Why It’s Important to Point Out That JPM Coin Is Not a Cryptocurrency

February 15, 2019

Yesterday J.P. Morgan announced JPM Coin, which CNBC hailed as “the first cryptocurrency by a U.S. bank.” Many others said the same thing.

Except it’s not really a cryptocurrency as that word is commonly understood.

In its own FAQ, J.P. Morgan draws a distinction between JPM Coin and crypto. In a helpful comparison chart, under the heading of “Cryptocurrencies (e.g. Bitcoin, Ether)” they list the key attributes “Public — open” and “Unconllateralized, Value is intrinsic to the coin” while under the heading JPM Coin it says “1:1 redeemable in fiat currency held by J.P. Morgan (e.g., US$)” and “Permissioned … Only institutional customers passing J.P. Morgan KYC can transact with these coins.”

That is absolutely right. The main thing that makes a crypto a crypto is that it is built in such a way that anyone can use it and anyone can participate in its consensus system without seeking permission from anyone else. That in turn means that it likely has a predetermined monetary policy and coins trade openly at market rates. That is certainly not what J.P. Morgan built, nor even what it wants to build, as I told a few reporters yesterday:

If it’s so different, why frame it in relation to cryptocurrency or as a new kind of crypto? Instead of announcing a new “coin,” J.P. Morgan could have simply announced a new interbank settlement network that lets its customers instantly transfer JPM-deposited dollars. That framing could have avoided confusion, but I doubt it would have generated as much attention.

This is just marketing you might think, but it matters.

As you might remember, a few years ago companies promising to build “blockchain without bitcoin” were all the rage. As it turns out, those companies spent a lot of time in Washington talking to policy makers. They capitalized on the excitement about “blockchain” generated by Bitcoin and other cryptocurrencies, yet promised that they could offer the same benefits but using permissioned systems, which strictly speaking is not true. In the process, they did not portray cryptocurrencies in the best light. Why take on the risks associated with crypto when you can have the same benefits for free?

This created a lot of confusion that my team and I had to spend a lot of time undoing. We even published an extensive report painstakingly explaining the vital importance of permissionlessness:

My sincere hope is that in pursuing what seem like very useful innovations in their businesses, that banks don’t feel it necessary to draw a comparison to crypto in search of buzz. Again, even if it’s unintended, it can confuse policy makers and the public.

To see what I’m worried about, look at the JPM Coin FAQ again. In it they point out that “only institutional customers passing J.P. Morgan KYC can transact with these coins,” while that is not the case with cryptocurrency like Bitcoin. Of course, that is because J.P. Morgan is a “financial institution” under the Bank Secrecy Act and, while Bitcoin is not. After all, it’s not a company, its a network. The proper analogy would be to Coinbase, which is a BSA-regulated financial institution, and indeed they conduct KYC just as J.P. Morgan or any other bank.

That lack of precision is surely unintentional on the part of JPM, but I bet that in the next couple of weeks I’m going to have a Hill staffer ask me about this. That’s fine, we’re here to educate, but unfortunately we can’t reach everyone. And a less scrupulous bank may argue that its e-coin will get us all the benefits of cryptocurrency without any of the risk. Of course, that’s not true at all because one of the most important benefits of crypto is that it is electronic cash.

While I’m glad banks are pursuing these blockchain-based projects, and think they’ll potentially create a lot of value, we need to make sure the word cryptocurrency doesn’t lose its meaning, which is open and permissionless electronic cash.

I welcome thoughtful comments via Twitter where you can find me at @jerrybrito.