Mega-bank JPMorgan Chase (JPM 0.39%) recently announced that it will launch its own cryptocurrency, becoming the first U.S. bank to do so.
At first, this might sound like an odd move. After all, JPMorgan Chase's CEO Jamie Dimon has been very outspoken against leading cryptocurrency bitcoin, going so far as to call it a "fraud." However, there are some big differences between bitcoin, the more than 2,000 other existing cryptocurrencies (that's not a typo), and the new cryptocurrency JPMorgan Chase is planning to create.
The new cryptocurrency will be called JPM Coin, and the purpose will be to speed up transaction settlement times. This could be specifically useful for international transactions, cutting settlement times from hours, or even days to settlements that occur in real time. Initially, JPM Coin will be used in just a small portion of the company's business, but could become more widely used within the company if its usage appears to be worthwhile.
Also, JPM Coin will be a so-called "stable coin," with its value pegged to the U.S. dollar. This is similar to some existing cryptocurrencies, such as Tether. In other words, you won't see massive price fluctuations like you have with bitcoin, Ethereum, and others – a JPM Coin will be worth one dollar.
What about Ripple?
When I read the news that JPMorgan Chase was creating its own cryptocurrency, I asked, "why don't they simply use an existing cryptocurrency that is designed to do the same thing?"
Ripple in particular would make a lot of sense. After all, Ripple is specifically designed to facilitate near-instantaneous cross-border transactions, and has partnerships with several major financial institutions.
There are a few possible explanations why JPMorgan chose to carve its own path. For one thing, if the bank controls the entire supply of its cryptocurrency, it could make regulatory compliance issues far easier than they otherwise would be. Also, JPMorgan moves more than $6 trillion in payments per day, so maybe it felt like creating its own cryptocurrency was warranted simply by its sheer size.
Finally, while Ripple is designed for the exact purpose that JPMorgan is creating JPM Coin for, its value isn't pegged to the U.S. dollar and can fluctuate dramatically over time, and JPMorgan Chase may not have wanted to deal with this uncertainty. For context, Ripple trades for about $0.30, but traded for more than 10 times that amount just over a year ago. In 2017 alone, Ripple's price rose by a staggering 36,600%. Banks like JPMorgan Chase may simply not want to deal with this kind of volatility.
Ripple CEO Brad Garlinghouse tweeted shortly after the news that JPM Coin "misses the point" of cryptocurrencies, while some analysts have called JPMorgan's effort a major threat to Ripple's very existence.
Will other banks follow suit? Will it affect other cryptocurrencies?
If JPMorgan Chase's cryptocurrency is indeed successful, and the bank experiences significant efficiency and other operational advantages by using it, I'd be surprised if other banks didn't do something similar by creating their own proprietary, dollar-denominated cryptocurrencies as well.
While there are many factors that determine cryptocurrency prices, it's fair to say that just like stocks, at least some of their price is based on investors' perceptions of their future potential. In other words, bitcoin's price isn't just based on how many people are using the cryptocurrency as a form of payment today.
So, if banks do start creating and using their own cryptocurrencies on a large scale, it could certainly spell trouble for cryptocurrencies like Ripple, Stellar, and several others whose specific purpose is to facilitate rapid settlement of payments.