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Bankers weigh in on JPM’s new digital coin

JPMorgan got hearts racing on Valentine’s Day, when it announced that it will be the first American bank to roll out its own digital coin. 

The coin, which will be 1:1 redeemable to fiat currency held by JPM, will be issued on Quorum – JPMorgan’s own blockchain platform – and will eventually be rolled out to others, says Umar Farooq, head of digital treasury services and blockchain at JPMorgan, on the bank’s website. 

Umar Farooq, JPM

“When one client sends money to another over the blockchain, JPM Coins are transferred and instantaneously redeemed for the equivalent amount of US dollars, reducing the typical settlement time,” he says.

Still in testing phase, full details on how the coin will function are still being worked out, but it hasn’t stopped bankers speculating on its impact – especially given previous comments made by the bank’s CEO, Jamie Dimon, where he called cryptocurrencies a “fraud” and a “scam” and said that if any of his employees were caught trading bitcoin they would be fired.

But as one transaction banker based in the US says, “dig a bit deeper and there is clearly a difference between a cryptocurrency and the JPM Coin.

“The JPM Coin is for internal use only, so in its essence is nothing like bitcoin, even if it does use the same underlying technology. As such, the risk of anything fraudulent occurring is negligible, but the benefit to customers is real. Faster settlements will mean better liquidity and thus better liquidity management.”

While the JPM Coin may look and sound like a cryptocurrency, what the bank is developing is something quite different.

“The JPM Coin has nothing to do with Bitcoin, its price will remain the same because JPM Coin’s assets will not flow into Bitcoin,” says James Hickson, CEO at fintech company Mash and previously head of Morgan Stanley’s technology business development in New York.

“In fact this is a win for the underlying technology, blockchain. The private sector has a key role in getting blockchain adopted and this represents an exceptional use case at scale,” he says.

Estimated capital markets spend on blockchain technology this year is $400 million. “Other capital markets firms are clearly looking at opportunities to innovate leveraging the same technology, but rather than copy the JPM approach, this announcement should be fuelling discussions at the board level regarding the implications of blockchain (digital ledger) technologies and how they can add value to their clients,” says Hickson.

Some bankers are sceptical. Citi, which developed its own coin back in 2014 to understand how blockchain technology could be used internally, didn’t plan on issuing the coin after senior bankers decided that there was a more viable alternative. 

Naveed Sultan, Citi

“The ‘Citicoin’ helped inform our current digital money strategy, which is to work with sovereigns, fintechs and Swift for faster payments and settlements,” says Naveed Sultan, global head of treasury and trade solutions at Citibank. 

“In order to be responsive to the digital economy, banks need to collaborate with different participants in the financial system to evolve in a manner where it is compatible with the digital economy. This is the approach Citi has taken and one which our clients and digital economy has come to expect,” he says.

Swift’s global payments initiative – a global system used by 165 banks to increase the speed, security and transparency issues in payments – is one such platform. 

“But when a bank like JPM – which facilitates a huge amount of cross-border settlements on a daily basis – says that they are introducing a digital coin, you know this is going to be a game changer,” says one European transaction services banker.

“The bank already has an extensive network that it can leverage off of, so in the first instance this might impact banks and other financial institutions more than it will corporates – there’s a huge number of banks that use JPM for cross-border settlements that will be attracted to their new offering.

“And if JPM offers discounts – say even a fraction – banks and then corporates could move over to JPM for their cross-border settlement needs,” he says.

Emmanuel de Rességuier, chairman and CEO at Fennech Financial, previously at Deutsche Bank and Société Générale, says: “At first sight this pilot seems to be a smart, stable, quick and secure way to process transactions between institutions, potentially drastically reducing execution, collateral and liquidity risks. I suppose the immediate objective is to lower processing and reconciliation (i.e. post trade) costs.

“Only time will tell what are the real-use cases and benefits of that technology, but such a move could pave the way for many applications in the future, depending on the acceptance from other financial institutions and large corporates,” he says. 

Perhaps JPM’s announcement is an attempt to build hype around the bank and its digital ambitions, say others. “All of a sudden, transaction banking has caught the imagination of banks everywhere, and they want to be seen as the most innovative or progressive when it comes to cash and payments,” says one transaction banker based in London. 

“Don’t forget, money is already digital – if you want to move £100, $100 or €100 from one account to the other, more often than not these transactions are instant, so I don’t see the need for a JPM coin that serves to provide a service we already have,” says the banker. 

And there is a risk to the bank itself – even with a balance sheet of $2.6 trillion: “a private digital currency can be an institutional risk and not sovereign risk. Sovereigns do not go out of business while private institutions and banks do,” adds the banker. 

“We are not dismissive of JPM’s statement – on the contrary, we are following its progress in transaction banking closely – but we have seen other banks make bold statements around cash and payments before, only to find that they don’t follow through,” he says.

For the banker, JPM isn’t adding anything new – or is he trying to trivialize the threat?

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