First of all: what are we talking about?
JPMorgan is one of the major bank and financial services providers in the world, with a portfolio of clients that counts more than the 80% of the companies in the Fortune500. Under its wholesale payment services it clears and settles currencies, shares and derivatives for $5 Trillion a day across 120 currencies (source: latest JPM Annual Report). In comparison Fedwire, the alternative FED controlled domestic large-value fund transfer system, .
JPMorgan is currently one of the most reliable service provider in the financial world and its network is one of the most trusted. It partners with a large number of intermediaries such as broker dealers, derivative dealers and clearinghouses that require a portion of the funds moved at any payment settled. In other words, moving money through JPMorgan is quite expensive, involves too many intermediaries and the settlement must go via an old and controversial network like the SWIFT.
The background
JPMorgan itself recognizes the limitations of this system and is now proposing an alternative to its clients. It knows that its strong position in the market could grant a serious first mover advantage.
JPMorgan has been working few years now to the development of its own permissioned , Quorum. Quorum is a DLT based on that differs from it by few key elements:
1. The permission to run a node for example is not open, but only the internal pre-authorized JPMorgan network is granted access;
2. The possibility to hold private transactions not exposed to a public ;
3. A more agile consensus mechanism called QuorumChain that brings the TPS to 100 against the 20 of (but the 1,500 of ).
Calling this “a ” might make tech purists jump on their chair! Especially if we compared to , born from opposite principles and raised to be very distant to this vision. A comparable project can be considered XRP, that shares the same institutional orientation and the simple settlement purposes, but not its economic system.
The
JPM is now launching a JPM Coin on top of this DLT, a settlement instrument for its wholesale business. Umar Farooq, the director of projects indicated it as the “payment leg for the wholesale transactions” that allows to settle payments without wire transfers from accounts.
JPM Coin is a stablecoin backed by USD. Clients that want to use it must deposit dollars upfront in their bank accounts. Of course, to open a bank account at JPM need to go through a KYC and AML procedures therefore each JPM Coin holder must be compliant.
So, where is the breakthrough?
Well, conceptually there isn’t any. Quorum is not a and JPM Coin is not a currency, nor a proper stablecoin. Quorum it’s a closed distributed network and JPM Coin is the digital representation of a right to redeem USD at JPMorgan, therefore are an instrument to reduce settlement time and fees.
JPM is betting that this new service will open the road to a reorganization of the current payment system and a shift from wire transfers to a different solution. Last but not least, we have to remember that banks like JPMorgan are there to make money and create innovation while doing it, not the other way around: the promise of quicker, cheaper payments will likely bring more open accounts at JPMorgan.
If there is a breakthrough, that would be that a major institution has publicly and volunteerly associated its name to , a bold initiative that is now awaiting for a second mover.
Why did this make so much noise?
This is not a new idea. A similar solution has been proposed with the already quite a bit of time ago by a consortium of banks for the same purpose. This makes me think that the reason why this made so much noise is primarily because of the hostile words towards an pronounced by the JPMorgan’s CEO Jamie Dimon. He first called a fraud and then later this year added that he “couldn’t care less about crypto” — in less elegant words.
Reactions to the JPM Coin
Nouriel Roubini aka Dr. Doom, the professor that predicted the 2008 financial crisis and fierce opponent of , and I couldn’t agree more. JPMCoin misses the culture and the most basic concepts that brought to us: trustless network, decentalized consensus and open surce!
’s CEO said that JPM Coin “misses the point of crypto”. Again, I agree. But I also feel that he might be quite afraid of this move. JPM becomes now a competitor of its network an most importantly does it with an instrument that differently from XRP is stable because backed by USD and by one of the most trusted institutions in the world.
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Published at Sat, 16 Feb 2019 16:42:04 +0000
