Is JPMCoin a cryptocurrency?

February 26, 2019 11:52
JPMorgan, whose boss Jamie Dimon (inset, left) once bashed bitcoin as a ‘fraud’, has launched its own crypto initiative, but industry insider Elizabeth White (inset, right) feels the unit’s implication would be limited. Photos: Reuters, The White Company

Despite a major selloff of popular cryptocurrencies such as Bitcoin and Ethereum, the market has seen a boom in "stablecoin" initiatives in the fast-moving crypto sector, as investors sought out cryptocurrency whose value is pegged to or tied to another stable asset -- like gold or the US dollar -- rather than floating freely on the market.

Elizabeth White, founder of New York-based crypto startup The White Company, spoke to EJ Insight recently on her stablecoin project and discuss the proliferation of the new hybrid breed of cryptocurrency.

Here, in the second part of an interview, she shares her views on how stablecoins can lead the cryptocurrency market growth in 2019, and also offers her take on a JPMorgan crypto initiative. Excerpts:

HKEJ: As the previous craze in the sector, initial coin offering (ICO) activities, a popular means to raise capital in which issuers offer digital tokens in exchange for funding, have been impacted as regulators worldwide sought to protect investors from fraud. Do you think stablecoins are the next to be regulated, given their rising popularity and the fact that they are closely linked to fiat?

White: Yes, we believe that stablecoins should be, and will be regulated. This is important because redeemable stablecoins need to always hold 100 percent of their issued amount in the underlying fiat.

While our holdings are independently verified, every month, by a certified public accountant using a standard, approved method, there are other stablecoins like Tether that have not provided the same level of transparency and thus pose a risk to their holders. Regulation of stablecoins should focus on ensuring that stablecoin issuers are operating in a transparent manner.

However, we must be careful that regulation does not impose undue burden on users wishing to buy or hold stablecoin. Since they are not used for investment and do not go up or down in value, any person passing a standard Anti Money Laundering verification should be freely able to buy and use stablecoins with no other restrictions.

Q: Rumors have it that Facebook is making a stablecoin for WhatsApp users. What would prevent banks and other giants, which can offer trust and brand value, from jumping into the stablecoin field?

A: There is nothing that would prevent large players from creating their own stablecoins. In fact, we believe that a "Central Bank Digital Currency" issued by the US Government, European Union, Hong Kong, etc., is inevitable. That is why stablecoins as a standalone business is unlikely to make money or survive, and that is also why we have built The White Company to be able to use these stablecoins when they become available. Our business does not rely at all on the White Standard stablecoins, and we would welcome the transition to government or bank-issued stablecoins.

Q: Would the ultimate stablecoin be the one that is backed by the central bank of the underlying fiat currency to which the coin is tied?

A: Yes, that is likely where things are going. There are so many advantages to digital currency that it seems inevitable.

There will always be a use for Bitcoin and other pure, decentralized cryptocurrencies for those that seek to avoid the traditional banking system, but for the vast majority of use cases in C2C, C2B and B2B financial transactions, there is no need for decentralization, but rather only for speed, low cost, efficiency and independent auditing or verification via an immutable ledger, all of which can be offered by a blockchain-based government-backed digital currency. And the major use cases will almost certainly switch to that stablecoin, rather than using one backed by a startup company.

Q: Recently, JPMorgan Chase launched the first US bank-backed cryptocurrency. Is the “JPM Coin” really a cryptocurrency? Why or why not?

A: Yes, it is technically a cryptocurrency because it is in fact a virtual/digital currency that uses cryptography/blockchain for security. There is a misconception that cryptocurrencies have to be decentralized or unrelated to fiat. That is not true, the JPM coin is a digital representation of US$1 backed by JPM.

Q: How will the creation of this cryptocurrency affect JP Morgan, as well as the perception of cryptocurrency in the traditional financial industry?

A: It likely will not affect it at all, unless it chooses to open up the coin for use by other banks and fintech companies.

At this point, since the only use of JPM Coin is internal, it really serves no purpose different from JPM's current database based accounting (i.e. for example how they record a transfer of funds from one JPM customer to another).

In its current form, it's merely a marketing gimmick. Since JP Morgan has not announced plans to open up their blockchain, and will likely not do so for many reasons (regulation, desire to tightly control who can buy/redeem it and who can hold it, etc.), we will likely not be talking about JPM Coin at all in 2-3 months.

On the other hand, it does not affect the perception of crypto at all. The traditional finance industry is concerned with cryptocurrency for its potential to replace the banking system, but also understands that cryptocurrency cannot achieve broad acceptance due to volatility and its limited acceptance at "real world" use cases.

The most likely impact of JPM Coin is that the US government, or a consortium of global central banks or private banks, will eventually form a unified blockchain based payment solution using digital fiat (US Dollar or other currencies) that can be used to supplant the current SWIFT system.

However, SWIFT has also realized the dangers its business model is facing, and might be considering opening up its system to smaller players such as fin-tech companies, small banks, etc.

Q: What do you think would be the implications for this event to the regulation towards the cryptocurrency?

A: Very little, since it's simply an internal blockchain and is no different at all from what JP Morgan is already doing (recording internal transactions between its own clients). That is the reason why it did not need any special approval or regulatory oversight.

However, if at some point, JP Morgan were to allow others to use their coin outside of their narrow closed system (which is unlikely), then it will be only after extensive regulatory review.

Q: After JP Morgan’s launch of its cryptocurrency initiative, do you think other similar institutions will follow suit?

A: Yes, certainly other companies are experimenting with internally controlled blockchains. However, the power of blockchain is accessibility and interoperability. There are already many projects that allow anyone to use it. Since those are not backed by any traditional financial institutions, they have yet to gain traction in the behemoth trillion dollar global payments industry. But it's more likely that one of those could forge enough partnerships with banks or traditional finance to gain a wide enough acceptance.

Q: Do you think stablecoins are crypto's “killer app”, which will end the crypto winter?

A: I think we are going to see some interest returning to blockchain technology in 2019, but it's unlikely that will translate into significant upside for most cryptocurrencies, which I believe will never again reach their 2017 peaks. Stablecoins are what will enable killer apps in crypto, but those killer apps are already here, in the form of facilitating global financial transactions.

One of the reasons for the 2017 rally was the bottleneck in liquidity in the crypto markets which happened due to the limited number of exchanges and strict limits on trading. This is no longer a factor, so while interest in crypto will return, there will this time be plenty of sellers and any bull market in crypto will be slow and steady, without the astronomical rise seen before.

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This is the second part of a two-part interview with the CEO of The White Company, which is deploying blockchain technology to connect the world of global payments and financial transactions.

Also see: Are stablecoins the way forward for crypto units? An expert view

EJ Insight writer