Banking giant creates in-house cryptocurrency

Banking giant creates in-house cryptocurrency

Wonders never cease.

Jamie Dimon, CEO of JPMorgan, called bitcoin a ‘fraud’ in September 2017 and said he would fire any JPMorgan employee who traded cryptocurrencies for the firm’s account.

Speaking about cryptos more broadly, Dimon said, ‘If you’re stupid enough to buy it, you’ll pay the price for it one day.

In 2018, JPMorgan banned the use of its credit cards to purchase bitcoins.

How times have changed.

Here’s an excerpt from CNBC last week about JPMorgan’s newest product:

The first cryptocurrency created by a major US bank is here — and it’s from JPMorgan ChaseThe lender moves more than US$6 trillion around the world every day for corporations in its massive wholesale payments business.

In trials set to start in a few months, a tiny fraction of that will happen over something called “JPM Coin,” the digital token created by engineers at the New York-based bank to instantly settle payments between clients.

The new JPM Coin may be the first of many similar products coming from major banks in the months ahead.

Just to be clear, the JPM Coin is not like bitcoin or most other cryptocurrencies in many important respects.

The start of things to come

In the first place, JPM Coin is used on what is called a ‘permissioned’ system. This is in contrast to bitcoin and most other cryptos, which trade on what are called ‘permissionless’ systems.

A permissioned system is only accessible by parties granted permission by the system sponsor.

In this case, only JPMorgan customers using JPMorgan accounts will have any occasion to use the JPM Coin.

In contrast, a permissionless system is available to any user with the proper software.

Bitcoin, Ethereum and Ripple are all permissionless systems.

The second difference is that JPM Coin is a so-called ‘stable coin’. This means that the value of a coin is set at a fixed rate to the value of a dollar and that rate does not change.

One JPM Coin equals one US dollar.

Other stable coins exist (usually at a rate of one coin = one dollar), but observers have raised questions about whether the coin sponsor actually has ready access to the proper amount of dollars to redeem the stable coins on demand.

JPMorgan will have no difficulty converting the JPM Coin to dollars because the dollar balances that gave rise to the use of a JPM Coin are kept securely on account in a different part of the bank.

Of course, JPMorgan also has access to a lender of last resort at the Federal Reserve.

The JPM Coin is not intended to be used widely for purchases, sales and payments by the general public.

Instead, it is an internal unit of account for making value transfers between the bank’s large customers, or between related accounts of a single customer or corporate group.

Those customers will have to pass numerous regulatory checks and much anti-money-laundering compliance to have access to the JPM Coin facilities.

The purpose of the JPM Coin is to reduce the costs and time lags in the current system of wire transfers in dollars.

JPMorgan moves over US$6 trillion on a daily basis.

Even small reductions in the time and expense associated with those movements can result in large savings for JPMorgan and its customers.

Billionaire Buffett buys in

Ordinary investors will not be able to buy or sell the JPM Coin directly because it exists on a closed permissioned system.

But investors should pay attention to the performance of JPMorgan’s shares.

As the benefits of the JPM Coin become more apparent, JPMorgan’s stock will likely benefit also.

Once JPMorgan has the new coin fully implemented, it will be in a position to offer the technology and payments channels to other financial institutions.

This will enable the bank to garner much greater profits from its original investment in this blockchain R&D.

Apart from these crypto-related developments, JPMorgan looks like an attractive investment for other reasons.

Another positive development on JPMorgan’s stock price is the disclosure last week that Warren Buffett’s Berkshire Hathaway took a significant stake in the company in the fourth quarter of 2018.

Here’s an excerpt from a report by Bloomberg on Buffett’s investment in JPMorgan, including commentary by Buffett’s long-time partner Charles Munger:

Berkshire spent the last half of the year snapping up more shares of banks and insurers, moves that made the company a major shareholder in four of the five largest US banks.

The Omaha, Nebraska-based conglomerate boosted its stake in JPMorgan Chase & Co. and Bank of America Corp. in the last three months of the year

Buffett had long praised JPMorgan’s Jamie Dimon even as Berkshire Hathaway didn’t invest in the stock. Berkshire eventually plowed in when the timing aligned, according to Vice Chairman Charles Munger. “As investment has gotten harder and the banks have done better and better, we’ve finally reached a crossing point where he was willing to act”, Munger said Thursday in an interview after the Daily Journal Corp. meeting in Los Angeles.

The combination of JPMorgan’s entrance into the world of cryptocurrencies and Warren Buffett’s vote of confidence should make JPMorgan one of the best performers in the financial sector in the months ahead.

All the best,

Jim Rickards Signature

Jim Rickards,
Strategist, The Daily Reckoning Australia