In the world of cryptocurrencies, after Nouriel Roubini, an economist of repute for calling market failures and pouring cold water on crypto, Jamie Dimon, JP Morgan’s chairman and CEO, may be public enemy number 2. His well-known and contrarian positions on bitcoin, where he famously said he would fire any JP Morgan employee who traded in cryptocurrencies, is now the subject of an about face at the systemically important bank. JP Morgan, along with other institutional investors, is now wading into the cryptocurrency market, not with the safe bet of trading digital assets as Fidelity is doing later this year, but in launching its own cryptocurrency, the JPM Coin. The battle for so-called stablecoins countering the price volatility of free-floating decentralized digital assets, like bitcoin, has now gained a very serious player.
To the bitcoin maximalists and the crypto-utopians, JP Morgan’s entrance will be considered a serious affront, as this is the pinnacle institution in their minds when it comes to all the ills of centralized banking. The attendant socialization of gain and privatization of losses that followed the 2008 financial crisis at the hands of systemically important financial institutions rings loudly in the minds of early crypto adopters. Many of whom, ironically, are exhibiting many of the same behaviors that stoke financial crises in the first place. To the enterprise blockchain community and those that believe in the fractionalization of underlying assets using efficient, secure and transparent technologies, the entrance of the largest U.S. bank is at once a serious and welcome move. JP Morgan’s foray into digitally minting its own cryptocurrency, however, may be a foolhardy endeavor. As much as this is another sign of the growing institutional confidence in the asset class and of enterprise adoption of its underlying technology, blockchain, few centralized cryptocurrencies have been successful. Many (if not most) have gained the dismissive moniker “shitcoins” for this very reason. The posture of financial regulators on centrally-issued and managed cryptocurrencies remains cold. If however the JPM Coin is used to remove friction in the bank’s business model among counterparties, the move will be well rewarded and the cryptocurrency label unearned.
Nevertheless, JP Morgan’s move into the market – broadsides over bitcoin’s bow notwithstanding – may mark a degree of permanence among large systemic institutions in the blockchain ecosystem. This is a welcome move, provided of course large enterprises get the right combination of ceding control, augmenting transparency and reducing friction that blockchain-based business models entail. Candidly, these changes are unnatural for large sprawling institutions like JP Morgan, which in many ways owes its embarrassment of riches to the opacity, complexity and asymmetries of information inherent in the market and its business model. Nevertheless, JP Morgan’s move is a bold one which will either be observed from the sidelines by peer institutions, replicated or challenged in some new, as yet unthought of combinations of analog and digital value.
What is clear, however, from this new digital mint, is that Jamie Dimon’s disdain for bitcoin and decentralized cryptocurrencies has not gone away, which is why some are calling JP Morgan’s crypto play a bitcoin killer. Notwithstanding the clear technical differences in a truly decentralized digital asset versus a centrally-issued cryptocurrency like JP Morgan’s, the nascent crypto industry can stand to benefit from some of the cybersecurity maturity inherent in large banks. The recent loss of $140 million in cryptocurrencies in the QuadrigaCX debacle in Canada, which affected more than 100,000 investors, speaks to the risk management immaturity still plaguing the crypto startup market. In many ways, crypto valuations have been suppressed in no small measure due to the wait for institutional players with more operational control and assets under management to enter the fray. While most were waiting for the likes of Fidelity and large asset managers to trade in crypto, enhancing market access through their more stringent operating standards and broader customer reach. JP Morgan taking an unexpected tact may be viewed cynically by some as a way of masquerading analog financial instruments under the guise of cryptocurrencies, or as a declaration of war. Whatever the motivation or labels used for the further digitization of assets and value transfer, proves that blockchain not only came out of beta in 2018, it is now entering a cycle of rapid adoption and market transformation.
Against this backdrop, it is reasonable to expect other big moves from big firms, not only in banking and asset management, but technology platforms and marketplaces like Amazon. If JP Morgan determined that it had all the preconditions for the launch of a native cryptocurrency, a firm like Amazon would benefit handsomely from creating and launching a veritable closed-loop economy on its vast platform, for which cryptocurrencies and blockchain would be essential foundational layers. In short, watch this space and watch the wave of trials, errors, tribulations and the occasional breakthrough successes it will augur.