5 things JPM Coin will do for banking and blockchain

JPMorgan Chase's digital currency launch is being hailed by some industry observers as the first step toward broader adoption of blockchain technology in financial services.

It’s not the first bank to explore this territory. UBS launched a centralized, private project in 2015 that attracted several other megabanks, including Barclays and HSBC. Other banks have their own initiatives, including Northern Trust’s private equity blockchain. Bank of Montreal joined several European banks in developing Batavia, a blockchain trade-finance platform. In November, BBVA completed the first-ever syndicated loan on a distributed ledger. ING and Credit Suisse have tested securities lending on the blockchain consortium R3.

But, observers note, the public support of JPMorgan — one of the largest banks in the world — gives blockchain technology a credibility boost in the eyes of industry peers, regulators and even consumers.

What then will greater adoption of blockchain enable in banking at large? Here's a rundown of five potential impacts on banking and payments.

Increase velocity
With the ability to reduce transaction times from days to just hours or even minutes, blockchain will be the foundation for banks to develop existing services and create others, observers said.

"It's going to be a critical component to institutions' technology stacks," said Eli Stern, Americas financial services blockchain leader at Ernst & Young. “From the standpoint of wholesale banking, securitization and things where financial institutions are transacting with each other, any blockchain application placed into that infrastructure eventually leads to some way to transact on the blockchain.”

Customers are seeking faster, cheaper transactions from banks, said Ryan Gilbert, a partner at Propel Venture Partners, the investment arm of BBVA.

"What customers are now saying is, 'If the money is sitting at the bank, usually I would move it across in a real-time basis and in a manner that is a lot more cost-effective for me than current treasury services are costing me.' The use of distributed ledger technology is probably very appropriate for this."

But banks should be aware that adoption carries a big cost. A blockchain core-conversion project would likely take years and cost tens, if not hundreds, of millions of dollars depending on the size of the bank.
Lessen slack in the system
Blockchain proponents often point to the technology’s ability to eliminate clogs in the transaction process by cutting different third parties such as payments processors out of the system. That, in turn, would speed up the transaction process at little or no cost to banks.

"The blockchain has the ability to strip all the in-betweens in transactions," said David Tawil, president of the New York hedge fund Maglan Capital. "It will make things smoother."

It also removes fees. Depending on size and volume, fees for cross-border payments through traditional payment networks range from 2% to 10%. On Ripple's blockchain-based XRP, an average transaction costs $0.003, or three one-hundredths of a penny.

Centralizing transactions allows for uniformity in the transfer of money for any use, Tawil said.

"Once all my money and transactions are on the blockchain, the world of lending and borrowing will be upended," he said. "Forecasting and budgeting will be upended. Everything will be so centralized and easy to manipulate. You’ll have all data. Companies take months to put together statements. Imagine, immediate financial statements in seconds."
Federal Reserve building in Washington, D.C.
Eliminate baggage
One hindrance to official acceptance of blockchain technology so far is that much of its development has been from the bottom up, said Cindy Yang, fintech industry group head at the law firm Duane Morris.

JPMorgan is not an unknown crypto startup or ambitious neobank, she said. "It does help the conversation," she said.

The limited approach the bank is taking with JPM Coin will also address regulator concerns, she added.

"This is a cleaner approach," she said. "This is an institutional, private system. It's not on the market. It's not bitcoin. The conversation is more concentrated. There's no question of whether it is a security or not. This is about whether this type of technology has a legitimate basis. It strips a lot of the regulatory headaches that others playing in the space have faced."

Regulators that understand and can appreciate the rewards and risks of blockchain technology will foster a more welcoming environment for startups that are challenging the established financial institutions, said Angela Angelovska-Wilson, chief legal officer for the stablecoin provider Sila.

Yang agreed. "It paves the way for neobanks, who can point to JPMorgan and say they're doing something similar. This provides an open area for competition. It's great for consumers."
Promote risk management
Any new technology brings its own risks, Yang said.

The technology is vulnerable to cyberthieves and coding errors, she acknowledged.

Ethan Silver, chair of the broker-dealer practice at Lowenstein Sandler, said, "There is the cybersecurity custodial risk. Who are you dealing with on the other end from an anti-money-laundering perspective, knowing who those parties are. But I think the technology has advanced well and in a way that companies are not blindly entering this space without having thought about those issues."

That's why there are benefits to JPMorgan's taking a lead role in developing blockchain-based technology, Yang said. It's private and centralized, limiting exposure. Plus there's the security that comes from its brand and its balance sheet.

"It's taking this step by step. It understands the major risks, and this massive spotlight is going to be helpful," she said. "I don’t think it would be making this statement without understanding what it is getting into."
Create retail possibilities
Consumer payments is one area where the promise of blockchain-based technology hasn't provided a viable business model.

But sustained effort by the biggest banks could eventually extend blockchain technology into other business lines, including retail.

"It could follow on the heels of this, or it could take a fair amount of time before we get to that point," Tawil cautioned. "It all depends on how much devotion there is to the project inside JPMorgan and other efforts. If you asked about digital development 20 years ago, the answer was, ‘It’s going to take time to develop systems, and run back-tests.' In today’s day and age that process is so compacted. It doesn’t take that much time. These systems are already built. They could roll it out to the public inside of a month. But they are doing it this way to make sure it all works."

Yang predicted that, to promote broader adoption, JPMorgan and other large banks will encourage cooperation in the technology's development.

"There's a lot of space for others," she said. "Everyone has skin in the game; they all want this to work. They will want to demonstrate a cohesive argument that it is protected against cyberattacks, counterparty risk and incorrect coding. There's room for collaboration."

There will be some winners in the cryptocurrency market too, Tawil said.

"If individuals and institutions alike start to feel extremely comfortable with using tokens, and as long as there is a valid use case for the token, then it should gain adoption. There’s first-mover status for bitcoin, [and] there are other coins with unique use cases. Certainly those tokens that are essentially currencies, stores of values, clearly should benefit from this."