What JPMorgan's New Cryptocurrency Means for Banking and Blockchain

When J.P. Morgan announced it had created its own cryptocurrency last week, the bank left the industry speculating about what the move might mean for the blockchain-based payments and for the broader future of banking. JPM Coin, as it's called, isn’t a traditional cryptocurrency—instead of being something to invest in—it’s more of a tool for settling transactions between financial institutions and across countries with a digital coin pegged to the U.S. dollar. The bank said it’s already successfully tested JPM Coin, making it the first bank to make its own digital coin. However, unlike many ad-tech companies, which rely on a vast ecosystem of partners and customers, JP Morgan is able to test internally without the buy-in of anyone else. Regardless of what J.P. Morgan does with JPM Coin, brands and other blockchain companies will likely be watching closely over the coming weeks and months. They’ll also be watching to see how other banks working on their own blockchain technology respond—or how blockchain companies like Ripple, whose cryptocurrency, XRP, has gained traction to solve a similar issue around intra-bank transactions—now that a competitor is now in its backyard. Anne Ward, CEO of Veritoken, a blockchain startup focused on identity management, said it might be good for Ripple to have competition because it further proves the need for the company’s technology. She said XRP has already been “battle tested.” According to Ward, 2019 will be a “year of firsts” for cryptocurrency,” which could lead to more validation in the space—and more encouragement for testing now that the biggest brands are getting on board. “If this spawns a bunch of silos, I don’t think that’s great,” she said. “But if we figure out how this can go into a wallet and consumers can use it, that would be amazing. It tells you they’re looking for other ways to move money around.” J.P. Morgan is not the only big bank already making bets on blockchain this year. The day before it announced JPM Coin, the Spanish bank Banco Santander announced a $700 million deal with IBM to speed up its own digital transformation. The five-year plan isn’t solely focused on blockchain—other areas will include improved uses of artificial intelligence and security systems—and could provide further assistance to the “digital investment team” that Santander started last year. Smaller banks are also testing. As Coindesk pointed out last week, California-based Signature Bank is already moving money with a similar system called Signet, with “more than 100 clients” using it to send “millions of dollars each day.” Jesse Lund, head of blockchain solutions for financial services at IBM, said JPM Coin’s uses overlap with what HSBC began testing last year. However, while they’re not exactly the same, he said there are other opportunities, too. For example, it could allow JP Morgan to extend its lending model outside of the bank. Lund said that could make JPM Coin an “equalizer’” if smaller banks can transmit directly to the bank. “It allows the small guys to sort of play on the field only the big guys could play before,” he said. “It’s a paradigm shift. It really is.” That’s not necessarily good news for Ripple, which has been courting larger banks and even central banks for tests. Lund said Ripple’s implementation that forces banks to only use XRP ended up being “problematic." That inspired IBM to allow choices for its own World Wire program, which gives clients the chance to use XRP and other tokens. He said JPM Coin’s pivot to the dollar might be more attractive than the more speculative value of XRP. “It kind of torpedoes their model compared to everyone else, but also plays into model we were hopping for,” he said. Ripple, which now has more than 200 banks using its payment system, declined to comment. However, Ripple CEO Brad Garlinghouse told Bloomberg that JPM Coin’s debut on a closed network "is like launching AOL after Netscape’s IPO.” Rajesh Kandaswamy, Gartner’s chief of research for blockchain, doesn’t necessarily see JPM Coin as direct competition to XRP, describing it as “expected.” However, if JPM Coin takes off, the creation of the coin could increase the likelihood of banks developing blockchain tech directly rather than relying on outside vendors. However, he stressed that JPM Coin is very much still a prototype. "What I anticipate is after this is we’re not going to see some news for some time,” he said. “And while it will spur some activity, it’ll be wait and watch more for some time.” Less than 10 percent of the top 100 largest banks will have core systems for blockchain in place by 2021, according to recent research by Gartner. And yet, the research firm sees financial services as one of the sectors most likely to benefit from the technology, both in terms of improving processes and finding new markets. So does JPM Coin count as an inflection point? No, Kandaswamy said. However, it is a next step. "Everyone talks about banking as a key place for blockchain,” he said. “In our view, banking is one of the first entrants, but it doesn’t necessarily mean they’re one of the earliest beneficiaries.” Branding JPM Coin as a cryptocurrency is also curious, considering how the bank's CEO, Jamie Dimon, has vocally criticized the likes of Bitcoin for more than a year. And while he has praised the promises of blockchain technology for other uses, it's left some wondering why J.P. Morgan didn't simply describe it as a tool rather than a token. "I don’t think what they’re offering is anymore of a cryptocurrency than Monero in Fortnite,” said Kyle Asman, partner at the blockchain investment advisory firm BX3 Capital, referencing the fake money used in the popular video game. Frank Chaparro, a journalist who covers cryptocurrencies for the blockchain-focused media company The Block, expressed a similar sentiment. He said it might be to help the bank capture the "awe and sexiness” of fin tech—much like it did by creating its own investment app to compete with the likes of free stock-trading platforms like Robinhood. "Why did they go about marketing it as a cryptocurrency?" he said. "Do they want to embrace the ecosystem? Was it a play for coverage and marketing pickup? That’s an interesting angle too.”