A revolution is looming large: The number one American institutional bank J.P. Morgan, one of the biggest hardware company in the world, IBM, and the social media giant, Facebook are finally coming at a crossroad with blockchain and Digital assets. After years of denial about this asset class, while secretly filling blockchain patents and building their own blockchain (i.e. ‘Juno’ project), a paradigm shift finally occurred in late February 2019 with the announcement of J.P. Morgan’s own “stablecoin” JPM Coin. At the same period, The Facebook Coin topic’s gained a lot of momentum after The New York Times broke the story and gave us indication for the future to come.
JPM Coin, what is it?
JPM Coin, has been deemed as a stablecoin. A stablecoin by definition, is a cryptocurrency that anyone can be bought or sold and will maintain its value. So, for JP Morgan client’s that deposited money and got coins in returns, they can go back to J.P. Morgan and redeem a coin for a dollar. And because of the volatility of Bitcoin, it makes sense for investors to have a stablecoin in place.
The JPM Coin has for objective to solve two main problems in financial markets today: the inefficient (and expensive) process of settlement and the volatility regarding money held in cryptocurrency.
According to J.P. Morgan, there will be the three official uses of the JPM Coin:
· The first uses of the JPM Coin is for international payments for large corporate clients, which usually happens using wire transfers between financial institutions via networks such as Swift.
· The second is for securities transactions.
· The final use would be for huge corporations that use J.P Morgan’s treasury services business to replace the dollars they hold in subsidiaries across the world.
Note: The JPM Coin does not meet any definition of a crypto-currency:
· It is private, not public. JP Morgan’s new coin will operate privately and will only be used for money transfers between the lender and its clients, it will not operate on a public network in the same way that conventional cryptocurrencies such as Bitcoin or Ether do.
· It is permissioned — not permissionless. Cryptocurrencies run on public networks that anyone can join without any permission, whereas JPM Coin will run on its internal blockchain network called Quorum (created in 2016 as part of the Ethereum Enterprise Alliance (EEA), of which JPM is one of the founding partners), which requires permissions and users must be approved by JP Morgan.
· It is based on trusted authorities verifying the transaction — not trustless. For example, Bitcoin is trustless because the system was designed so that nobody has to trust anybody else in order for the system to function. Other forms of digital currency (such as the JPM’s experiment) usually require a central authority you have to trust in order to use the currency, and that central authority is argued to be the central weakness of the whole system.
· It is centralized — not decentralized. The central authority is J.P.Morgan, which controls everything, as opposed to Bitcoin or other cryptos which are not controlled by anyone
What J.P. Morgan hopes to achieve with it.
Let’s breakdown a little bit of history to understand the JPM Coin Applications. Before the 2008 financial crisis and different regulatory agreements such as Basel III (2010) and the Dodd–Frank Wall Street Reform and Consumer Protection Act (2010), banks had the ability to be in certain position profiles: they were able to hold lower quality assets and take more risks with customers through deposits. The financial crisis brought those processes to review and a number of requirement were put on these banks to limit what they could do with the money : they now have to prove that they have sufficient reserves in a case of a certain crisis, which means banks cannot be exposed to risky assets and illiquid positions as they could prior to the crisis, which also means that they must have a far better understanding of where their money is at any point of time : for example, knowing where their money is tied up in a settlement process. In syndicated lending, banks’ money can be tied up for an average of 9 days which represents a lot of money sitting on the sideline that can’t be used and can’t be put towards your liquidity targets that are mandated by regulators.
What are they trying to do?
They try to improve settlements which is a large problem in the market. Settlement is the term that represent the exchange of financial instruments for money and also, getting that money to the right people in the way the bank is managing the risk. This process is very centralized and that’s why today we have institutional banks, settlement parties, the DTCC: Depository Trust & Clearing Corporation etc.
Settlement are unfortunately slow because of old systems and processes such as Swift — Society of Worldwide Interbank Financial Telecommunication) — has 11,000 Financial Institutions, across 200 countries. 15 million messages are sent per day through Swift.) and R3 — consortium of 100 banks that have developed a blockchain, in order to make blockchain transaction according to their terms.
It’s one thing to message between parties the fact that each party owes each other money, it’s however more important to be able to settle that with real money. Also, In the institutional banking world, usually the settlements are occurring at the end of the day which means that you don’t know how much you owe a party before you cash out, and it’s even trickier in investment bank. However, on the tech side, today the fastest blockchain is too slow compared to the demand that Swift has (15M messages/day).
With the JPM Coin, J.P. Morgan will be able to:
· Execute Real-time settlements: Instead of sometimes taking more than a day to settle because institutions have cut-off times for transactions and countries operate on different systems, the payments will settle in real time, and at any time of day.
· Have a Real-time view across product, across geography against your counter parties.
· Multiply those benefits to J.P. Morgan’s clients because they will able to settle faster too.
At any point in time J.P. Morgan will know exactly their net balance, that mean they will not have to hold collaterals and reserve anymore to be able to settle some debts they may have.
Hidden Agenda(s) & Challenges
The issue with JPM Coin is the stablecoin marketing behind it, while for corporate reasons it is understandable in reality it showcases J.P. Morgan’s agenda behind the scenes.
J.P. Morgan provided a mechanism where you can turn your real money into digital cash (a coin) however, because the technology is not permissionless, you can only redeem your stablecoin within the four doors of J.P. Morgan which means, you must have an account with J.P. Morgan, you must have Quorum blockchain compatibility, you must have that business relationship with J.P. Morgan and have deposited the money in the first place to get coins instead.
JPM Coin is not necessarily a stablecoin but more of an API call (a digital service that you can call programmatically, and it will perform a business transaction, different from Circle and Gemini which are a stablecoin).
Even though this marketing scheme is foul play for the crypto-community, the project makes sense. By having the first-mover advantage, J.P. Morgan increases its chances to position the JPM Coin as the reference is settlement exchanges between institutions and fish in Swift’s troubled waters.
How this will playout overtime? Well, Swift has been a leader in the settlement within institution for a long time and has survived many technological challenges (recent hacks), it may will be difficult to takeover swift in terms of technology: we have to see how JPM and XRP will overcome those problems where transactions and settlement are concerned.
IBM paves the way into crypto/blockchain adoption.
After J.P. Morgan, it is IBM’s turn to introduce cryptocurrency and blockchain to its banking clients with a worldwide payment network solution.
IBM Blockchain World Wire is a payment network created by IBM that uses Stellar private blockchain. It will help financial institutions improve the services they deliver to their consumers by optimizing and accelerating foreign exchange, cross-border payments and remittances (which is a major source of income for developing countries). This (real-time) solution will provide a cheaper and quicker alternative than the present banking system to many locations: 72 countries, with 48 currencies and 46 “banking endpoints” (including banks and money transmitters) where people can send or receive cash by using digital assets (i.e. cryptocurrencies or stable-coins).
Announced Monday, six international banks (3 of them being Philippines-based RCBC, Brazil’s Banco Bradesco, and Bank Busan of South Korea) have signed letters of intent to issue stable-coins, or tokens backed by fiat currency on World Wire which is, according to IBM, the first blockchain network of its kind to integrate payment messaging, clearing and settlement on a single unified platform.
Before being fully up and running, banks must get approval from regulators. In the meantime, the one stablecoin running on World Wire at the moment is a previously announced U.S. dollar-backed token created by Stronghold, a startup based in San Francisco and Stellar Lumens (XLM). Indeed, while Stronghold’s USD-backed coin currently serves as an on-ramp for dollars, the platform is used outside of the U.S. (there are no pay-in and payout end points yet). However, is it a matter of time before IBM gets a favorable response from the U.S. regulators, according to Jesse Lund, head of IBM Blockchain. Upon approval, this will add Euro, Indonesian Rupiah, Philippine Peso, Korean Won and Brazilian Real stable coins to the World Wire network.
This announcement has a huge upside. Many banks received this idea well and expressed their desire to get in. Why? As we saw for J.P. Morgan and the JPM Coin, settlements take huge amount of time and costs. In this case, international payments still don’t have a real-time option in a world where remittances (funds that are sent or transferred to another party usually abroad) were worth $574 billion in 2016, according to the World Bank, a number that grew each year for the past 50-years (besides the 2008 financial crisis). The United States is currently the largest source of international remittances in the world, sending a total of $56.3 billion in 2015.
This is where, Stellar protocol complement the IBM World Wire network: “We were looking for a blockchain protocol that could compliment what we’ve been doing in the enterprise blockchain space, which is private and permissioned. But as we looked at that other space, which is a public, permissioned network, we needed a protocol that had the capacity to issue tokens and have scalability. Stellar emerged pretty clearly, as it provided the scalability, we needed to support the transaction volumes we were looking at, which is thousands of transactions per second,” according to Jesse Lund, head of IBM Blockchain.
If for the present moment the IBM World Wire platform is free to join, it is highly possible that IBM converts their product as a new source of revenue. According to IBM spokeswoman, the IBM blockchain platform will be moving to a pay-as-you-go model with hourly charge based on consumption “so that users have much more flexibility over their costs and infrastructure as they build blockchain,” she said.
Facebook Coin, what is this all about?
Where blockchain and crypto adoption is concerned, Facebook rumors of launching a coin (broken by the NY Times) stiffened the crypto community up. Let’s remember, at the same period last year, Mark Zuckerberg’s company imposed a ban on the promotion of crypto-currencies and ICO on their platform.
According to Bloomberg, the coin is set to be tested on the Indian’s remittance market. Why? India has the biggest WhatsApp user base with 200 million users also, the country is leader in the world in remittances — people sent $69 billion home to India in 2017 (World Bank data).
As J.P. Morgan’s coin (JPM Coin), the Facebook Coin will benefit from its large user base — 2.7 Billion users every month according to The N.Y. Times (from Facebook, Instagram, WhatsApp) which will be a catalyst to get traction rapidly and early in the process. That number is huge because it represents the users, not the accounts (one user can have several accounts) hence the potential to become the most used currency is there. Companies such as Mastercard and Visa that were already shaking with the advent of Blockchain must see those rumors as a telltale sign of their demise.
One of the main questions we can wonder is of centralization — will Facebook allow its digital coin transactions to be decentralized? With 2.7 Billion users, they are almost assured to be the lead-central bank. However, according to The N.Y. Times, experts argued that Facebook may face the same technological limitations and regulatory hurdles as Bitcoin. Another point to make would be about privacy. The company has a very poor record at keeping data private, and if the company fails to correct that issue, governments and regulatory institution may use it as a pretext to sabotage that idea — which is probably the reason why the company waits before officializing anything.
Conclusion, tomorrow will be brighter than yesterday
This is a game changer. J.P Morgan will give more visibility to the blockchain and digital asset road map by adopting it to existing infrastructures such as institutional banks. It is a great first step to mass adoption.
For blockchain to achieve mass adoption, we will need people actually using the technology. Investing money in the crypto space and keeping it in your wallet forever will NOT drive adoption. Using it drives demand and demand drives prices. It’s also very important for companies like J.P. Morgan and Facebook that are deeply ingrained in our lives to lead the way and hopefully, integrate BTC, XRP, LTC and even go public for consumer use.
As we have more insight on the Facebook Coin, we will be able to bring more information about how the coin will model the crypto-space for the next decades to come. It will be interesting to see in the couple weeks or months if Facebook officially launches their coin or not while dealing with various privacy issues nonetheless, one thing is undeniable: with J.P. Morgan and Facebook adopting blockchain and digital assets, the revolution is en marche.
(Thanks Tierno for helping on this article)