As Ripple pushes for ever greater adoption of its payment facilitator platforms, two powerful financial institutions have been dominating Ripple-related headlines over the past week. Yoshitaka Kitao, CEO of Japan’s SBI Holdings, made the bold statement that XRP will probably surpass Bitcoin to become the number one crypto asset, adding that his firm is “aiming to make that happen.” A few days earlier, JP Morgan announced the launch of JPM Coin, which many see as direct competitor to Ripple’s XRP.
JPM Coin: The First Financial Institution to Launch a Cryptocurrency?
JP Morgan’s official press release issued on February 14 describes JPM Coin as “a digital coin designed to make instantaneous payments using blockchain technology.” The coin will be pegged to the US Dollar at a 1:1 ratio and will initially be focused on “business-to-business money movement flows.”
The press release implies that JP Morgan sees their new offering as a cryptocurrency, as one of the sections in the release is titled “How does JPM Coin differ from other cryptocurrencies?” However, online commentators have expressed doubt over whether JPM Coin constitutes a true cryptocurrency. In a Forbes article with the clear headline “Stop Calling JP Morgan’s JPM Coin A Cryptocurrency, Because It’s Not,” Madhvi Mavadiya writes:
“If JP Morgan’s new coin operates privately and is only used for money transfers between the lender and its clients, it would not operate on a public network in the same way that cryptocurrencies such as bitcoin or ethereum do… cryptocurrencies operate on public networks that anyone can join without permission… JPM coin will run on a blockchain network called Quorum, which requires permissions and users must be approved by JP Morgan.”
The same article quotes Coin Center research group executive director Jerry Brito as comparing the distinction between JPM Coin and cryptocurrencies as being akin to the distinction between the internet and AOL:
“The internet is open, so anybody who wants to create a blog, website, or consumer service can connect a server to the network without asking permission from anybody. Compare that to AOL – it was a permissioned network where if you were a publisher, you had to go to the company and seek their permission.”
This distinction is similar to that made by Ripple CEO Brad Garlinghouse during a January debate with SWIFT CEO Gott Liebbrandt:
“Swift can talk open APIs, open networks, but it isn’t – it’s a SWIFT-controlled API… but it’s still a central database [with] a central operator. Decentralized systems, over time… are likely to win. Today, that’s not what SWIFT is.”
Garlinghouse’s comments were made at the same time SWIFT announced a pilot scheme to utilize R3’s Corda Settler payments system, which utilizes XRP to facilitate cross-border payments. Garlinghouse echoed these sentiments in responding to JP Morgan’s announcement, reiterating the comparison between the closed network of AOL and the open network of the internet on Twitter.
As predicted, banks are changing their tune on crypto. But this JPM project misses the point – introducing a closed network today is like launching AOL after Netscape’s IPO. 2 years later, and bank coins still aren’t the answer https://t.co/39EAiSJwAz https://t.co/e7t7iz7h21
— Brad Garlinghouse (@bgarlinghouse) February 14, 2019
JP Morgan’s head of blockchain projects Umar Farooq has been doing the media rounds to explain the value proposition of the new JPM Coin. Speaking with CNBC, Farooq described the coin as “a subsidiary [that] can represent cash on the balance sheet without having to actually wire it to the unit,” allowing financial institutions to “consolidate their money and probably get better rates for it.” Farooq depicts the primary use case of JPM Coin as a money-saving accounting measure to improve the efficiency of money which “sloshes back and forth all over the world in a large enterprise.”
Garlinghouse sees ventures such as JPM Coin as being ultimately unworkable as a global payments solution. In a LinkedIn article written in response to an announced settlement utility coin from BNY Mellon, Deutsche Bank, Santander, and UBS in August 2016, Garlinghouse outlined the potential problems of banks creating their own native digital currencies:
“A bank-issued digital asset can only really efficiently settle between the banks who issued it. Then, two scenarios can play out. Scenario one: all banks around the world put aside competitive and geopolitical differences, adopt the same digital asset, agree on its rules, and harmoniously govern its usage. Fat chance. Scenario two (the more likely scenario): banks not in the issuing group issue their own digital assets with their own sets of rules and governance…
If banks of different digital asset groups want to settle trades with one another, they’ll have to make markets between their unique digital assets or trade between their digital assets and a common fiat currency. What a mess!
…The second big problem with the ‘utility settlement coin’ is it seems it’ll be backed by a basket of currencies. Once backed by cash, it’s no longer an asset; it’s a liability. Trading liabilities then ultimately requires moving cash across borders, re-creating today’s system but adding more friction!”
Garlinghouse’s argument is that an open network such as the XRP distributed ledger is the only way to truly facilitate seamless cross-border and inter-bank value transfers. In his debate with SWIFT CEO Liebbrandt, Garlinghouse also described how such an open network could allow the participation of the billions who do not have access to traditional banking services. Garlinghouse sees XRP as being part of the development of an “Internet of Value,” wherein transferring value is as simple and platform-agnostic as sending an email. In contrast, JPM Coin is a mechanism for improving transfer times and lowering fees within the structure of a financial institution.
Whatever your stance on the open vs closed network debate, JPM Coin may represent a serious threat to Ripple’s plans to supplant SWIFT as the world’s leading payment processor. As Yahoo! Finance reports, “JP Morgan Chase is far from the only bank to internally pilot blockchain technology”:
“For example, Goldman Sachs (GS), Bank of New York Mellon (BK), JP Morgan Chase and Northern Trust (NTRS) are all working on crypto-based custody services. Citigroup (C) has also tested blockchain technology in its Treasury and Trade Solutions business.”
The amount of money at stake for financial institutions is truly enormous. During his debate with Liebbrandt of SWIFT, Garlinghouse stated that XRP could potentially free up $10 trillion that is currently utilized for providing liquidity to cross-border payments. JP Morgan moves $6 trillion dollars around the world every day, while more than 34 million payments are made each day using SWIFT. Ripple was always likely to face an uphill battle in moving these transfers to its own platform. With the announcement of JPM Coin, its clear that financial institutions are not going to hand over control of this market without a fight.
SBI Holdings CEO Predicts Ripple Will Surpass Bitcoin
One believer in Ripple’s potential is SBI Holdings CEO Yoshitaka Kitao. Kitao’s recent interview with Japanese cryptocurrency news site Coin Post was widely picked up on by English-language crypto news outlets. Smartereum provides one of the most complete translations of Kitao’s comments, which outline SBI’s firm belief in Ripple’s future success:
“There is a widespread increase in the practical use of DLT technology for international remittance. This includes the use of Ripple’s digital asset. Major companies overseas like Santander and other big names are making moves. Major money movers are also starting to use xRapid which depends on XRP. The number of companies joining RippleNet is also increasing substantially.”
Kitao’s interview focused heavily on growing adoption of Ripple’s product suite by major banks. This is a topic we delved into when discussing the ongoing battle between SWIFT and Ripple, and Ripple’s services are now being utilized by some 200 financial institutions. Kitao contrasted this with Bitcoin, which he claims “has no value” because its “high price makes it difficult for the industry to find practical use cases for the technology.” Kitao went on to state that “XRP will most likely become the number one cryptocurrency asset in the world,” showing SBI’s support for this in adding: “That is our aim.”
A Coin Telegraph article analyzing Kitao’s comments points out that “SBI has been working intensively to foster the adoption of XRP among financial institutions.” SBI is described as being “the largest outside shareholder” in R3, which is the blockchain consortium behind the XRP-using Corda Settler payment solution that is now being trailed by SWIFT. Kitao may have even played a direct role in R3’s adoption of XRP for payments, as Kitao pushed for R3 and Ripple to work together on a joint venture following a protracted legal dispute between them.
Figures available through the Nikkei Asian Review show that SBI Holdings has experienced a massive turn around in its fortunes over the past few years. SBI reported a negative cash flow of more than $53 billion in 2015, then close to minus $21 billion in 2016. SBI was back in the black in 2017, reporting a $11.4 billion cash flow, which rose to $46.2 billion by March 2018. Kitao’s “Message from Top Management” on the SBI Holdings website states that the company is transitioning from being a Japanese-focused company to a worldwide finance giant. As Coin Telegraph reported in January, SBI Holding’s most recent annual report identifies Ripple’s technology as a key part of its future strategy.
SBI has been very active in utilizing cryptocurrency and blockchain technology to transition Japan away from being a cash-based society and push the country toward becoming a world leader in blockchain tech. SBI became the first Japanese financial institution to launch its own cryptocurrency trading platform, VCTRADE, in July 2018. Plans to launch a digital coin for use in peer-to-peer and in-store transactions were announced in September 2017. SBI followed this up a year later with the September 2018 announcement of S Coin, which links card payments with digital currencies through a mobile app, and also acts as a smart contract platform.
The Battle Lines are Being Drawn
The launch of JPM Coin and SBI Holding’s firm statement in support of Ripple show that financial institutions across the world are getting serious about incorporating blockchain technology. But these are still early steps on the road to transformative widespread adoption. New digital technologies brought major disruption to many industries that were unprepared for their arrival, from Napster’s transformative effect on the music industry to Uber’s assault on traditional taxi services. With more money riding on their activities than almost any other in the global economy, major financial institutions are not likely to be usurped so easily.
Garlinghouse has characterized the move by JP Morgan and other financial institutions to institute their own digital currencies as being too little, too late. In 2017, JP Morgan CEO Jamie Dimon famously labelled Bitcoin “a fraud,” but later qualified that the underlying blockchain technology was potentially interesting. Many will see JP Morgan’s move to introduce its own coin as directly back-pedaling on Dimon’s earlier statement. This reading was rejected by a spokesperson from JP Morgan, who was quoted by Yahoo! Finance as describing Dimon as being “more consistent than people give him credit for”:
“He’s always separated cryptocurrency from the underlying value and the use of blockchain… We have always believed in the potential of blockchain technology and we are supportive of cryptocurrencies as long as they are properly controlled and regulated. As a globally regulated bank, we believe we have a unique opportunity to develop the capability in a responsible way with the oversight of our regulators.”
Garlinghouse has also attacked the inherent complexity of each financial institution operating its own closed network of fiat-pegged stablecoins, which he describes as being far inferior to an open system. But in an interview with CNBC, JP Morgan’s head of blockchain Umar Farooq showed the scale of the competition Ripple is up against:
“Pretty much every big corporation is our client, and most of the major banks in the world are, too… Even if this was limited to JPM clients at the institutional level, it shouldn’t hold us back.”
And as explained in the same article, JP Morgan is in a very strong position:
“J.P Morgan is betting that its first-mover status and large market share in corporate payments — it banks 80 percent of the companies in the Fortune 500 — will give its technology a good chance of getting adopted, even if other banks create their own coins.”
The battle for providing a new global payments infrastructure won’t be won overnight. With so much riding on the outcome, this is likely to be a long and hard-fought war.