The Bitcoin resurgence, Facebook’s Project Libra, and growing global economic uncertainty have put pressure on the banks. Banks must remain innovative or risk being disrupted. Can blockchain help?
JP Morgan Chase CEO Jamie Dimon recently told Yahoo Finance that “crypto companies want to eat our lunch.” With growing recognition of crypto’s disruptive threat, the company has added new features to its internal stablecoin. This could see the project rolled out to corporate customers reports Bloomberg Japan.
JPM Coin, which is pegged to the US dollar, is reported to have added privacy features obscuring not only how much money is being sent but who is sending it. The underlying blockchain, a variant of Ethereum’s Quorum network, will be used for another internal application; adding settlement features to the blockchain-based Interbank Information Network (IIN). The IIN was originally set up in partnership with Australia’s ANZ bank and the Royal Bank of Canada in 2017 to aid the processing of payments held up by compliance issues and technical errors.
For JP Morgan’s external clients, the coin could soon be used to settle bonds and commodities transactions, Umar Farooq, head of digital treasury services and blockchain at the bank, told Bloomberg. Farooq said the bank’s clients are excited by the potential for its digital coin to speed up the trading of securities such as bonds. The coin could enable the “instant” delivery of bonds on a blockchain platform, said Farooq, adding that, “We believe that a lot of securities over time, in five to 20 years, will increasingly become digital or get tokenized.”
Tokenize the world
There’s a growing narrative around the potential for security tokens to revolutionize the financial world. As the crypto space moves on from the ICO bubble of 2017, investors are looking for a token model without the risk profile of ICOs. Because security tokens are subject to securities laws, they are seen as less risky and more compliant. Furthermore, since the assets represented by security tokens already exist in the real world, they can function as a bridge between the blockchain space and the legacy financial system. This enables greater access to institutional investors, a wider potential investor base – and therefore greater liquidity.
It’s not just JPM Morgan watching this space. In a recent interview with French financial newspaper Les Echos, Goldman Sachs CEO David Solomon revealed that Goldman is no longer just watching, it is now an active developer of blockchain solutions.
Solomon expressed a firm belief in the potential of blockchain-based digital currencies to enable frictionless cross-border payments, claiming that Goldman is conducting “extensive research” on the concept of “tokenization”, and keeping a close eye on the efforts of Libra and other platforms.
Goldman Sachs made its first foray into blockchain in 2015, patenting a cryptocurrency called SETLCOIN that would help customers settle securities trades. This project soon faded from view, but Goldman hit headlines again in the bull run of late 2017 on rumors the bank would be setting up the first Bitcoin trading operation on Wall Street.
This trading desk never materialized, and the rumors were quashed when CEO David Solomon told a US House of Representatives panel that Goldman had never made such plans. Instead, he claimed at the time that the firm only maintains an interest in the market, simply “watching and doing work to try and understand the cryptocurrency market as it develops.”
Around the world
Elsewhere, banks without plans for a blockchain of their own have poured funds into a communal project. First proposed in 2015 by Swiss bank UBS and British tech startup Clearmatics, the blockchain project known as Utility Settlement Coin (UCS) has emerged from the research and development phase.
Under the new name of Fnality, the project announced last month that it has attracted £50 million in Series A funding from over a dozen of the world’s top banks, including Santander, Bank of New York Mellon Corp, Barclays, HSBC, Deutsche Bank, and Credit Suisse.
Collectively, these banks are supporting the development of what will be institutional stablecoins for five major fiat currencies: the dollar, the Canadian dollar, the pound, the yen, and the euro.
These are to be used in a similar way to JPMCoin to settle financial transactions, but not between branches of the same bank, but instead between banks in different currency jurisdictions. This helps create liquidity and removes the need for businesses to hold bank accounts in multiple locations.
Just as with retail stablecoins, putting these new payment channels in place requires careful navigation of the regulatory and technical issues, but the Utility Settlement Coin is expected to be operational within 12 months, subject to regulatory approval.
On the other side of the world in Japan, the country’s biggest bank Mitsubishi UFJ Financial Group (MUFG) has set a 2020 launch date for its own blockchain-based payment network, which is being developed in collaboration with US tech firm Akamai Technologies.
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