JP Morgan Kicks-Off Commercial Bank Money 'Tokenization'
While details scant, the latest announcement from JP Morgan made large waves within the cryptocurrency community as the major investment bank is set to launch the JP Morgan Coin. What on the surface appears to be the workings of a marketing team masquerading the token as a cryptocurrency no different than a stablecoin backed by the institutions own deposits, is for all intents and purposes the next step for the expansion of JP Morgan’s already partner-established blockchain network addressing no more than their own internal transfers. Should it expand beyond though, default risks, low as they might be for JP Morgan, could still pose regulators with questions whether or not the value is on par with the Greenback when assessing liquidity and lending ratios for JPM Coin bearers.
In what could be considered as the largest enterprise deployment of a blockchain network, JP Morgan has now more than doubled the participating institutions since last year for its Interbank Information Network (IIN) built atop the bank’s own Quorum Blockchain, a permission-based variation of Ethereum.
Having already signed-up over 175 institutions to its IIN, a program whose focus was the minimization of friction in regards to information sharing for compliance data-related inquiries, JPMorgan is now evolving its blockchain capabilities to address value transfer and what effectively could be considered as the ‘tokenization’ of commercial bank deposits.
Having now an established and growing database of shared information amongst network participants, JP Morgan’s Quorum could be very well overcoming key compliance hurdles set by regulators.
Quorum does win marks with the ability to quickly tie-up any loose ends for Know-Your-Client (KYC) and Anti-Money Laundering (AML) requirements that have bogged down banks worldwide with a time consuming and tedious process yet to be addressed holistically by legacy transfer and settlement services.
|| CRYPTOCURRENCY, BUT NOT CRYPTOCURRENCY
While lingo has boxed in JP Morgan’s coin, it is by nature far removed from the decentralized tenants of cryptocurrency. The planned coin is on the surface a stablecoin backed by the institutions own deposits inside a closed-off permissioned environment controlled by JP Morgan that at initial stages is to facilitate their own client transfers.
But client facing user experience is unlikely to change. And whether a blockchain was used or not, depositors would be non-the-wiser except for the promise of an uptick in settlement speed.
|| NEW BUILDING BLOCKS?
Questions remain on the actual necessity of a blockchain. While speed is certainly an important factor in the developing payments landscape, non-blockchain applications worldwide have already attained the goal (see table).
"The only real use for a blockchain is when there is a need for no single entity to be in control of the network" Tim Swanson, Founder of advisory firm Post Oak Labs tells Diar.
This is far from the case with JP Morgan's Quorum. The question is, however, whether or not this represents only the start of a much larger potentially interoperable banking network integration.
Inevitably, or at least would be the goal should this truly be representative of US Dollar deposits that the Wall Street Major is ready to conduct settlement with, is for JPMorgan’s coin to bleed across Quorum participants as acceptance for instant transfers between banking clients.
|| ALMOST LIKE MONEY IN THE BANK
New money realities though come to the fore requiring banks who accept holding JPMorgan’s Coin on their books to assess institutional and country risk, however.
The very requirement of such an assessment that would be posed by regulators in order to establish an institutions liquidity ratio based on their treasury, marks the question of whether or not the token is a true representation of the US Dollar.
Credit rating service Moody’s gives JPMorgan a big thumbs up and even recently upgraded the bank's score. But ratings have been wrong before and even though the Wall Street giant comes with a “low credit risk” warning, it still implies that there is, albeit a small one, a chance of default.
How regulators would value blockchain dollar representation by a Prime-1 lender is clearly unknown territory.
Select Bank Ratings
|1||Aaa||US Government Bonds|
|2||Aa1||JP Morgan Chase Bank|
|3||Aa2||Royal Bank of Canada|
|4||Aa3||Bank of America|
|6||A2||JP Morgan Chase & Co|
|7||A3||Bank of America Corporation|
|8||Baa1||Italian Banks (Intesa Sanpaolo, Banca IMI, Mediobanca, and FCA Bank)|
|9||Baa2||Banco de Bogotá, Columbia|
Fast Payment Systems Sans Blockchain
|1||2001||Korea||Electronic Banking System|
|2||2003||Chinese Taipei||ATM, FXML, FEDI|
|3||Iceland||CBI Retail Netting System|
|5||South Africa||Real-Time Clearing|
|7||2008||Chile||Transferencias en linea|
|8||UK||Faster Payments Service|
|9||2010||China||Internet Banking Payments|
|10||India||Immediate Payment Service|
The evolving landscape of banking, payments and cross-border remittances has taken on a very digital realm that has led to the establishment of research teams by Central Banks worldwide to assess the possibility of a Central Bank Digital Currency (CBDC) (Diar, 19 March 2018).
Sweden, an extreme circumstance today who has all but abandoned cash, has been forced to address the possibility of a CBDC as the payments infrastructure now lays, for the most part, in the hands of Swish, a single digital payments application owned by the major Scandinavian banks.
In its investigation, the Riksbank, Sweden’s Central Bank, posed the question that “if banknotes in practice disappear, will we then have a situation where the general public only has access to commercial bank money, and what would the concept of legal tender then entail?”
While a recent report by the International Monetary Fund (IMF) has poured cold water on any prospect in the short-term for a CBDC, the question will need to be addressed sooner or later as digital payments through commercial bank money, tokenized or otherwise, will continue on their growth path replacing cash (Diar, 19 November 2018).
In actual fact, the majority of world financial transactions are now effectively commercial bank money. What does create a slight divide is the actual, despite difficulties, the very option to hold printed notes - a direct liability against a central bank.
Ultimately, governments will have to assess the systemic risk of commercial bank money and it's affects on society. But one thing does seem certain - more tokenized representations of fiat currency and assets are to come to play.
Grayscale Closes Record Year But Inflows Depressed
Digital Currency Group's institutional investment arm Grayscale closed off 2018 with a record year according to Managing Director Michael Sonneshein speaking to The Block and inline with Diar estimates.
Diar data shows that unstitutional investors, however, have grown slightly cold showing inflows less than over 60% than the start of 2018 at the peak of Bitcoin - a total tally of just over$30Mn for 4Q18. Still, this marks a massive win for Grayscale closing it's weakest quarter of last year leaps beyond 2017 as a whole even (Diar, 5 November 2018).
Grayscale Bitcoin Investment Trust Estimated Inflows
Source: Grayscale Notes: *Diar Estiamtes
Stablecoins Lose Speed, Dai Outstanding Increases
Major stablecoins outside of Tether (USDT) and Ether-Collateralized Dai have all seen their outstanding supply decrease in February down nearly $100Mn since the start of the month - a net decrease of 10%.
While being a double edged sword, Dai does have an upper hand during positive trading days where Collaterelaized Debt Positions (CPD) of Ether find an appreciation in value a as well as a tradable asset that has become available with trading pairs across major exchanges.
Outstanding Stablecoin Supply (As of Press Time)
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