Industries are looking for the profit in blockchain

JP Morgan’s CEO Jamie Dimon may have said unflattering things about bitcoin and cryptocurrency generally, but his bank is pursuing the profit in blockchain technology.

Bank consortium and blockchain

Back in October 2017 the bank, which just happens to be the biggest in the USA, revealed that it and several other banks were conducting tests with sending payments using blockchain technology. The banks acknowledged that using decentralised ledger technology (DLT) would simplify the process and reduce the time involved in the process from “weeks to hours.”

The group of banks, now naming themselves the Interbank Information Network (IIN) grew in number, all of them seeking to leverage the power of the blockchain. Some have been testing the use of Ripple’s technology, while others have been exploring Hyperledger and the Enterprise Ethereum Alliance platforms.

Some see it all as a way of getting media attention: mention ‘blockchain’ in your press release and the story is bound to find its way to print is the thinking. But Michael del Castillo at Forbes, writes that there is a little-known economic principle powering the phenomenon. He refers to a research paper from Prysm: “Called “hold-up,” the principle dictates that when an individual invests in a group project, that investment is worth more as part of the group than outside it, giving others bargaining power equal to the investment.”

Tackling the ‘hold up’ principle

He describes the principle as being similar to the ‘hold up’ in a bank robbery. He says, “Like an old-fashioned bank robbery, the unlucky investor can essentially be “held up” for the value of the funds and other resources invested in the group and forced into undesirable situations, discouraging participation in the consortium at all and undermining even the greatest potential benefits.”

What he is getting at is that blockchain removes the ‘hold up’ situation. In the IIN consortia using blockchain allows members to share data, “without requiring that they hand over control of the actual data itself, where it could be easily copied and drained of its value.” As del Castillo sums it up, “As a result, competitors linked together via a blockchain are free to invest in common goals, and if they choose to leave the group in the future they can take their data with them as easily as one moves a bitcoin.”

And there is money to be made from it. Research company Gartner estimatesthat the business value locked up in these blockchain consortia and elsewhere in the industry will reach $3.1 trillion by 2030.

It is not only banks that are forming blockchain consortia. Across the medical industry there are new groupings emerging all the time, and the automobile sector is another.

Industry consortia want to solve blockchain snags

But there are still some snags to be ironed out, especially regarding the ‘hold up’ scenario. The Prysm research suggests that consortia creators identify past causes of hold-up in their industry and code smart contracts that account for them, and that the data is “structured in a way that is readable both on or off a blockchain, making it easier to not only integrate with other consortia, but leave them.”

Some answers, or remedies, that will allow competitors to work together more effectively are to be presented at Consensus 2019 this week. We are seeing progress in the adoption of blockchain that goes beyond it being confined to being the technology that has ‘something to do with cryptocurrency’.

JP Morgan still has Cryptophobia

It may have seemed that with the announcement of the JPM Coin, the banking giant had overcome its ‘cryptophobia’. However, I cam across a story last week that indicates it is still some way from showing crypto the love.

Cryptoraves, a company that is working on the tokenization of social media, had its bank account shut down last month by JP Morgan, without any explanation whatsoever.

In the long run, JP Morgan told them they were working in a “prohibited industry.” But that is as much information as Cryptoraves could wring out the stone that is the bank.

Cryptoraves was surprised to receive a letter saying, “After a recent review of your account, we have decided to end our relationship with you.” That is like ending a relationship by text. It is rather harsh, all the more because it doesn’t provide any reason for the break-up. Who wants a bank that treats its customers like this?

And is Cryptoraves really operating in a “prohibited industry”? Go to its website and the first thing you see is that you can get “FREE TOKENS.” People use the tokens to boost their credibility on social media. For example, a Twitter user can request free tokens and send them to other Twitter users. The tokens have no actual value, therefore they are not securities in the regulatory sense.

Cryptoraves has published an assessment of where it thinks the issue with JP Morgan arose: “We did send two wire transfers to Gemini to buy ETH and LOOM in order to cover future blockchain fees. We suspected that these transactions flagged our account, but the Chase rep would not confirm this. They would not give us a reason for the closure. We called the number in the letter and the agent told us to visit a branch for these details. Visiting our branch resulted in no other details except when our branch rep pressed the agent (yep as the primary course of action, our rep called the same phone number), they said we were operating in an ‘prohibited industry’. I guess JPM’s own blockchain department didn’t get the memo?”

Furthermore, Cryptoraves had had a 15-year relationship with the bank and praised its service. There is a suggestion that the timing of the account closure is connected to the launch of the JPM Coin, but that may just be a bit of a conspiracy theory. What is clear though is that banks are still making it difficult for crypto-related companies and crypto owners, especially when something as innocuous as a transfer can result in your account being closed.

JP Morgan surprises us with a stablecoin

When JP Morgan announced the launch of its very own stablecoin, the industry was somewhat shocked. Was this not the big bank that loathed cryptocurrencies? The move got people excited, both in traditional banking and in the crypto community. But is the JPM Coin really as big a deal as everyone seems to think it is.

Naturally, the industry pricks up its ears when JP Morgan speaks, and any of its previous explorations of the blockchain have produced similar interest. As Ben Jessel, head of enterprise blockchain at Kadena remarks, “In the last few weeks, blockchain innovation managers’ phones across Wall Street investment banks have been ringing with executives inquiring about JP Morgan’s stablecoin and how they should be responding.”

That’s because enterprise blockchain technology has been the way that big companies have sought to harness blockchain technology to meet their needs as large organisations. JP Morgan’s move has made others question what to do next — is this the time to jump in and be first in the fast-follower line?

Initially, the JPM Coin seems exciting, because it suggests that Wall Street is beginning to “blur the lines between institutional banking and the brave new world of cryptocurrency,” as Jessel suggests. But the reality is not so simple.

Faster, cheaper settlements

JP Morgan’s stablecoin seeks to solve two problems in financial markets today: the expensive and inefficient process of settlement and the volatility involved in holding money in cryptocurrency. Settlement is expensive for banks for a number of reasons: first, payments are rarely made in real-time, which means that in many cases funds that should be paid are not actually made available until the end of the day. For the banks, this means billions of dollars can be tied up and can’t be used.

Blockchain speeds the process up, making the process less expensive for banks and reducing the liquidity trap, i.e. funds being tied up in the process of settlement.

JP Morgan’s stablecoin neatly connects the dots between the aspects of settlement and volatility management by providing digital cash that can be used and enabling the ability to redeem the coin at a stable rate. This may sound like a big deal, but in fact all it means is that any counterparty would be paid by JP Morgan issuing a digital certificate. At its most fundamental, JP Morgan is promising to credit the account of a user when presented with a digital certificate that has a redemption value of a dollar.

Having said all this, JP Morgan’s new ‘Coin’ is not an insignificant development. Don’t forget, this is an industry where they still use fax machines, so in that context, the JPM Coin is actually a pretty big deal.