To understand the distinction between a crypto-currency such as bitcoin and the underlying technology, blockchain, look no further than JPMorgan Chase’s launch last week of its own digital currency, JPM Coin.
That this was a startling innovation by one of the world’s biggest banks got largely overshadowed by the well-publicized remarks in 2017 from JPMorgan Chase CEO Jamie Dimon that bitcoin was “a scam.â€
While he later retracted his blanket condemnation of cryptocurrencies, such is his stature as an industry leader that the comment has not been forgotten.
Dimon was right in some respects that in its early days, bitcoin exchanges and wallets were susceptible to hacking, scams, and scandals. But the blockchain – or distributed ledger – technology underlying the cryptocurrency itself offered protection against cyberattacks and fraud.
Unalterable transactions
Today, blockchain technology is spreading beyond cryptocurrencies to other applications where its transparency, integrity and decentralization are useful. The key to blockchain is that it requires no independent verification because transactions are locked in place and unalterable the moment they are made.
None of this is lost on Dimon. JPMorgan Chase is an industry leader in technology investmentOpens a new window , plowing $10.8 billion into tech last year alone. Some of that is going into blockchain applications, which facilitate smart contracts. These are automatically executed once the conditions have been fulfilled on a blockchain and are already in wide use for certain types of financial transactions.
JPM Coin was created in order to fulfill the financial conditions of these contracts at the same time. It makes no sense to execute a contract immediately if payment must wait three days to be processed through banking’s traditional wire transfer system.
Now payment can be made simultaneously with JPM Coin, available only to JP Morgan customers and has a stable value of one dollar.
Eliminating the middleman
Experts argue that JPM Coin is not really a cryptocurrency because it doesn’t exist outside the bank’s ecosystem – precisely why the bank created it, to maintain absolute control and to keep its value steady at a dollar per coin.
Purists would argue it’s not really a coin at all but, rather, a token; that is, something that has value only within its own ecosystem.
But debating a nomenclature still in flux is hardly the point. Call it a permissioned cryptocurrency on a permissioned blockchain or call it a stablecoin. What it accomplishes is to enable transactions to be completed far more quickly than via traditional technology – within seconds instead of days – by eliminating middlemen and verification procedures.
Dimon and JP Morgan have been steady in describing the value of the blockchain technology. “I think Jamie has been more consistent than people give him credit for,†says a bank spokesmanOpens a new window . “He’s always separated cryptocurrency from the underlying value and use of blockchain.â€
Moving value
The bank’s blockchain head, Umar Farooq, says JPM Coin is a response to customer demand for a way to move value in the bank’s blockchain applications, rather than a cryptocurrency in the sense that anyone can access it and trade it.
One cryptocurrency expert compares it to the distinction between AOL and the internet. “The internet is open, so anybody who wants to create a blog, website, or consumer service can connect a server to the network without asking permission from anybody,†says Jerry Brito of Coin CenterOpens a new window . “Compare that to AOL – it was a permissioned network where if you were a publisher, you had to go to the company and seek their permission.â€
Blockchain technology was developed to support bitcoin, the first cryptocurrency, which was launched in 2009 by the pseudonymous Satoshi Nakamoto. Blockchain is based on a series of cryptographic developments that allow transactions to be fixed indelibly in place, making it nearly impossible to tamper with a cryptocurrency or interfere with a smart contract.
Dashed expectations
Many have hailed it as a fundamentally transformational technology, on a par with the internet itself, and the hype has led to a roller-coaster ride of dashed expectations. Numerous projects have been launched and then abandoned in the realization that blockchain is not always an improvement on existing technology.
Whatever Dimon’s original thoughts on cryptocurrencies, he has put the bank’s money behind his beliefs. JPMorgan isn’t the most adventurous institution – nor is it the most conservative, either. The advent of JPM Coin is the latest example of its determination to stay on the top of its industry.