Is JP Morgan Stablecoin – Old Technology New Innovation?
Recently, one of the largest multinational investment banks – JP Morgan surprised the blockchain community with the announcement of the it’s “JPM Coin” - first-ever bank-backed crypto of the US. Certainly, the rare move came as an unexpected revelation for the blockchain, financial sector, and Cryptocurrency world owing to the fact that JP Morgan has been especially known to be unfriendly towards cryptocurrencies. So, what makes this announcement so exciting, and is it justified?
However, before discussing the JP Morgan’s Stablecoin, let’s have a glance over the primary objective of a stablecoin and its utilization. In the context of the finance or banking sector, the Stablecoin is expected to address the two of its major issues associated with the settlement - the expensive & inefficient settlement process and the volatility involved in holding money for an unspecified period.
One of the key aspects of financial markets, this settlement process is regarded as an expensive business for several reasons. During settlement, the payments are rarely made in real-time, as the result, the funds that should be paid are made available at the end of the day. In some cases, it might take several days, consequently, the idle holding of billions of dollars results in an expensive and wasteful liquidity trap. Furthermore, the effect of this problem multiplies when the settlement process involves several global banks.
For example, a multinational bank may be in credit to a counter-party in one country and in debt for the similar amount to the same counter-party in another country. As the banking operations are extensive and complex in nature, many times, these banks are unable to “net out” their position since they required to hold collateral to pay for an exposure or debt. In this way, not only the banks are holding onto debts for an unspecific period, but they also may be holding onto the collateral for debts that they do not understand they don’t really have. Besides, reserving abundant of liquidity across various countries for settlement might even burden the banks with unnecessary costs.
How could blockchain assist in solving this issue?
Before focusing on the blockchain, let have a look at how the major casinos work in Las Vegas. Few of the casinos made an agreement to honor the chips of the other’s, which permits the customers to exchange $100 into chips at the Bellagio, use them to play at the Venetian, and then cash out at the MGM Grand. In the similar way, the financial/banking institutes can utilize the blockchain-backed digital currency - “settlement coin” in the form of chip, through which the financial institutes will be able to settle on an instance basis instead of crediting/debiting each other’s account at the end of the day. By means of this, the financial institutes can effortlessly reduce the complexity involved in settlement and manage “intra-day” liquidity efficiently.
However, this is not that simple as it appears on the surface! Since, the digital currency encounters significant volatility due to the noteworthy aspects such as demand & “market events”, the holding of a large amount of funds in the digital currency form might be highly risking exercise for the institutes. This has resulted in the invention of the stablecoin whose value is pegged to the value of an asset and is redeemable at a fixed price at any point of time. Nevertheless, these stablecoins also faces certain issues, such as, it can be pegged if and only if there are sufficient assets and reserves behind it.
Moving further, the JP Morgan’s stablecoin invention might sound like a greatest achievement in this context, however, the key issue lies with its utilization. In reality, the JPM coin provides a digital certificate that can be redeemable at only on its platforms, which is actually the anathema to the objective of establishing an ecosystem where every member enabled to utilize a universally accepted digital currency that can be easily exchangeable at any other platform.
Old Technology – New Innovation
From the technological point of view, this innovation is masquerade of the most fundamental technology, as the JP Morgan promises to credit the account of a user when presented with a digital certificate that has a value pegged to the US Dollar. Moreover, the ability to digitally invoking the payment mechanisms of a bank has been existed prior to this – called as an API – which facilitated the communication with an online software service such as a payment processing interface of that bank digitally.
However, it does not mean that the JP Morgan’s innovation should not be appreciated. Any kind of innovation associated with the adoption of blockchain in the banking/financial sector should be applauded as it presents unlimited opportunities that will certainly transform the global fanatical system. Moreover, the potentiality of blockchain technology has no barriers as both the banks and the financial institutes as well as the consumers will be empowered to access any kind of services or assets at whatever time, on whatever occasion. So, JP Morgan keeps doing the awesome work! The corporate world is buzzing around you!!!