The Breakdown - JPMorgan Launches JPM Coin: Welcome to the Private Currency Era

Episode Date: October 28, 2020

Today on the Brief: Stocks down; bitcoin up Consumer confidence shaky as baking supplies demand grows 3,400% Bank for International Settlements and Swiss central bank to test CBDC this year Our main discussion: JPM Coin.  Initially announced in February 2019, JPMorgan’s JPM Coin is being launched for commercial use. In this episode, NLW looks at: The history of private currencies in the U.S. Why Libra was a starting gun for both governments and other private corporations How JPMorgan intends to make money from JPM Coin Why other investment banks might follow

Make no mistake that this is a fundamentally new era where all of a sudden these corporations are going to use this type of synthetic currency as a key part of how they do business. Given how much we've seen just native, organic, decentralized adoption of stable coins this year, it's hard for me to imagine that these technologies won't end up finding their way into some very different use cases than currently JPMorgan executives are thinking about. Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is sponsored by crypto.com, nexo.io, an elliptic, and produced and distributed by

coin desk. What's going on, guys? It is Tuesday, October 27th, and today we are talking about the private currency era as JPMorgan launches JPM coin. First up, however, let's do the brief. First on the brief today, a stock slump as Bitcoin surges. Yesterday was the S&P 500's worst loss in a month, and today it is down as well. Meanwhile, in Europe, stocks, Europe is heading towards the lowest close since June. So what's going on? Well, it's not that complicated. U.S. consumer confidence is worse than forecast, according to a report that came out yesterday, and it's not hard to see why. COVID numbers are on the rise, and investors are concerned about the return of lockdowns. In many parts of Europe, we're already seeing different

types of strategic, smaller lockdowns. So all of these things are creating a context where people are very rationally, it seems to me at least, holding on to resources that they might otherwise be spending, which halts the general flow of our consumer economy. So there's that going on, but it doesn't seem to be impacting Bitcoin. In fact, Bitcoin is going the other direction. From a Bloomberg Daily Wrap piece yesterday, quote, Bitcoin rose towards 13,500, approaching levels not seen since just after the burst of the cryptocurrency market bubble almost three years ago. There's a lot of reasons for that, some of which we're going to get into a show sometime this week about election outcomes in Bitcoin, but for now, pretty cool to see it

heading in the opposite direction of stocks. Next up on the brief today, a second stockpiling wave. This gets into this consumer confidence conversation as well. Demand for items like baking goods have spiked 3,400% from a year earlier in the three weeks through October 13th. For some context, there was a 6,000 percentage jump during the first wave of COVID-19 lockdowns, so we're not quite that high, but still pretty remarkable. Grocers also aren't able to get everything they want still. Raleys is a chain with 130 locations that's only filling an average. of 70 to 75% of its orders, which, again, while better than the 40% it was filling at the peak

of the early crisis, it's still low, and many of these companies are expecting things to get worse. Now, if there's a saving grace here, it's that companies who are in these markets have been spending millions to expand their production lines, so it's unlikely that we'll see really severe shortages at any point. Last up on the brief today, the Swiss Central Bank and the Bank for International Settlements plan to test a digital currency this year. This was revealed by Benoit Korei, who was one of the pieces I read on Longreed Sunday this week. He is, for those who don't know, the Bank for International Settlements Innovation Person, effectively. He revealed this at the Bunn Summit in Shanghai and basically said that they are planning on issuing

a proof-of-concept stage currency by the end of 2020, which will pave the way for a retail CBDC thereafter. The Swiss Central Bank and the BIS have been collaborating for about a year at this point, starting in October of 2019. And this digital currency leads perfectly to our main topic, the private currency era. Money has been the provenance of the government for a very long time. In fact, the U.S. has made it quite illegal for corporations to print their own money. Back in the olden days, there was a thing called company script that was effectively a credit against accrued wages. Often when people

lived in company towns or camps, so think about the period during westward expansion, people could use this company's script at the company's store, so they could use it for their supplies and what have you. Companies could charge outrageous markups at these stores and basically make people entirely dependent on them, right? If you're giving them a currency that's only useful in the company's store, it doesn't really allow people to make different decisions about their money. Often as well, even though you could theoretically exchange it for real cash, the rates weren't really fair in many cases. Now, at some points during the Depression, many people turned to script. Local governments were even often paying their employees in script. All of this became illegal, however, under the Fair

Labor Standards Act of 1938, and it's never been legal since. Now let's zoom up to the Bitcoin era. Bitcoin launches, but it's not really clear just what the hell it is. It also doesn't have a company per se, so there's really not a force trying to get it to shut down under this sort of private currency idea. There are of course plenty of regulators who don't like it, but it's usually about its use with criminals not about a private company issuing money. This episode is brought to you by crypto.com, the crypto super app that lets you buy, earn, and spend crypto all in one place and earn up to 8.5% per year on your Bitcoin. Download the crypto.com app now to see the interest rates you could be earning on BTC and more than 20 other coins. Once in the app, you can apply for the crypto.com

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That's elliptic.co slash coin desk. There are stable coins, and really Tether was the early innovator here. They did start to get some notice. There has been an ongoing legal fight between New York and Tether parent Bitfinex about proof of reserves and some other irregularities, but still regulators haven't really been worried about a private company printing their own money in the way that they might have been in the olden days. But then Libra comes along and it completely changes things.

All of a sudden, it's not just a nubriot. knowable company talking about printing their own currency. It's a company that the U.S. government is already hugely scared of. Democrats are convinced that it is too powerful and can be manipulated for politics, i.e. the whole Russian bots thing. Republicans are convinced that it has too much power to censor conservative voices. Others are up in arms about hiring practices or how child porn and child trafficking happen through it, or just the fact that they hate Zuckerberg. And of course, underneath all that is fear. A fear of the power of two. billion users, a user base bigger than the biggest country in the world. And now they want to create

a money. Not only that, they want to create a money that explicitly diminishes the standing of the U.S. dollar, at least in their eyes, by having it backed by a basket of currencies, not just the U.S. dollar. This is fundamentally not just another synthetic Eurodollar representation. It's its own unit of account. And, oh, by the way, just for funsies, they're going to set up in Switzerland, not the U.S. since then, the project has evolved quite a bit, including most notably to me, Facebook backing away from the original basket of currencies approach. This is the biggest design decision that I think had high implications in the first place, and the fact that they backed away from that really says that it was clear that that was not going to pass muster from U.S. regulators. Meanwhile,

the response. Of course, if you've been listening to the breakdown, you know that central banks around the world race to start preparing their own digital currencies, seeing this Libra moment as something of a starting gun. But also, other parts of the private sector shift their attention as well. They shift from enterprise blockchain, whatever that means, to actual internal currencies and proprietary settlement systems. And that's where we entered J.P. Morgan. J.P. Morgan previously built something called Quorum, which was effectively like an enterprise version of Ethereum. They recently, however, offloaded the Quorum project. to consensus, which is a key member of the Ethereum ecosystem.

It turns out it wasn't to get out of blockchain per se, but to switch their focus. We've learned this week that JPMorgan has created a new blockchain unit called Onyx. Onyx has more than 100 staffers, so this is a pretty serious thing. Taki's Georgia Coppoulos is the global head of wholesale payments and had a bunch to say about this initiative, telling CNBC that, quote, we are launching Onyx because we believe we are to a period of commercialization of these technologies, moving from research and development to something that can become a real business. Georgia Coppilos added that a large international tech company is already as of this week

using JPM coin for cross-border payments. So this is the first commercial use of JPM coin. The project itself was launched in February 2019, and at that time it was said that it would be used to settle cross-border payments in a faster way. Each JPM coin would be redeemable for 1 U.S.D. For a sense of just how big an area this is for J.P. Morgan, this is a company that moves more than $6 trillion a day across more than 100 countries. What about the business model? Let's grab a few quotes from a CNBC article about this. Banks could charge a few cents to confirm data for each transaction, saving money on remediating mistakes and creating a model to earn money by participating in the network. According to Umar Farouk, the bank's newly named CEO of Onyx. They also talked

about ending the paper check system. Georgia Coppolo said, we're talking about hundreds of millions of checks being sent. Using a version of blockchain with the participants being the main issuers of checks and the main operators of lockboxes, it's possible we can save 75% of the total cost in the industry today and make checks available in a matter of minutes as opposed to days. In these interviews, J.P. Morgan also said that they're looking to create new, separate payment rails for central banks in the coming central bank digital currency moment. So let's talk significance. First, there is significance around where this suggests our industry is as a whole.

And I'm going to go back to a quote from the article that I was sharing before. The developments give J.P. Morgan executives confidence that blockchain is past a period of inflated expectations and will soon start to yield real solutions. That follows the path of the so-called Gardner hype cycle, which is a model for the adoption of new technologies. Quote, if you think about blockchain, we are either somewhere in the trough of disillusionment or just beyond that on the hype cycle, Farouk said, referring to stages of the Gardner cycle. That's why at JP Morgan, we've been relatively quiet about it until we were ready to scale and commercialize it. This is a commercial implementation of a private, stable coin inside of JP Morgan.

You've got to know that that's going to be a big deal, and I think that's the second part of this significance is the implications for other companies. You have to believe that every other competitor out there is going to do something similar. We're going to see every type of coin that you can imagine, but inside these big investment banks. The big question is what other uses these currencies eventually have, if any? Do they just stay in their lane? Do they just help with these sort of internal cross-border settlement ideas? Or do they start to find their way into other use cases?

As long as they stay pegged to the US dollar, there are potentially some limits on how. disruptive it will be, but make no mistake that this is a fundamentally new era where all of a sudden these corporations are going to use this type of synthetic currency as a key part of how they do business. Given how much we've seen just native, organic, decentralized adoption of stable coins this year, it's hard for me to imagine that these technologies won't end up finding their way into some very different use cases than currently JPMorgan executives are thinking about. Anyways, guys, what do you think? Is this a big deal or is this a total non-news event that's just us getting hyped about JPMorgan doing something with blockchain? Hit me up on Twitter, let me know at NLW,

and until tomorrow, guys, be safe and take care of each other. Peace.