Thursday, February 21, 2019 5:00PM / Content & Image by Meristem
On the 14th of February 2019, JP Morgan Chase, world’s no 1 investment bank, with an asset size of c.USD2.6trn, became the first bank to create and successfully test a digital coin which will be backed by a fiat currency. The digital coin, according to the bank, will be tested on a tiny fraction of JPM’s asset size and will seek to facilitate instantaneous payments through the blockchaintechnology. Although neither money per se, nor a cryptocurrency in all its entirety, the JPM coin will be equivalent to one US dollar and will exploit the blockchain as an instantaneous payment platform. Through the JPM coin, the bank seeks to onboard a fraction of its institutional client base to help facilitate international payments and funds transfer.
Unlike other cryptocurrencies, the JPM coin feeds off Quorum, the bank’s blockchaintechnology and grants permission to a restricted client base which JPM has accessed and authorised to transact on its coin. Hence, the JPM Coin will not have an open/public interface like other cryptocurrencies and will be exclusive to institutional customers like the banks, brokerdealers, corporates amongst a few. Also, one JPM coin represents one United States Dollar and the currency holds no intrinsic value, unlike other cryptocurrencies which serve as an investment asset. The JPM coin is also redeemable and collateralised, i.e. backed by the clients’ deposit account, unlike other cryptocurrencies that are uncollateralised and lack any asset backing.
How it Works
An Extract from JP Morgan Chase N.A. “The diagram below is a simple representation of how the process works.
In step 1, a J.P. Morgan client commits deposits to a designated account and receives an equivalent number of JPM Coins.
In step 2, these JPM Coins are used for transactions over a blockchain network with other J.P. Morgan clients (e.g., money movement, payments in securities transactions).
Finally, in step 3, holders of JPM Coins redeem them for USD at J.P. Morgan”.
The difference between the coin and other cryptocurrencies, in the view of many, does not lend credence or support the growth of cryptocurrency; however, we hold a more grounded view. The JPM coin exploits the potential of the blockchaintechnology, and it’s a step closer to unlocking hidden opportunities within the purview of regulatory bodies.
The bank’s adoption also serves as a validation of the prospects most financial institutions stand to get from it. The consummation of the marriage between finance and technology is where the ultimate birth of value lies. While funds have gone into FinTech’s research and development, value truly lies in people using the technology. The adoption of blockchainand digital currency by a bank as large as JPMorgan Chase N.A., with over 46million digital customers across 100 countries, creates the room for mass adoption.
The banking space is highly competitive; hence, we do not expect the bank to retain this competitive advantage for long, once implemented. We expect to see as others, both globally and within the Nigerian banking space, seek to develop this competence along the way. In our opinion, we expect most financial institutions with a strong focus on treasury management to utilise the blockchaintechnology, owing to its ability to improve transaction transparency and speed.
In Nigeria, the InterswitchBlockchainService, a partnership between Interswitch and Microsoft - which feeds off Microsoft Azure blockchaintechnology, is a step closer to fully integrating blockchainservices within the banking system and allowing participating banks to process and verify transactions. Just like the JP Morgan Chase blockchaintechnology, the platform only grants access to authorised users, however, it does not permit the creation of a cryptocurrency or digital coin.