The news that JPMorgan Chase was beginning its own crypto-token – its own proprietary version of Bitcoin technology – surprised me not in the least. It was a given, once you understand why cryptotech is viable as a monetary asset.
It turns out, however, based on the hundreds of startled articles out there, that knowledge of why this is true is hard to come by. Popular legend still treats it as magic internet money at best and alchemy at worst. Even within the Bitcoin community, many people remain oblivious as to the underlying reason why this innovation works and is so hugely important to the building of the next generation of finance and payment solutions.
What is the central innovation about Bitcoin that causes its functioning to be an epic improvement over government-issued fiat currency? The answer is this: crypto adds to the traditional functions of money an additional service layer. It not only works as money. It bakes into the protocol a method of settling payments that is far less costly, with far less counterparty risk, than our existing payment systems.
That settlement system, providing for the geographically noncontiguous and secure exchange of property titles, is the reason for the underlying value of crypto. It is why these never-before-existing digital assets began to trade at a price.
It took years for this realization to dawn, but now that it is here, there is no going back.
JPMorgan Chase is the world specialist in payment systems. That it would turn to blockchain technology is hardly a surprise at all. This is why it is utterly ridiculous to say that “Chase's announcement has nothing to do with Bitcoin. And in fact, it has nothing to do with cryptocurrencies.” It has everything to do with cryptocurrencies and the underlying technology of Bitcoin, and you see that once you understand that distributed ledgers, cryptographically enabled, on the internet constitute the primary innovation of that thing called Bitcoin that was released to the world 10 years ago.
It’s fair enough even to describe JPM Coin as an “alt-coin” in crypto parlance, but one with a specific purpose. It is a token to enable efficient settlement of business-to-business transactions that flow through its network. It is tied directly to the dollar so that its market valuation is not subject to the wiles of speculation.
No, it won’t be available for consumers just yet.
“JPM Coin is currently a prototype that will be tested with a small number of J.P. Morgan’s institutional clients,” says the FAQ, “with plans to expand the pilot program later this year. JPM Coin is currently designed for business-to-business money movement flows, and because we are still in a testing phase, we don’t have plans to make this available to individuals at this stage. That said, the cost-savings and efficiency benefits would extend to the end customers of our institutional clients.”
The prevailing method of interbank settlements is technologically out of date. It hasn’t improved in its fundamentals in decades. You as a consumer know this if you have used ACH, Swift, and so on. Yes, the security is better today than a decade ago but at the cost of tens of billions, and the costs mount by the day.
Using an encrypted digital ledger – one that substitutes hashes for trust – eliminates vast numbers of layers and time. Time and trust equal counterparty risk. Automating this with blockchain drops the costs to a small fraction while increasing certainty.
In other words, there is nothing magical going on here. What crypto has achieved is the unity of the medium of exchange and the ability to settle digital transactions in the absence of physical proximity, without the need for traditional systems of identity trust. It brings certainty, security, and low cost to a crucial function of modern financial systems.
There is an additional element of JPMorgan Chase’s move here that delights me. It adds to the prophecy of F.A. Hayek (1974) that banking institutions would eventually get fed up with the systems built by government and set out to innovate their own currencies. He couldn’t possibly have foreseen the tech that would make this possible, but he saw the broad outlines of what would happen if the major stakeholders of the system got fed up with the tools built by a nationalized service.
JPM Coin represents the next stage of development in monetary and payment systems. There will be another. Then another. And another. Without end.