JPMorgan’s New Digital Currency: Will Benefits Outweigh Risks?
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Think of it like getting in on the ground floor of the nickel. JPMorgan Chase announced the JPM Coin earlier this week, a prototype digital coin equivalent to one U.S. dollar. The bank’s customers will be able to use the token—and the underlying blockchain technology—to transmit instantaneous payments to one another.
Don’t get too excited just yet. The coin is still firmly in the pilot phase, with JPMorgan planning to test it out among a small number of institutional clients before a wide release is anywhere in sight. Still, it can’t hurt to think about the potential legal risks at play for the bank, which at this point resemble those posed to any organization trafficking in personal data: hackers and accidents.
“One risk is that somehow there’s a glitch in the software and the accounting gets screwed up and people feel like they’ve lost money. And one way that there can be a glitch is if there’s a hack of the system so they need to be very careful about their cybersecurity around the blockchain,” said Patrick Burke, partner at Phillips Nizer and former deputy superintendent of the New York State Department of Financial Services’ Office of Financial Innovation.
Before diving into all of the potential pitfalls, it might help to take a look at what the regulatory landscape looks like. Michelle Gitlitz, co-chair of Blank Rome’s blockchain technology and digital currencies group, drew a comparison to the early days of the internet, when telephone laws provided the initial framework for the burgeoning technology.
The same school of thought applies here. Only in the case of digital assets, it's pre-existing money transmission laws that are providing the guideposts. And they’re not exactly in short supply, either. According to Gitlitz, they exist in every state except Montana.
“One thing that we always look at when someone comes to me with a token that’s a digital representation of money is what are the federal and the state money transmission rules that are potentially implicated?” Gitlitz said.
She thinks that it’s also possible that the JPM Coin could also fall within the paradigm of New York’s BitLicense requirements. Entities that engage in virtual currency transmission or control and issue virtual currency, for example, are required to register with the state’s Department of Financial Services.
During his time at the department, Burke was involved with the approval process for a similar digital payments platform, which also made use of blockchain, that launched earlier this year from Signature Bank.
Like the JPM Coin, Signature’s platform was designed to allow customers to move funds among accounts. The bank needed the department’s go-ahead in order to offer the platform’s services within the state.
“I know that we looked at basically the safety and soundness of it as a product and so we looked at consumer aspects. We looked at whether or not it was cybersecurity safe, what the protections were from hacking and in terms of the security of clients’ funds, customers’ funds, including the interface,” Burke said.
The interface for a blockchain platform could potentially be a major source of contention for banks looking to dip a toe into cryptocurrency. If it’s not user-friendly enough to mitigate costly errors—a customer accidentally sending funds to the wrong person, for example—there could be backlash.
One advantage that proprietary coins might have over cash or public cyrptocurrencies like bitcoin in this regard is that mistakes should be in theory easier to halt or trace since all of the transactions are happening in-house. The same circumstances could also help to protect a bank from getting caught in the middle of shady financial dealings.
“Since it’s staying in the bank it’s at much lower risk for money laundering or violation of sanctions. So they’re safer as these things go compared to a cryptocurrency that’s out in the wild,” Burke said.
