3 predictions for the digital financial future

The financial industry is going through a sea change. So many aspects of it are under scrutiny: from debates over cashless societies, to universal basic income, and the implications of digital currencies. Money has always been a hot topic, but it has become even hotter.

Blockchain changed the conversation

The advent of blockchain technology is in part a reason for this sudden increase in interest. As Lauren deLisa Coleman writes for Forbes, we are seeing financial giants like JP Morgan enter the digital currency space, alongside Facebook and IBM. And she points out, “But amidst such vast activity around digital currency overall, there is a specific and growing interest toward trend shifts pertaining particularly to token exchanges.

Talking about Token Exchanges

Coleman reports on the discussions at a New York event: Token Exchanges: The promise of liquidity, compliance and stability, where lawyers comprised the majority of the audience. Joel Telpner, partner and Chair Fintech & Blockchain Practice at Sullivan & Worcester LLP, addressed the issue of turbulence in the digital currency space: “We’re all collectively paying the price at the moment, but it’s important to keep in mind that this is not a bad thing. Most all new forms of technology have experienced a high level of unreasonable exuberance in the early days and after that period, business becomes much more stable.”

A more mature environment

Interestingly, he also suggested that now is the time to create a new ecosystem with new players: “”We’re at the end of the beginning,” he remarked. “This is about moving from the wild, wild, west to a more mature level of the digital currency space and tokens. Those that remain have to work hard and understand that success will come from fundamental principles in business and governance, and it will certainly pay off.”

3 key things to watch out for

He then identified what he believed are the three key regulatory areas to watch this year that could be game changers:

1. He believes the US Securities and Exchange Commission (SEC) will make a statement about the status of digital currencies and tokens — which are tokens and which are not.

2. The CFTC (Commodity Future Trading Commission) will become more involved in the token space given that this collective regulates commodities.

3. Stablecoins will come under a regulatory spotlight and decisions will be made about how to regulate this particular type of digital currency.

The event also revealed that a consensus of opinion indicates the issue of custodianship will come under focus this year as well. In addition, there will also be an eye to how trade is conducted in this space and how securities are managed securities once they are issued.

But, one of the most hotly debated topics in the industry is which jurisdiction will establish itself as a leader in the space: Telpner’s response to this was: “”But this approach was wrong in 2017, 2018 and still wrong to think like this in 2019, because all countries are working hard to regulate this space. Stop chasing jurisdiction.”

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.