JPMorgan tests blockchain-based payment system

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Yesterday, Bloomberg revealed that JPMorgan is exploring a new system for international payments based on blockchain and token deposits. 

Bloomberg cites anonymous sources, but says they are people familiar with the project. 

It would be a very early-stage project and would be based on a token deposit on the blockchain, which could speed up cross-border payments and settlements.

JPMorgan’s idea for blockchain-based payments

Although what Bloomberg is reporting is neither official nor confirmed, but merely rumours from anonymous sources, the picture seems quite clear. 

It should not be forgotten that the bank created its own blockchain-based token, JPM Coin, several years ago, and this is probably where the new project started. 

In fact, the bank has already developed the basic infrastructure to handle payments with digital tokens, although the token used for the new project will apparently be different. 

This token is not expected to be created until the new project is approved by US regulators, but if it is, it could be launched quickly. 

The new token will be a deposit token, i.e. a transferable digital currency that represents a deposit request sent to a commercial bank and is the digital version of the deposits that bank customers hold in their fiat currency accounts. 

Thanks to the use of digital deposit tokens and blockchain technology, the settlement of cross-border transactions could be instantaneous, as opposed to current transactions that can take days.

The Deposit Token

The deposit token would be used to send money quickly and easily to customers of other banks. It would also be particularly suitable for settling transactions involving tokenized assets or financial instruments issued on the blockchain. 

Its basic infrastructure would interact with existing banking systems to also enable anti-fraud and anti-money laundering controls. 

The token will initially be pegged to the US dollar, but other tokens pegged to other currencies could be launched in the future. 

However, it will not be a true stablecoin as it cannot be traded on exchanges. Rather, its use will be limited to payments, settlements and transactions within the traditional financial system. 

JPMorgan wrote in a recent study: 

“We believe deposit tokens will become a widely used form of money within the digital asset ecosystem, just as commercial bank money in the form of bank deposits makes up over 90% of circulating money today.”

JPMorgan and the crypto industry

JPMorgan is by no means new to initiatives related to blockchain and cryptocurrency technology. 

Although these are, for the time being, purely technical projects rather than speculative financial initiatives, they are genuine attempts to take advantage of the innovation generated by the crypto sector. 

For example, JPM’s JPM Coin, which allows some corporate clients to move dollars and euros from their various accounts within the financial institution, has already processed some $300 billion in transactions in less than four years, although in reality the bank alone moves some $10 trillion a day using traditional systems. 

This makes it ideal for use by multiple, even competing, banks.

The alternative in such cases with traditional technologies is to rely on a trusted third party, which is risky on one hand, and on the other hand it can create ill-feeling if the third party in question is connected or affiliated to a particular bank. 

So, instead of using a JPMorgan system, other banks might not have any particular objection to using a transparent and immutable blockchain-based system without having to trust JPMorgan or a third party connected to them.

However, traditional technologies have a number of shortcomings: they are slow and expensive. In fact, in some cases, such as cross-border transfers in different currencies, they are quite cumbersome. 

The use of new blockchain-based technologies makes everything simpler and faster, thereby reducing costs. 

In fact, on the blockchain, money is programmable and, thanks to special smart contracts, it is possible to set up certain transactions that take place automatically, without error and without risk. 

But the real advantage is probably something else. Because smart contracts on blockchain are public and verifiable by everyone, and because real blockchains are immutable, unassailable and predictable, a transparent and secure system based on blockchain is particularly reliable.