Pet Stablecoins: Why Some Banks Issue Their Own Digital Tokens, While Others Don’t

This week, a number of banks shed light on their respective crypto-related projects, following the recent expansion of JPMorgan Chase into the field.

IBM was the big mover. A joint announcement by IBM and Stellar (XMR) said that as many as six global banks might issue their own stablecoins on IBM’s blockchain-powered payments network, dubbed “Blockchain World Wire” (BWW).

The question now is whether this marks a turning point for cryptocurrency’s use, or if it merely continues the experiments that have marked the early stages of digital money. While quite a few financial institutions seem ready to go blockchain and create tokens in a bid to streamline cross-border payments, some still choose to set the technology aside.

Citigroup, the corporation behind one of the world’s top-20 banks by asset value, revealed earlier this week that it was abandoning its “Citicoin” project to focus on more conventional remittance methods like SWIFT. The bank’s reasoning seemed focused on preserving the current forms of inter-bank transfers as a proven and universal method.

Can those bank-issued coins be called “cryptocurrencies”?

When JPMorgan Chase announced that it built its own digital token based on a private Ethereum (ETH) blockchain last month, the crypto community seemed largely skeptical.

Nathaniel Popper, author of the book “Digital Gold, a History of Bitcoin,” tweeted back then:

“The JPM Coin makes it possible to move dollars between JPMorgan bank accounts instantly. That raises the question: Why was it not already possible to move dollars between two JPMorgan bank accounts instantly?”

Given that the JPM Coin is only available for private use within the inner circle of the banks’ clients, one should be hesitant to even call it a cryptocurrency, according to at least one expert.

Hartej Sawhney, a blockchain expert and co-founder of Hosho, a startup protecting investments and providing multiple smart contract services, told Cointelegraph in an email:

“Recently, banks and media have had a field day misusing the word cryptocurrency. There is no such thing as a ‘cryptocurrency’ without open consensus or permissionless participation. Announcing a new ‘coin’ was simply a marketing play for J.P. Morgan. Bitcoin for example, is open source, permissionless, strictly limited in quantity, and has no account fees.”

Not only is the JPM Coin permissioned and available only to institutional customers who have been cleared via JPMorgan Chase’s Know Your Customer (KYC) precautions, Sawhney added, it is also pegged 1:1 to fiat currencies held by the bank. That is fundamentally different from what cryptocurrencies constitute, he argued:

“Anyone can use a cryptocurrency, and anyone can participate in its consensus system without seeking permission from anyone else.”

Regulated institutions will act

Michael Dowling, CEO and founder of FairX, a financial services company involved with banking and digital assets, and former chief technology officer at IBM’s blockchain arm, also distinguishes bank-issued coins from conventional, “pure-play” cryptocurrencies akin to Bitcoin (BTC), XRP and XMR. Bank-backed tokens are “cryptocurrency implementations of fiat currency,” which are commonly referred to as “stablecoins.” He told Cointelegraph:

“A lot of people are obsessed with this ‘token’ thing, but at the end of the day a bank is a really fancy ledgering company with amazing security; the key to bank's successful use of blockchain tech, in a practical way, is to shift some of the authentication of a user from the centralized bank to the user's own device, proven by a cryptographic ledger. That's really what this bank-issued coin is really all about — it’s still the same USD ledger, its authentication for who is allowed to change the ledger has shifted from username/password at the bank to pub-pri key cryptography in a distributed fashion.”

Dowling then summarized his statement: “I do NOT believe regulated institutions will announce their own pure-play cryptocurrencies, but I am absolutely certain they will announce their own deposits on ledger.”

Interestingly, while JPMorgan Chase’s move was largely reported as a first for a United States bank (and any major lender), New York-based Signature Bank rolled out a similar feature earlier in December 2018. Dubbed the Signet Platform, the private blockchain allows the banks’ clients to move their money “in 30 seconds,” just like the JPM Coin — and it is also pegged to the U.S. dollar. It comes as no surprise that Signature’s coin was largely overlooked, given how the bank compares to JPMorgan Chase size-wise: The former has just $45 billion in assets, while the latter wields more than $2 trillion.

When announcing the feature, Signature Bank co-founder and CEO Joseph J. DePaolo seemed particularly bullish on the use of private blockchains for financial institutions. He told Forbes:

“We have to do this, otherwise we’re not going to exist. [...] If you’re not involved in blockchain, in five years, you won’t be around as a bank.”

DePaolo’s viewpoint seems to echo the findings of Citigroup’s “Bank of the Future” report, which suggests that fintech companies that are actively disrupting the banking market with new technologies are driving out its longstanding participants — or at least compelling them to give up a large portion of their margins, a traditionally important source of income for banks. Specifically, the paper estimates that by 2025, major North American banks could lose 34 percent of profit from mainstream areas such as payments, investments and personal lending.

What is a bank-issued coin’s purpose?

Primarily, banks tend to pick up blockchain for instantaneous cross-border payments. The technology shows a lot of potential within that field. Blockchain reportedly allows performing international remittance “in near real-time,” according to the IBM website, while normally they take three to five working days to complete within the existing infrastructure. Moreover, transaction costs can be saved as third-party intermediaries get removed from the process (according to research from McKinsey, the average cost for a bank to execute a cross-border payment through correspondent banking costs $25 to $35).

The two largest blockchain projects aiming to streamline cross-border remittance for global banks are hosted by Ripple and IBM Blockchain. Ripple has at least two blockchain-powered payment tools for those purposes, called xRapid and xCurrent (the main difference between them is that xRapid uses XRP, the company’s native token, while the latter works with fiat currencies). IBM, in turn, oversees its Blockchain World Wire (BWW) payment network operating on the Stellar (XMR) blockchain, which completed its beta in September 2018.

At this point, both Ripple and IBM Blockchain seem to be a force to be reckoned with: RippleNet reportedly has more than 200 clients, while BWW, which has been around for considerably less time, is currently used by 54 banks, as Jesse Lund, global vice president of IBM Blockchain, told Cointelegraph. Both of them are networks that are open to a wider amount of financial institutions, while some banks — like the aforementioned JPMorgan Chase — want to deploy their own private ledgers.

Notably, unlike Ripple, IBM’s BWW supports different digital assets within its blockchain, including bank-issued coins: Just recently, Cheddar reported that six international banks — such as Brazil’s Banco Bradesco, South Korea’s Bank Busan and the Philippines’ Rizal Commercial Banking Corporation — have signed letters of intent to issue their own stablecoins backed by their national fiat currencies on IBM’s network. “These are expected to add Euro, Indonesian Rupiah, Philippine Peso, Korean Won and Brazilian Real stable coins to the network,'' Lund told Cointelegraph in an email, adding:

“Ultimately, we hope to see a global financial network that represents a real-time facility for moving money from anywhere to anywhere — where foreign exchange is just an inherent part of the process that happens automatically through the use of an expanding digital asset ecosystem.

“World Wire can use fiat currency, lumens or stable coins. This is a completely new kind of payments infrastructure than traditionally used, and it differs from SWIFT and other approaches.”

Dowling also highlighted this feature as a major advantage for the network:

“While IBM's service does use a pure-play crypto as a settlement asset as an option, I believe the legitimate institutions will use fiat-stablecoins issued by banks as settlement assets instead. That stabs Ripple in the heart — why use XRP if I can use....an acknowledged and accepted currency?”

Cointelegraph has reached out to Ripple to get a further comment for this article, but they failed to prepare a statement before press time.

Ripple’s CEO, Brad Garlinghouse, has criticized the concept of bank-issued digital coins (which he calls “bank coins”) and specifically the JPM Coin in the past, citing its centralized structure, among other things. He has also argued that the JPM Coin lacks the interoperability that would make it a significant innovation:

“This guy from Morgan Stanley was interviewing me last week, and I asked him, so is Morgan Stanley going to use the JPM Coin? Probably not. Will Citi use it? [...] Will PNC? And the answer is no. So we’re going to have all these different coins, and we’re back to where we are: there’s a lack of interoperability.”

Dowling agrees with that statement. “It [the JPM Coin] MUST be interoperable between banking institutions for it to work properly,” he told Cointelegraph. “Otherwise, we're just swapping bank currencies.”

Bank-issued stablecoins vs. public stablecoins

Stablecoins — with their ability to overcome crypto’s infamous volatility — have become widespread during the bear market, especially among more compliance-oriented players.

Projects like USD Coin (USDC), launched by payments company Circle in conjunction with Coinbase, the Winklevoss twins-backed Gemini dollar, Paxos and Facebook’s secretive project are among the most notable examples.

Recently, Jeremy Allaire, co-founder and CEO of Circle, has