By Mike Faden
The digital currencies used in these bank-operated cryptocurrency payment systems differ in several ways from most other cryptocurrencies, including Bitcoin. One difference is that most of them are proprietary “stablecoins” that are pegged to national currencies. The goal is to make them less volatile than other cryptocurrencies, many of which have fluctuated widely in value. Experts say that the relative stability of stablecoins opens more possibilities to use cryptocurrencies in everyday payments and as a digital form of cash.1
Second, the banks are in general providing the coins only to their customers, whereas anyone can buy or sell Bitcoin. Third, the companies control and manage exchange of the coins using a private, company-operated “permissioned” blockchain; in contrast, Bitcoin transactions occur on a public blockchain that enables anyone, in theory, to participate in verifying transactions and earning bitcoins by doing so.
In February 2019, J.P. Morgan said it had successfully trialed JPM Coin, a prototype new digital coin, for transferring international payments as cryptocurrency between its corporate customers. The bank said it is also looking at using the technology for other purposes.2,3
The bank says that exchanging money between different parties over a blockchain requires a digital currency; it created JPM Coin to fill that cryptocurrency payments role. Each JPM Coin represents one U.S. dollar held in an account at the bank. When one bank customer sends money to another over the blockchain, JPM Coins are transferred and instantaneously redeemed for the equivalent amount in U.S. dollars, reducing the settlement time. A transaction typically involves a three-step process, according to the bank: first, a business deposits money at the bank and receives the corresponding number of digital coins; second, the coins are used in cryptocurrency payment transactions over a blockchain network with other bank customers; and third, the holders redeem the coins for dollars.4
The bank said that it plans to extend the coin to other currencies over time. Payments execute on a private version of the Ethereum blockchain, but will also run on other platforms in the future, according to the bank.5
A key benefit of using the digital coin will be transaction speed, according to a bank executive quoted by CNBC: international cryptocurrency payments will settle in real time at any time of the day. In contrast, international payments sent via traditional correspondent banking networks can take much longer to settle, for a variety of reasons including the cut-off times for transactions in different countries.6
According to the executive quoted by CNBC, the bank is also considering two other potential uses of the coin. One is to replace wire transfers when buying securities. The other is aimed at multinational companies that use the bank’s treasury services. Using the cryptocurrency might enable each subsidiary to represent cash on its balance sheet without having to actually wire money between units, offering companies the possibility of consolidating their cash and getting better rates.7
Signature Bank, another U.S. bank, launched a blockchain-based payment system for its customers at the end of 2018 after receiving approval from New York State regulators. It is already being used by about 100 business customers to send each other cryptocurrency payments of millions of dollars a day, according to Coindesk.8 According to the bank, the system enables corporate customers with account balances of at least $250,000 to send dollar payments to each other in real time, 24 hours a day, without transaction fees.9 Some of those customers are cryptocurrency startups, but they also include a firm that is using the platform for trading renewable energy. Signature’s cryptocurrency payment network uses a stablecoin pegged to the dollar, and runs on a proprietary blockchain based on Ethereum, according to Coindesk.10
Potential advantages of such blockchain-based cryptocurrency payment systems include faster transaction times and lower fees, according to an article in American Banker. Cryptocurrency payment technology has the potential to eliminate third parties such as payment processors from the transaction process. And the fact that the technology is endorsed by major financial players, and the scope is limited, may make regulators more comfortable, according to the magazine.11
In Japan, Mizuho Bank in February 2019 launched J-Coin Pay, a mobile payments platform based on a digital currency, in cooperation with about 60 other regional domestic banks.12 According to a Mizuho spokesperson quoted by Quartz, the system does not use cryptocurrency or blockchain technology.13 Consumers and businesses that are customers of the banks will be able to make payments using a smartphone app and QR codes.
According to the Nikkei Asian Review, the J-Coin will be pegged to the Yen, and the banks will promote use in part by charging merchants lower fees than for credit card payments. Together, the banks have about 56 million account holders, and aim to sign up over 6.5 million J-Coin Pay users and 300,000 participating retail outlets over the next few years, according to the Review.14 Mitsubishi UFJ Financial Group is also planning trials of its own digital coin with around 100,000 account holders in Tokyo.15
Banks are not the only organizations exploring digital coins and cryptocurrency payments. According to the New York Times, large social-media and messaging companies are working on digital coins that their users could use to send payments to other users.16
Several U.S. banks are creating digital coins for B2B cryptocurrency payments. A report suggests some large technology companies are also exploring digital currencies to enable payments among users of their services. Proponents say the potential benefits include faster payments and lower costs.
Mike Faden has covered business and technology issues for more than 30 years as a writer, consultant and analyst for media brands, market-research firms, startups and established corporations. Mike also is a principal at Content Marketing Partners.
1. “Stablecoins,” Harvard Law School Forum on Corporate Governance and Financial Regulation; https://corpgov.law.harvard.edu/2019/02/10/stablecoins/
2. “JPMorgan to use cryptocurrency for corporate-payments business,” American Banker; https://www.americanbanker.com/articles/jpmorgan-to-use-cryptocurrency-for-corporate-payments-business
3. “J.P. Morgan Creates Digital Coin for Payments,” J.P. Morgan; https://www.jpmorgan.com/global/news/digital-coin-payments
5. “JPMorgan Has Its Own Crypto and It’s Starting Real-World Trials, Coindesk; https://www.coindesk.com/jpmorgan-moving-its-in-house-crypto-to-real-world-trials-report
6. “JP Morgan is rolling out the first US bank-backed cryptocurrency to transform payments business,” https://www.cnbc.com/2019/02/13/jp-morgan-is-rolling-out-the-first-us-bank-backed-cryptocurrency-to-transform-payments--.html
8. “‘Already Live’: Signature Bank Is Moving Millions on a JPMorgan-Like Private, Dollar-Backed Cryptocurrency,” Coindesk; https://www.coindesk.com/already-live-signature-bank-is-moving-millions-on-a-jpmorgan-like-private-dollar-backed-cryptocurrency
9. “Signature Bank Unveils Proprietary Digital Payments Platform, Signet,” Signature Bank; http://investor.signatureny.com/news-releases/news-release-details/signature-bank-unveils-proprietary-digital-payments-platform
10. “‘Already Live’: Signature Bank Is Moving Millions on a JPMorgan-Like Private, Dollar-Backed Cryptocurrency,” Coindesk; https://www.coindesk.com/already-live-signature-bank-is-moving-millions-on-a-jpmorgan-like-private-dollar-backed-cryptocurrency
11. “5 things JPM Coin will do for banking and blockchain,” American Banker; https://www.americanbanker.com/list/5-things-jpm-coin-will-do-for-banking-and-blockchain
12. “Launch of J–Coin Pay, smartphone payment service using QR codes,” Mizuho Bank; https://www.mizuhobank.com/company/release/20190220release_eng.html
13. “One of Japan’s biggest banks is launching a digital “coin” to replace cash—without using crypto,” Quartz; https://qz.com/1566232/mizuhos-j-coin-doesnt-use-crypto-of-blockchain/
14. “Mizuho's digital currency to take on payment rivals next month,” Nikkei Asian Review; https://asia.nikkei.com/Economy/Mizuho-s-digital-currency-to-take-on-payment-rivals-next-month
15. “Mizuho Bank prepares roll out of proprietary digital currency,” Finextra; https://www.finextra.com/newsarticle/33156/mizuho-bank-prepares-roll-out-of-proprietary-digital-currency
16. “Facebook and Telegram Are Hoping to Succeed Where Bitcoin Failed,” The New York Times; https://www.nytimes.com/2019/02/28/technology/cryptocurrency-facebook-telegram.html