company promotes its own blockchain system that uses central bank money and connects to the European Central Bank‘s cross-border payment platform.
Citigroup CEO Michael Corbat, meanwhile, said that blockchain won’t be a game changer anytime soon (paywall) because financial companies are moving at different speeds to adopt such technology (it’s like being the only one of your friends to own a telephone). Even so, he has high expectations for it in the medium- to long-term for things like trade finance, which has become a rote answer for executives seeking to explain crypto’s promise for mainstream uses.
As for JPMorgan, the bank hasn’t quite explained why it needed to create a digital coin. Is the lender under pressure because businesses and consumers have found cheaper, easier ways to handle cross-border payments? Or, perhaps, has it discovered that a crypto pilot program is cheaper than paying for advertising elsewhere?
It’s too soon to say whether JPM Coin will mark any sort of turning point in global finance. If past crypto announcements from big banks have taught us anything, it’s to beware of the hype. —John Detrixhe
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Chart interlude
Tallinn calling
Crypto trading volumes have fallen in most markets in the past few months, but a few managed to buck the trend. One is Estonia, where CryptoCompare says Bibox and P2PB2B have seen increased buying and selling. P2PB2B has offices in Tallinn, but says its headquartered in Switzerland, while BiBox calls itself an AI-enhanced crypto exchange.
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De-jargonizer
Mempool
Bitcoin is slow. Currently, the network can handle only three transactions per second. Because of this modest processing capacity (also known as throughput), there’s a significant backlog and users must wait 12 minutes for their transactions to be confirmed just once.
The mempool—a mashup of memory and pool—is where pending transactions wait until they’re added to the bitcoin blockchain. Each node, or computer connected to the network, keeps its own mempool of unconfirmed transactions. These are temporarily stored in the computer’s random access memory, or RAM.
Please send news, tips, and Dimon bucks to privatekey@qz.com. Today’s Private Key was written by John Detrixhe and Matthew De Silva, and edited by Jason Karaian. An investment in knowledge pays the best interest.