"JPMorgan released a blockchain market report this week that talks about the technology's prospects in mainstream applications and the feasibility of stablecoins such as the Libra project backed by Facebook."
JPMorgan Perspectives reports this year that blockchain has proven to be more widely used in companies such as stock exchanges, although it will take years for it to be adopted by mainstream institutions.
The report states: "They have seen the long-term potential of changing banking business models through distributed ledger technology (DLT) or by providing effective information transmission and random number storage."
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But it needs to be stated that the speed of its progress depends on the resolution of legal and technical issues, especially cross-platform integration:
"While we will not see widespread implementation of blockchain solutions until at least three to five years, challenges such as the macroeconomic environment, legal and regulatory frameworks, and technical challenges such as cross-platform integration may hinder further progress development of."
According to the 74-page report, banks are increasingly using distributed ledger technology (DLT) to build their settlement / clearing and collateral management systems. The report also states: "The crypto market continues to mature and institutional investors' participation in cryptocurrency transactions is now significant ."
JP Morgan's Blockchain Practice
JPMorgan Chase (JPMC) is a leader in the field of blockchain technology and has a global team: JPMC Blockchain Center of Excellence (BCOE), which is dedicated to exploring potential applications for the entire company and developing innovative solutions for customers .
In 2016, with the release of Quorum, JPMC became the first bank to open source blockchain protocols, focusing on institutional-level performance, privacy, and security requirements. It comes from the public Ethereum blockchain, is free to use and transparent, and can be used for third-party review and verification. JPMC continues to invest heavily in Quorum and has a dedicated team dedicated to developing Quorum's roadmap to meet the requirements of many financial institutions and companies that develop applications using Quorum technology.
JPMorgan Chase ’s bulk payment business was first trialled in 2017 and launched the JPMC ’s first production-grade scalable and peer-to-peer blockchain-based network, the Interbank Information Network (IIN): IIN is committed to solving the problem of interbank information sharing. The long-term challenge is to reduce friction in the cross-border payment process, enabling payments to reach beneficiaries faster and in fewer steps.
In 2018, JP Morgan Chase tokenized a $ 150 million one-year floating rate bond based on blockchain tokens. Its innovation-focused customers represented financial institutions, enterprises, and asset management companies. This is the first time in North America. In this so-called "Dromaius" project, customers use a tokenized platform to easily and seamlessly simulate the creation of debt instruments, multi-party automatic clearing, and a shared ledger that calculates quarterly interest payments during the life of the bond. Dromaius' focus is to simplify, standardize and automate the process of creating and distributing selected financial instruments, while reducing the multi-party reconciliation requirements in post-trade lifecycle calculations.
In 2019, after JPMC announced the JPPM Coin2 project, it became the first national bank to successfully create a digital currency representing fiat currencies for its customers. The digital currency is anchored in USD deposited in JP Morgan Chase Bank North America and is designed to facilitate blockchain payments linked to the core banking system, thereby realizing the potential of blockchain-based use cases such as cross-border transfers and programmable automatic value transfer Etc. can enhance the customer experience.
In the same year, JPMC's Chase Auto business announced the company's first project, which is to connect Internet of Things (IoT) devices to the blockchain through the development of an asset network (NoA). The focus of this project is on digital dealer floor plan finance Audit process. With telematics, Chase Motors and the car dealerships it serves will be able to share an auditable ledger that tracks the location of a batch of vehicles from dealers mortgaged as financing collateral. In terms of scale, this new technology has the potential to reduce the time, effort, and cost required for financial companies to conduct physical audits, while enabling auto dealers to access and locate inventory instantly and accurately at multiple different physical locations.
In addition to its strategic cooperation with the JPMC business, BCOE is also actively conducting research and development of related emerging technologies, such as zero-knowledge proofs and multi-party computing, while incubating new use cases and building and decentralizing digital identities, tokenizing assets and collateral , Digital asset security-related prototype and key management, and renewable energy.
JP Morgan Chase 2020 Blockchain Report Summary
Part 1. The evolution of blockchain, will blockchain become mainstream ?
Blockchain has begun to become mainstream; Bitcoin's preferred position has been further consolidated; the industry still has obstacles: garbage in and out; quantum computing raises future security issues.
1.1 U.S. blockchain financial services: still in its early stages of development, but Signature Bank stands out:
- Commercial payments are the focus of U.S. banks in the first use cases of blockchain technology, as medium-sized regional banks are leading;
- Large banks have avoided bank cryptocurrency companies, but smaller banks have stepped in to fill gaps in the provision of banking services;
- A handful of smaller banks have withdrawn from the market, and Signature Bank is a pioneer.
1.2 European blockchain financial services: Exchanges already have settlement and clearing efficiency:
- Blockchain technology has the potential to boost the efficiency of the entire industry, especially in the areas of settlement and clearing;
- The exchange adopts blockchain technology in its operations and seeks to launch a new digital asset trading platform;
- Traditional capital markets are continuing to use blockchain, and more assets are being tokenized;
- Asset managers are exploring the launch of digital asset solutions.
1.3 Bank Blockchain: The Latest Development of Distributed Ledger Technology
- Banks continue to invest in blockchain in 2019, but we have not seen a clear cost benefit. However, we still believe that distributed ledger technology (DLT) has the long-term potential to change the banking business model, and we hope that the momentum of adopting this approach in the medium term will continue.
- We see that compared to other use cases, trade finance blockchain solutions provide the highest efficiency gains in the banking industry, especially when digital payments and KYC solutions are replaced by other available media to a large extent.
- Although we believe that blockchain solutions will not be widely implemented until at least three to five years, challenges such as the macroeconomic environment, legal and regulatory frameworks, and technical challenges such as cross-platform integration may hinder further development .
1.4 Logistics blockchain: barriers to widespread adoption persist
- With the development of automation technology, competition for disruptive freight technology is increasing
- Other collaborative logistics and visibility solutions to meet near-term productivity needs
- There are still obstacles to widespread adoption, including standard setting and government integration
Part 2: The rise of alternative payments
2.1 The rise of global non-cash payments
- The number of cashless payments has increased dramatically in recent years, especially in emerging markets
- But the value of cashless payments varies; in some countries, the amount of cashless payments adjusted for GDP has fallen in 2014-18
- Card payments and electronic money payments are growing faster than other types of non-cash payments
- Despite an increase in cashless payments, cash use is still increasing in most countries
- Fed payments study 2019 shows similar trends in the U.S., growth in non-cash payments accelerated in 2015-18
2.2 China Case Study: Managing Cashless Economy on a Large Scale
- The modernization of payments is a global theme and a key driver of stablecoin projects such as Libra
- To complement previous work in this area, we hope to draw on China's experience with digital payments as a case study on consumer preferences
- We reviewed China's major third-party payment platforms, including business models, market structures, regulatory developments and, importantly, their interconnections with financial markets
- Monetary funds and wealth management products form a key part of China's financial system
- Integrating these funds into online ecosystems (such as Yu'ebao and Alipay) has driven AUM's explosive growth
- But since then the pace has slowed, and although China's money supply continues to expand, this may reflect a decline in attractiveness compared to traditional bank deposits
- This interaction has led to rapid changes in technology and structure, and in this case has also led to the rapid establishment of new risks to financial stability; timely regulatory intervention is the key to managing this transition;
- Although the convenience and functionality provided by integration into an e-commerce network is undoubtedly an important factor, the degree of sensitivity of China's MMF AUM to the rise in earnings suggests that the economy is comparable, if not more, to the externalities of participating networks Important consideration
- The case of China shows that the transition to a large-scale cashless economy can be managed on a large scale.
2.3 Japan Case Study: Rapid Growth of QR Code Payments and Affiliate Programs
- Japan's cashless interest rate is 24% (based on BIS), but 49% for direct debit / bank transfer
- Cashless payments have grown rapidly, especially since the government started rolling out in October 2019. Credit card payments are driving this growth, with QR code payments growing fastest
- Loyalty programs have also grown rapidly with the support of platform players' reward rates of up to 20% and Japan's negative interest rate environment
- With the expansion of the platform ecosystem, the platform merchant's loyalty points are currently at a medium scale and can be used as an alternative payment method; in the medium term, this may cause problems for monetary policy / financial stability
- Banks are redesigning their digital currency strategy, and consumers are choosing non-cash payment methods with high returns
Part III: Can stablecoins replace cryptocurrencies?
3.1 Market Implications of Libra and Other Stablecoins
- Unlike free floating cryptocurrencies, stablecoins are designed to minimize price volatility by linking the value of collateral to collateral, including fiat currencies and assets
- Libra is the most eye-catching of such tokens, mainly due to its huge network externalities due to its association with Facebook
- … and recently, the central bank seems to be seriously considering using supranational multicurrency support tokens as an alternative to global reserve assets
- What we are considering more is not the possibility of the project's success, but the stability risk introduced when the stablecoin has global and systemic impact
- Although e-commerce is mainly related to C2B and C2C transactions, the vast majority of these payments are B2B …
- … subject Libra or any other stablecoin-based payment system (which accounts for a large percentage of these transactions) to the intra-day liquidity requirements of high-turnover networks such as Fedwire
- Without overdrafts or other short-term credit markets to reallocate cash and maintain payment chains, such a system could easily become deadlocked, especially under pressure
- Although underfunded people are less at risk of payment deadlock, they account for a small portion of the global economy and payment activities, even if they include the shadow economy
- By design, Libra relies on collateral income from its reserve account to finance network maintenance and other expenses, and to compensate Libra Association members …
- … but since yields on most major currencies are negative, it is unclear how the system will continue to work if collateral is a cost rather than a source of income
- As interest rates fall (especially when interest rates become negative), it is necessary to increase transaction costs, which may tax consumers and businesses as the situation worsens, exacerbating and prolonging the recession
3.2 Can the stablecoin reach global scale?
- In previous publications, we examined the practical challenges of operating a stablecoin-based payment system …
- .. However, as the G7 Working Group has pointed out in a recent report, the risks associated with achieving the global scale of stablecoins may be of a different kind compared to more niche implementations.
- Here we consider three issues regarding the scalability of Libra and other stablecoins, especially those backed by assets:
- Is the world ready to use private funds? We think we are fully prepared. Thanks to the ubiquity of some Reserve Banks, most of the money in the world comes from private issuers. However, if guided by the experience of traditional banks, the privilege to do so comes from significant regulatory oversight and costly compliance obligations.
- Is the underlying technology ready to be rolled out globally? Many popular distributed ledger technology (DLT) protocols are very energy intensive: for example, the Bitcoin network consumes as much power as the Austrian country, even though it processes far fewer transactions than global applications require. In practice, less distributed semi-private networks may be required.
- Where does the collateral come from? A large proportion of short-term high-quality sovereign debt is locked in the central bank's balance sheet, and the US dollar is the only important source of positive returns on such assets. Wholesale bank deposits are unlikely to fall to negative rates following policy rates, but non-operating balances may pose a challenge to institutions with limited liquidity.
3.3 Is the cryptocurrency market mature?
- The market value of cryptocurrencies has recovered from about $ 125 billion a year ago to about $ 235 billion, with Bitcoin accounting for almost two-thirds, thereby increasing its dominance
- Once “false” trading volumes have been adjusted (such as laundering transactions), institutional investor participation becomes very important
- Cryptocurrency market continues to mature as new contracts are introduced on regulated exchanges, and futures contract options have recently been introduced on regulated exchanges
- The gap between Bitcoin's market price and our estimate of its "intrinsic" value has narrowed significantly, largely due to falling market prices
- Its market value continues to be higher than our estimate of intrinsic value, suggesting that there is still downside risk
3.4 Cryptocurrency for portfolio diversification: striving to prove uniqueness
- As the global economy enters its 12th year of longest expansion in history, there is no shortage of risks that need to be hedged, from some familiarity (recession, inflation, military conflict, trade war, currency war) to newer (epidemics) , Climate change) changing catastrophes, systematic cyber attacks)
- Many such events have occurred with high frequency in the past 50 years, and investors and risk managers believe they know how best to proceed with defensive assets such as US Treasuries, Japanese yen, gold, and quality stocks Hedge
- With so many historical events supporting the effectiveness of traditional assets to hedge extreme macroeconomic environments and geopolitical flashpoints, exploring alternatives such as cryptocurrencies seems creative, but meaningless
- The appeal of crypto assets is that they are less relevant to traditional asset classes and often increase the efficiency of the portfolio
- However, the lack of a legal subject matter also limits its use in transactions and thus its liquidity. Even small distributions are impractical. Crypto assets still fail to rise like bonds, yen and gold when stocks suffer large losses
- Because Japaneseization fixes interest rates around 0% and limits capital gains from falling yields when stocks fall, bonds may lose their ability to hedge stock portfolios in the coming years. Therefore, less constrained markets such as the yen and gold should form part of a long-term hedge. Cryptocurrencies should also be added to this list, not because they have shown the same hedging effectiveness as traditional markets, but because they can uniquely hedge against an environment that has not yet appeared, thereby losing both their currency and their payment systems. confidence
3.5 Status of Petro in Venezuela: ready to go but nowhere to go
- Petro is widely praised but gains little international influence
- Maduro regime increasingly seeks domestic use of "sovereign coin"
- But in the end, Petro looks more like another (high inflation) fiat currency so far
The above is the summary of the 2020 JPMorgan Chase blockchain research report. Editor of this article: Xiu En