The largest US bank, J.P. Morgan, has launched its own digital currency, which is a long-awaited breakthrough for the crypto world. It’s called the ‘JPM Coin,’ and it has the potential to revolutionize the digital payments system for years to come. Finally, a serious player with more than one hundred years of experience in the financial sector has entered the market.
John Pierpont Morgan founded Bank of the Manhattan Company on September 1, 1799. The company merged with Chase National Bank in 1955 to form the Chase Manhattan Bank. It is the earliest of the predecessor institutions that eventually formed the current JPMorgan Chase & Co. 106 years after the death of John Pierpont Morgan, he died at the age of 75 in Italy, J.P. Morgan Chase & Co. developed a game changer and is bound to take away some of the recent uncertainty pertaining to cryptocurrencies.
The first famous digital currency, electronic payment system or online money––whatever you want to call it––started in the form of the ‘Bitcoin” in 2009. Since then, a slew of other new cryptocurrencies followed suit, literally popping up like mushrooms after heavy rainfall. Players in this new digital payment system received more and more attention thanks to the stratospheric price developments, especially by December 2017 when Bitcoin reached a value of $20,000.
Today, around 1,600 different online currencies circulate, however, the times of heady exuberance are over––Bitcoin’s value dropped more than 85% since the 2017 high, valuing the digital money at slightly under $4,000 by February 2019.
What was the impetus for the launch of an online currency?
In the summer of 2007, a speculatively bloated real estate market triggered one of the largest global banking and financial crises since the Great Depression of 1929. At this point, people had completely lost confidence in the financial sector. They wanted a currency system that worked independently of the state and greedy banks––they just did not know how to go about it yet.
Only a year later, a person or group of people (we are still not sure to this day) under the pseudonym Satoshi Nakamoto laid the foundation stone for a digital currency or peer-to-peer payment system that operates without the intervention of traditional banks. The name was Bitcoin.
But how exactly does the Internet currency work?
In contrast to traditional money like the euro or the dollar, for example, which changes hands in the form of government printed bills or via regular SWIFT or US wire transfers (whatever you want to call it) through the banking system, anyone can, in principle, generate a digital file (so-called bitcoin mining) and trade it over the web.
This virtual money is stored in an electronic wallet. To manage all your digital assets, you need an online account that anyone can set up with a pseudonym. Once registered, the network user receives two keys: A public key allowing the system to verify transactions, i.e., confirmation that the bitcoins really belong to whoever sends them from A to B; and a private key signing and saving the operation––preventing any changes to the transaction. The payment system is based on a special web-based and decentralized database called Blockchain, which is administered by the participants themselves.
But how do you get the digital coins?
Theoretically, there is the possibility of generating or ‘mining’ Bitcoins yourself. This requires a computer that solves exceedingly complex mathematical equations. This process requires extremely high and energy-intensive computing power, making it wholly uneconomical for the creation of currencies such as Bitcoin.
In addition to the ‘mining’, you can buy digital currencies on specialized exchanges. For this, you need ‘real money’ such as euros or dollars, often called fiat money among crypto experts. Again, you sign up––but this time using your real name–– this serves to combat money laundering. However, your anonymity is no longer guaranteed. Once you have made the purchase, the digital money can be transferred to your wallet.
A few of the most important alternative currencies
Bitcoin is still the best-known electronic currency but there are more than 1,629 cryptocurrencies (as of 15.06.2018, source: coinmarketcap.com). The most well-known alternatives besides Bitcoin are Ethereum, Ripple, and Litecoin––here is a small overview:
- After Bitcoin, this is the second most widely used cryptocurrency worldwide
- Name of the currency: ether
- Price as of 22/02/2019: about $148
- Ethereum was originally developed as a platform that executes smart contracts
- Originally planned as a network (similar to Ethereum)
- Functions on the main principle of the verification of promissory notes
- No mining possible, issued via a digital bank
- Restriction 100 billion
- Price as of 22/02/2019: about $0.32
- Price as of 22/02/2019: $50
- Similar network to Bitcoin
- Difference: Faster transaction rate (2.5 minutes, Bitcoin every 10 minutes), more security, higher power consumption
The money supply of each cryptocurrency is usually predetermined––for example, the upper limit for Bitcoins is 21 million units. While you can theoretically print genuine banknotes as much as you like, this is not possible with digital money.
The advantage of cryptocurrencies is that it is safe from inflation. The value of a cryptocurrency is derived––as in real financial life––from supply and demand. With higher demand, the value increases and vice versa. Neither a government nor other currencies can influence the price.
Still there is doubt!
“You can’t have a business where people can invent a currency out of thin air and think that people who are buying it are really smart,” said Jamie Dimon, CEO of J.P. Morgan Chase of cryptocurrencies in September 2017 when the digital payment platforms were still reaching sky-high valuations.
It did not take long for Dimon to change his tune. The largest US bank announced on Thursday, February 14, 2019, that it had completed the development of its own cryptocurrency, which is now being tested as a prototype.
At first glance, this step is astonishing. J.P. Morgan boss, Jamie Dimon, is considered a skeptical observer of the crypto world. Dimon described the most important digital currency, Bitcoin, in 2017, as a “fraud” and he compared the sharp price increases with the Dutch tulip mania, a speculative bubble in the 17th century.
And yet this recent U-turn makes sense. For as skeptical as their boss may be regarding Bitcoin, JP Morgan played a large part in working on the underlying blockchain technology, which allows for the long-term comprehensible crypto payments.
J.P. Morgan Chase earned more than $31 billion in 2018, and the company spends tens of millions of dollars a year researching blockchain technology. J.P. Morgan, in 2017, withdrew from the R3 banking consortium, which is testing blockchain’s potential. Instead, with the help of Ethereum developers, the bank has built its own blockchain called Quorum. This now forms the platform for the JPM Coin.
“JPM Coin is currently a prototype that is being tested with a small number of business customers,” explains Umar Farooq, who oversees the company’s blockchain projects and digital payments. Later in the year, the pilot program will be extended. “At the current stage, we have no plans to offer it to end customers.”
Moreover, JPM Coin will not be a competitor to Bitcoin and the like. It is not meant to work on an open network for private customers. This digital currency has an entirely different approach. The JPM Coin is a proprietary clearing tool for JP Morgan networks. Moreover, it is tied to the dollar on a 1:1 basis; the bank guarantees the unlimited exchange. Other currencies, such as the euro, will soon also be connected.
But what is the advantage of a coin that is used exclusively internally?
According to Farooq, the cryptocurrency is supposed to speed up payments and simplify transactions. For the customers, this could soon make things significantly cheaper.
For example, if a Japanese group has a US business partner and both are clients of J.P. Morgan, the JPM Coin could be the tool of choice in the future. Presently, if the Japanese company wants to transfer money to their US partner, they have to exchange their yen credits into dollars. Afterward, J.P. Morgan in Japan transfers the money across the Atlantic. Only when the payment has arrived and been confirmed will the US customer receive the money. The aforementioned process can take several days and is expensive.
In the future, the Japanese company could manage their account directly through JP Coin. It can be transferred without any form of manipulation or fraud within minutes using the blockchain system, and the US customer can access the funds directly. This cost and time saving will benefit both sides.
This shows the limits of the approach because the blockchain, in this case, is not decentralized, but centrally controlled by the bank––all parties involved must be able to rely on the money instantly if necessary. In other words, JPM Coin must immediately convert into real money.
However, despite the limitations, bank clients will have a secure and exceptionally reliable electronic payment system that does not come under the threat of extreme price fluctuations that are in a sense fictitious. At J.P. Morgan a real US Dollar backs each JPM Coin in circulation.
JP Morgan is not the first bank to test cryptocurrencies as a mean of payment. However, most bank clients, for the larger part, are not profiting from any of these experiments. The Swedish bank SEB is already transferring funds between Stockholm and New York using Ripple as the online currency of choice. And British banking giant HSBC is experimenting with blockchain techniques for currency trading.
Nonetheless, J.P. Morgan’s decision to rely on its own coin to settle customer payments is a significant step. It breaks with Wall Street’s long-held belief that blockchain based payments systems, while promising for the transaction of information, is not suited to the transfer of actual value. If a real skeptic like banking veteran Jamie Dimon can be convinced that there is some merit to cryptocurrencies, then maybe the system is the way of the future.