On April 21, it was revealed that JPMorgan Chase (JPM), the United States’ largest bank with over $2.62 trillion in assets, is planning to widen the use of its blockchain system.
Specifically, JPM is adding new features to its Interbank Information Network (IIN), which is now used by more than 220 banks across the globe. With the JPM Coin launched earlier this year, it seems that the U.S. financial institution is increasingly betting on blockchain, pushing crypto closer to mainstream adoption.
Brief intro to JPM and crypto: the “Blockchain before Bitcoin” approach
JPM has been maintaining an overall mixed stance on virtual currencies. Its CEO, Jamie Dimon, is perhaps best known among crypto enthusiasts for his harsh comments regarding bitcoin.
In 2017, Dimon openly called bitcoin a “fraud.” A year later, the banking giant’s CEO reterierted his position by saying that he doesn’t “really give a s—” about the cryptocurrency. Lately, however, he has taken a somewhat softer approach toward bitcoin: At the 2019 World Economic Forum in Davos, when the JPMorgan Chase head was asked if he took any satisfaction when the cryptocurrency collapsed last year, he replied that he did not.
However, despite his unmasked criticism aimed at the world’s largest cryptocurrency, Dimon has been much more careful when discussing the technology that underpins it. Back in 2015, he first shared his thoughts on the subject, stating that “blockchain is like any other technology,” but then also clarifying:
“If it is cheaper, effective, works, and secure, then we are going to use it. The technology will be used, and it could be used to transport currency, but it will be dollars, not bitcoins.”
At the latest Davos gathering, Dimon voiced his updated, more optimistic opinion on blockchain. Specifically, the JPM CEO noted that he is pro-blockchain, despite the excessive hype around the technology, and that the technology serves as a better replacement for certain online databases:
“Blockchain is a real technology — it’s just a database we can all access that’s kept up-to-date.”
Indeed, JPM’s experiments with blockchain date back to 2016, when the banking behemoth published a white paper for Quorum, its private blockchain platform built on the Ethereum protocol.
Quorum was created as part of the Ethereum Enterprise Alliance (EEA), of which JPM is one of the founding partners. As mentioned above, the platform runs on the Ethereum blockchain and is modeled after the Ethereum Go client. It has been adopted by pharmaceutical giants Pfizer and Genentech as well as Microsoft Azure, among others. It has also been tested with a number of high-profile players, including National Bank of Canada and Goldman Sachs Asset Management. In March 2019, JPMorgan Chase announced that it was considering making Quorum an independent entity in a bid to attract more partners that could be reluctant to deal with JPM directly if they are competitors of the bank.
IIN: the ever-growing, blockchain-powered international network of banks
The IIN, in turn, is JPM’s peer-to-peer network powered by Quorum. Launched as a pilot back in 2017, it aims to deal with issues of interbank information sharing, “from minimizing friction in the cross-border payments process to enabling payments to reach beneficiaries faster and with fewer steps,” as per the company’s website. Suresh Shetty, blockchain technology lead for IIN, explained:
"Historically, correspondent banks communicate one-way, bank-to-bank, but we have transformed their interaction. When a payment detail is flagged for confirmation, different parties can interact simultaneously, requesting and sharing information."
As of March 2019, more than 220 banks worldwide have signed up as members of the IIN, including banking powerhouses such as Sumitomo Mitsui Banking Corporation (SMBC), Crédit Agricole — the world’s largest cooperative bank by turnover — and Banco Santander. The network is expanding at a swift pace: More than 60 banks joined it just within the past few months, given that the IIN consisted of 157 member banks as of January this year.
However, just like with Quorum, some financial institutions might be hesitant to join a JPM-supervised venture, according to Hartej Sawhney, a blockchain expert and co-founder of Hosho, a company protecting investments and providing multiple smart contract services. He told Cointelegraph:
“IIN is not a competitor to Ripple unless it begins to sweep all the banks in the world onto their network, which could be difficult for JPM given their historical reputation. Ripple, Circle, and Transferwises advantage may be that they are third-party intermediaries, not banks themselves.”
However, the main priority for the INN is not to facilitate cross-border payments with stablecoins or its own cryptocurrency (which is what Ripple is actively trying to achieve with its similarly sized RippleNet), but rather to tackle the current system’s downsides with a blockchain-powered solution.
“Broadly speaking, the cross-border payments system works quite well. Attempts to construct some new way of transacting on blockchain look to us like a solution in search of a problem,”
Sungmahn Seo, head of Europe, Middle East and Africa payments and foeign exchange at JPMorgan Chase, told Euromoney in October 2018, outlining the INN’s primary goal:
“However, when a cross-border payment does get stuck for whatever reason, that can get quite painful. It can be difficult and can take weeks to resolve. We want to make resolving stuck payments much simpler and much easier, and that is about easing access for the right parties to the right information.”
According to Seo, the U.S. banking giant receives 100,000 to 200,000 enquiries regarding stuck payments every year, and most of them are international. He described the hurdle it entails for banks in greater detail:
"There can be many steps between multiple correspondent banks in sending a payment from the US to China, for example. And when a query pops up, the question becomes: which bank has the full and complete information? Banks start sending emails but some banks don’t like to respond that way because email may be insecure. So, then it’s phone calls between banks in very different time zones. The query can start ping-ponging around. When it gets painful, it gets really painful. A payment that should have taken minutes can take many days to complete as requests for information ping-pong between the banks.”
Thus, instead of handling cross-border payments like Ripple-created XRP and other SWIFT-killers that aim to overtake the conventional money transferring structure and put it on blockchain rails, the IIN is merely an encrypted distributed ledger network that allows participants to identify themselves and share information necessary for sending money — and not necessarily large amounts — to each other. Notably, neither Ripple nor the IIN and has revealed publicly exactly how their systems work, Eyal Shani, blockchain researcher at Aykesubir, pointed out in a conversation with Cointelegraph.
Now, some new crucial features are being added to the ever-growing network. As John Hunter, JPM’s head of global clearing, told the Financial Times, the IIN members will be able to instantly verify whether a payment is heading to a valid bank account — as per the new update, scheduled to go live by the third quarter of 2019. At present, transactions can be rejected days after they were sent because of incorrect information, such as typos in sort codes, account numbers and addresses. Hunter told the Financial Times:
“Banks straight through processing rates are in the mid-80s to mid-90s. It’s that gap — the 5 to 20 percent of payments — that have to be assessed by operations where we’re trying to alleviate some of that pain.”
Eyal Shani believes that the use of smart contracts and blockchain will indeed allow the IIN to minimize the number of such errors:
“By tokenizing the system and enabling the use of modern smart contract and flexible coding, the IIN could solve better and faster compliance problems and other payment errors. The negative feedback regarding the centralization of the coin is irrelevant at this point of maturity of blockchain.”
Indeed, JPMorgan Chase also seems to recognize that, in its current form, blockchain is still far from reaching its full potential. The bank’s chair of global research, Joyce Chang, told Bloomberg earlier in January:
“Blockchain isn’t going to reinvent the global payment system, but it will provide marginal improvements. The most meaningful impact will probably be three to five years away and mostly on trade finance.”
Notably, the Financial Times report also revealed that JPM is planning to attract more fintech startups to work with the IIN network’s structure. Such firms will be able to develop applications in a specially designated sandbox in which they can gain access to data modeling, file transfers and secure messaging — as Hunter explained to the newspaper, “developers only need to bring their intellect.” On top of that, paid subscriptions might reportedly be introduced for the IIN members in the future, which also implies that JPMorgan is counting on its blockchain-powered network in the long term.
Thus, although the banking giant’s other recent crypto project, JPM Coin, was received quite poorly by the community, part of which deemed that JPM Coin is not a cryptocurrency at all, JPMorgan continues to explore the field of blockchain — and given the large amount of bank who have co-signed its project, the U.S. financial titan might be headed in the right direction.
Cointelegraph has reached out to JPMorgan Chase for further comment, but the bank declined to answer.