Are the Banks Reigniting the Crypto Bull Market - Vivek Kaul's Diary
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Are the Banks Reigniting the Crypto Bull Market

Feb 19, 2019

Selva Freigedo

Have you noticed the price of cryptos?

Bitcoin is up 8% today.

Cryptos have seen some positivity recently, and there are quite a few things going on behind the scenes.

For one, we could be seeing a bitcoin ETF coming out soon. It could mean more institutional investors jumping into this market.

The price increase could also have to do with something JP Morgan did.

The US bank is the first major bank to launch its own digital currency, JPM Coin.

The new coin is based on blockchain technology.

What is blockchain?

It is essentially a shared public ledger - a database that every member of the network can see and contribute to. It is also the technology behind bitcoin.

The bank is looking at using JPM Coin to settle cross-border payments for large corporate clients instantly. JP Morgan moves quite a lot of money per day, about US$5 trillion.

The main goal is to make international payments quicker and more efficient. As CNBC explained, the coin will have three applications:

  • 'The first is for international payments for large corporate clients, which now typically happens using wire transfers between financial institutions on decades-old networks like Swift. Instead of sometimes taking more than a day to settle because institutions have cut-off times for transactions and countries operate on different systems, the payments will settle in real time, and at any time of day, he said.

    'The second is for securities transactions. In April, J.P. Morgan tested a debt issuance on the blockchain, creating a virtual simulation of a $150 million certificate of deposit for a Canadian bank. Rather than relying on wires to buy the issuance - resulting in a time gap between settling the transaction and being paid for it - institutional investors can use the J.P. Morgan token, resulting in instant settlements.

    'The final use would be for huge corporations that use J.P Morgan's treasury services business to replace the dollars they hold in subsidiaries across the world. Unseen by retail customers, the business handles a significant chunk of the world's regulated money flows for companies from Honeywell International to Facebook, moving dollars for activities like employee and supplier payments. It generated $9 billion in revenue last year for the bank.'

But, JPM Coin is not really a cryptocurrency. It has some differences from your good ol' regular crypto, like bitcoin.

Unlike bitcoin which is public and has open access, JPM Coin runs on a private network. That is, you won't be able to buy it. Only the bank and its clients will be able to use it.

Also, it is not as volatile as other cryptos. The value won't fluctuate as it's pegged to the US dollar. That is, one JPM Coin equals one US dollar.

Even though JP Coin is not a crypto per se, the bank's move is quite significant.

My point is, the fact that a major US bank is creating a digital currency based on blockchain, to make payments more efficient, is massive. It could be telling you that there might be something to blockchain and cryptos after all.

JP Morgan is quite optimistic about blockchain. As Umar Farooq, the head of JP Morgan Blockchain projects noted:

  • 'So anything that currently exists in the world, as that moves onto the blockchain, this would be the payment leg for that transaction. The applications are frankly quite endless; anything where you have a distributed ledger which involves corporations or institutions can use this.'

Things are changing with blockchain. And you are already starting to see some uses in everyday life too.

You see, JP Morgan is not the only bank looking at, or even using, blockchain.

Just recently, I logged into my Banco Santander account in Spain to make a payment. The bank gave me the option of making the payment 'instant'...for a higher fee of course.

Banco Santander is one of the first banks globally to implement blockchain payments.

What are the benefits?

There are a lot of benefits. Lower costs, efficiency and security.

Banco Santander has also recently signed a deal with IBM to use IBM's blockchain technology platform to 'provide new efficiencies to the bank's operations'.

And even SWIFT, the payment system, is already looking at blockchain for faster payments.

The banking industry is changing.

But anyway, faster and more efficient payments is only one of the ways that blockchain could affect your life.

Blockchain can change the way we look at energy, it could improve food safety, shipping.

Blockchain could disrupt plenty of industries that are labour intensive and time consuming.

Best,

Selva Freigedo,
Editor, Markets & Money

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Please note: This article was first published in Markets & Money on 19th February 2019.

Selva Freigedo is an analyst with a background in financial economics. Born and raised in Argentina, she has also lived in Brazil, the US and Spain. She has seen economic troubles firsthand, from economic booms to collapses and the ravaging effects of hyperinflation, high unemployment, deposit freezes and debt default. She is lead Editor at the daily e-letter Markets & Money.

Disclaimer: The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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