JPMorgan Chase & Co.
When the largest bank in the United States and the sixth largest in the world is talking about the potential of blockchain technology, there is a lot to learn from it. In a recent 74-page report, JPMorgan Chase discussed the opportunities and challenges in front of cryptocurrencies, digital currencies and blockchain technology. It was a sober read of what we have been dealing with for the last year in the blockchain space. It covers a lot of ground: bitcoin, China’s DC/EP and cashless payments, blockchain efforts, stablecoins and Facebook’s Libra. JPMorgan is probably the most prominent financial services enterprise trying to embrace blockchain technology, and they should get much more credit for that. In the last four years, they have cloned Ethereum protocol as an enterprise offering called Quorum and started some of the most important initiatives in the space as JPM Coin and the Interbank Information Network (IIN), which is currently as large as 400 participating correspondent banks. So, here are six key things we learned from the JPMorgan report.
Payments and trade finance are the most prominent use cases
JPMorgan sees the most value from blockchain and DLT technology in payments and trade finance use cases. This comes as a validation of the efforts from the largest central banks experimenting with digital currencies for cross-border and wholesale payments.
Stablecoins are needed for cashless economies to modernize the payments markets
Stablecoins, mentioned 86 times in the report, are a foundational instrument for a new type payments ecosystem that is mobile-only and could reach beyond cash. JPMorgan spends a lot of time on cashless payments, giving the most prominent example of China’s blockchain effort executed at scale.
JPM Coin is still on the roadmap
The stablecoin representing the U.S. dollar, announced in February 2019 and created to facilitate payments between JPMorgan and its partner banks on the private, permissioned network Quorum, is still in the discussion. Similar to the Wells Fargo Digital Cash initiative, the JPM Coin is focused only on internal usage as a payment vehicle without exposure to secondary markets and trading. It’s an instrument aimed at institutional customers and cross-border money movement, offering 24/7/365 transactions, and it will greatly optimize the internal liquidity inefficiencies every large bank suffers from nowadays.
Another validation for the JPM Coin case was given by Eddie Wen, Global Head of Digital Markets at a panel at the Commodity Futures Trading Commission (CFTC), who gave a great presentation on the coin’s utility and purpose.
Blockchain in banking is mainly used for backend operations: clearing, settlements and collateral management
This doesn’t come as a surprise to anyone, but the most promising use-cases for blockchain in banking are in the backend operations. That means things like securities lending and managing of the posted collateral, providing an immutable audit trail for reporting and regulatory purposes, and providing a single source of truth for clearing and reconciling of transactions.
Facebook Libra opened Pandora’s box but will probably fail
According to the report, in which Libra takes a major stage, the Facebook stablecoin design presents “an inherently unstable setup.” JPMorgan goes in length about the possibilities for wholesale payment vehicles but marks the scrutiny Facebook has faced since it announced the stablecoin project. It is definitely worth the read as they are describing it as “nonoperational wholesale unsecured funding, which receives relatively punitive treatment in bank liquidity regulations.”
Cryptocurrencies are interesting but not there yet
This is a complex but fair observation from the JPMorgan research group as they look at cryptocurrencies like Bitcoin, Ethereum and Ripple as a possible hedge against stocks and equities. The conclusion is that, while cryptocurrencies are interesting, even 1 percent exposure with them is an extremely risky and impractical endeavor since they don’t have a legal tender. The original mantra in the cryptocurrency space is that they are uncorrelated assets and can be paired with gold and Japanese Yen as safe-haven assets. Unfortunately, JPMorgan doesn’t see it in the same way, as they warn about the high volatility and typically thin markets which are prone to manipulation by a single player.
Overall, the report from JPMorgan is quite the read for any blockchain and cryptocurrency professional as it presents a highly distilled, well-presented, accurate summary of the events that shaped last year. All this coming from the largest bank in the United States cannot be overlooked. And importantly, it is also a validation for blockchain technology as most of the serious financial services enterprises already are paying close attention.