JPM Coin and the Future of Commercial (and Maybe Consumer) Transactions

White and Williams LLP

White and Williams LLP

In early 2019, J.P. Morgan became the first major United States bank to successfully test a digital coin (the “JPM Coin”) designed to modernize the future of instantaneous payments in commercial transactions. The JPM Coin is neither an official currency nor backed by the full faith and credit of the U.S. government, unlike the dollar. The JPM Coin can be analogized to a “token” and is based on the concept that one JPM Coin held in a JPMorgan Chase N.A. account is considered the equivalent of one dollar. The value of a JPM Coin does not fluctuate like a stock trading in the market.

The JPM Coin is currently in the prototype stage and will have to clear some regulatory hurdles before being offered on a large scale. The JPM Coin will be used to successfully initiate and transfer funds between institutional accounts without the need for wires, checks, cash or other traditional payment methods typically used in commercial transactions. The end goal is to reduce costs and time while providing a mechanism for the instantaneous flow of funds.

Other financial institutions have successfully developed their own blockchain-based digital payment platforms. In December 2018, Signature Bank launched a blockchain-based digital payment platform called Signet, which is currently in use by its clients. When talking about the Signet system, Signature Bank’s President and Chief Executive Officer, Joseph J. DePaolo, said “[w]e can say there are trades going on in the millions some days and tens of millions other days and I would say the number of clients we have is in the triple digits.” Even though it is a fraction of the size of J.P. Morgan, Signature Bank is an example that blockchain-based digital payment platforms have appeal among stakeholders in the financial services industry.

People will undoubtedly confuse the JPM Coin and other blockchain-based digital payment platforms with Bitcoin. In fact, they are very different. As stated above, the JPM Coin is like a token, based on the concept that one JPM Coin is the equivalent of one dollar. On the other hand, Bitcoin is a version of digital currency, also known as cryptocurrency, in which individuals and businesses have the ability to pay for goods and services in lieu of making cash payments or using credits cards. In a nutshell, cryptocurrencies are created and recorded on digital ledgers and new “units” are generated through the successful solution of mathematical equations. Bitcoin, along with other types of cryptocurrencies including Ethereum and Litecoin, trade on blockchain-based digital markets completely independent of financial institutions like J.P. Morgan. In fact, Bitcoin and other cryptocurrencies were created to circumvent the administrative burdens and costs of doing business with banks and making consumer purchases on credit backed by those institutions.

Similar to buying and selling stocks on a stock exchange, individuals and businesses buy and sell cryptocurrencies and trade them on digital exchanges resulting in price fluctuations. The cryptocurrency market is not heavily regulated by the U.S. government and is volatile. For example, in 2011, one Bitcoin could be purchased for approximately one dollar. In 2017, Bitcoin traded at a record high of $19,783 per coin. On March 1, 2019, a person could purchase one Bitcoin for approximately $3,800 per coin.

The JPM Coin is considered a stablecoin, which is a form of cryptocurrency that has a set or “stable” value. Many will try to label the JPM Coin as a Bitcoin-like cryptocurrency because a stablecoin is by definition a cryptocurrency. However, the JPM Coin is a true stablecoin in that the value of a JPM Coin will not fluctuate. Some analysts believe that the JPM Coin will hurt the future of Ripple, a form of cryptocurrency that trades on digital exchanges, because Ripple also seeks to supplant traditional payment methods, including SWIFT transfers. Unlike the JPM Coin, Ripple cannot be considered a true stablecoin because its price fluctuates on a daily basis in the market. Only time will tell how the JPM Coin will affect other cryptocurrencies attempting to replace traditional payment methods in commercial transactions.

J.P. Morgan’s Chief Executive Officer Jamie Dimon has not been shy about voicing his distaste and skepticism on the cryptocurrency market. This founded suspicion made it surprising that J.P. Morgan launched the JPM Coin, but J.P. Morgan’s investment in the JPM Coin proves that the bank believes in the underlying technology and intends to be a large player in the market. In rolling out the JPM Coin, the bank’s head of Digital Treasury Services and Blockchain said that the “JPM Coin can yield significant benefits for blockchain applications by reducing clients’ counterparty and settlement risk, decreasing capital requirements and enabling instant value transfer.”

The Future

Even though the intended current use for the JPM Coin is for business to business transactions, there may come a day where consumers are able to take advantage of the benefits associated with the instantaneous aspect of blockchain technology outside of cryptocurrency. In fact, Mr. Dimon recently said that the “JPMorgan Coin could be internal, could be commercial, it could one day be consumer.”

It is unclear what the future actually holds for consumer transactions and the JPM Coin, but it is hard to imagine that consumers will do away with their credit cards in the next few years. But, who really knows how far-fetched of an idea it is to have the JPM Coin and other related “tokens” being used in every day America with how advanced technology has become over the last decade.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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