JP Morgan goes crypto, Argo Blockchain exits

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When a scion of the investment banking world gets into crypto it is probably worth taking notice. JP Morgan Chase, America's largest bank, has just grabbed everyone's attention with the launch of its very own cryptocurrency, the JPM Coin.

JP Morgan intends the internally developed crypto asset to be used in its wholesale payment system, which currently sees daily volumes in the region of $6 trillion.

The bank is targeting at least three areas of its business operations with the new coin: cross-border payments; treasury services and securities. Real-world testing is being rolled out over the next few months.

The JPM Coin is the fruit of its Quorum blockchain technology efforts, which at the base layer is a permissioned (private as opposed to public blockchain) enterprise version of the Ethereum smart contract platform. It is open source.

JP Morgan is a member of the Ethereum Enterprise Alliance as well as the business-focused Hyperledger blockchain consortium. It left the R3 consortium in 2017.

In comments to CNBC, Umar Farooq, the head of the bank's blockchain projects, was effusive: "So anything that currently exists in the world, as that moves onto the blockchain, this would be the payment leg for that transaction. The applications are frankly quite endless; anything where you have a distributed ledger which involves corporations or institutions can use this." 

JPM Coin is what's known as a stablecoin – a cryptocurrency that has its value pegged to another asset class – in this case a fiat currency, the US dollar.

A firm depositing funds with JPMorgan would see the dollars converted to JPM Coin which acts as the bridging currency for transactions. On completion, the JPM Coin is converted back into US dollars as the transaction is settled. In this scenario, settlement is instantaneous and in real-time as opposed to taking hours or even days  currently, especially when dealing with different time zones and laws when conducting cross-border transactions.

JP Morgan thinks clients using JPM Coin will see their cash freed up.

"Money sloshes back and forth all over the world in a large enterprise," said Farooq in the CNBC report. "Is there a way to ensure that a subsidiary can represent cash on the balance sheet without having to actually wire it to the unit? That way, they can consolidate their money and probably get better rates for it."

The US bank is not the first to show interest in a settlement coin. For example, Mitsubishi UFJ Financial Group started work on its MUFG Coin in 2016.

Threat to Ripple?

JPM Coin is a direct competitor to Ripple whose entire business is focused on facilitating the exact same cost reductions and efficiencies JP Morgan hopes to achieve.

While Ripple claims to have more than 200 banks and other financial institutions as partners, very few of them are planning to use Ripple's  XRP coin for liquidity. That's because of the high volatility of cryptocurrencies, although as far as XRP goes, that volatility has reduced in recent months.

Ripple chief executive Brad Garlinghouse is claims not to be worried by the developments at JPMorgan: "A bank-issued digital asset can only really efficiently settle between the banks who issued it."

In his view, you will end up with a fragmented landscape if each bank develops its own crypto, which in the end could undermine any efficiency gains.

And Garloonghouse sees another big problem, this time with the stablecoin paradigm: "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."

But to keep its product offering as broad as possible, Ripple may still need to consider developing a stablecoin, and quickly. 

There have been a number of stablecoin launches in recent months and Facebook has even got in on the action, with reports that it will be using one when it launches a payments platform in India for its Whatsapp messaging app.

JPM Coin will also threaten the continued existence and dominant position of the decades old SWIFT payments messaging system.
Depending on how the trials work out, expect other banks to follow JPMorgan's example.

JP Morgan chief executive Jamie Dimon in 2017 famously described bitcoin as a "fraud" and "worse than tulip bulbs".

Pension funds arrive and warm words from the SEC

The JPM Coin news has certainly added to a sense of relative stability in crypto markets, with bitcoin holding onto much of the 8% gain seen this time last week. Although there may still be further to fall, talk of the bottom being near is upon us again.

Much of that view is underscored by the promising signs that the hoped-for appearance of institutional funds moving into crypto is beginning to happen.

Two US pension funds – Fairfax County's Police Officer's Retirement System and the Employees' Retirement System – have invested in the $40 million venture fund from Morgan Creek Digital.

Also, on the bitcoin exchange traded fund (ETF) front, where market participants continue to closely monitor developments, two commissioners at the US Securities and Exchange Commission (SEC) made comments that have been interpreted positively.

Commissioner Robert Jackson, in an interview US political news outlet Roll Call, said: "Eventually, do I think someone will satisfy the standards that we've laid out there? I hope so, yes, and I think so." 

Although that doesn't mean an approval is imminent, it has encouraged the view that crypto is indeed a valid asset class and it is really just a matter of time before issues such as market manipulation and liquidity are addressed by a maturing industry.

Those remarks were followed by a speech from another SEC Commissioner, Hester Peirce , in which she worried about the SEC seeming to take a "merit-based regulation" approach "in running away from anything labelled crypto". 

She also fretted that the SEC was taking too much of a broad-brush tack in its application of the Howey Test ,used by the US regulator to decide what should – and should not – be considered a security.

Peirce became something of a darling of the crypto world for her dissent last year when the SEC rejected a bitcoin ETF proposal from the Winklevoss twins.

"We owe it to investors to be careful, but we also owe it to them not to define their investment universe with our preferences," said Peirce.

She was also fairly accommodating regarding crypto exchanges, urging them to reach out to the watchdog: "Some of these platforms want to register with us, and I am eager to make progress on this front. There are features of crypto trading platforms that may differ from exchanges or alternative trading systems designed for traditional securities. To identify how regulation may need to change to accommodate these differences we will need to improve our understanding of how the platforms operate."

Ethan L. Silver, chair of the broker-dealer practice at US law firm Lowenstein Sandler LLP, in comments provided for interactive investors, said: "It is nice that she is encouraging people to come speak to the SEC and to seek no-action relief, but the practical realities are that there has been a lot of meetings and discussions that have yielded little progress."

Silver also agreed that the Howey test as being applied in crypto "is overly broad".

In the US, Congressmen Warren Davidson and Darren Soto plan to re-introduce the Token Taxonomy Act, with the aims of defining a digital token and distinguishing it from a security. 

On that and the SEC's evolving stance, Silver said: "I don't think it is reasonable to expect that the pending legislation to take digital assets completely out of the jurisdiction of the SEC will pass given the paramount investor protection concerns of the SEC around products that resemble securities more than anything else."

Specifically on the bitcoin ETF issue Silver intimates that there is still a way to go.

"We need the SEC to provide clarity on how it expects digital assets to be custodied under its existing rule set.  This includes the application of audit, market surveillance, examination, net capital requirements and cybersecurity controls, among others. Until this is nailed down, something like a Bitcoin ETF will never be approved and trading and liquidity being provided via ATS [Alternative Trading System is the non-exchange trading systems used in the US and Canada] will remain very limited."

Bitcoin bottom – $8,000 by year end?

Michael Novogratz, the chief executive and founder of Galaxy Digital, in an interview on Bloomberg this week sounded fairly confident the worst has passed as far as the bear market is concerned. He remarked: "$3,400-600 feels like we are grinding along at the bottom."

So where does the price go from here? "Going to grind back up. Could you go to $8,000? Of course you could," Novogratz insisted.
Bitcoin is currently priced at $3,609, up 0.6% in the past 24 hours, according to Cryptocompare.

Lightning Pizza

The Lightning Network payments system built on top of bitcoin to speed up transactions, got a boost this week after Twitter and Square chief executive Jack Dorsey said it would implement it in Square's Cash app.

Elsewhere, the company behind the crypto payments Fold app, announced this week that Domino Pizza in the US would start accepting bitcoin after the launch of the app's Lightning Pizza service.

Finally, a number of crypto companies are having to adjust their business models as the bear market trundles on.

Argo mining agro

Argo Blockchain (LSE:ARB), the London Stock Exchange-listed mining-as-a-service outfit, has decided to stop accepting new contracts from consumers and will soon be closing existing ones, as it shifts to mining on its own account. 

Low crypto prices have made mining unprofitable for all but the most efficient of miners, typically those with the lowest electricity prices. Argo has access to cheap electricity via its Canadian subsidiary and plans to reduce "input costs achieved from suppliers".
The latest restructuring is aimed at reducing its cash burn. The company a net cash balance of £15 million.

In a press statement Mike Edwards, co-founder and director of Argo, said: "We are being proactive and strategic in light of the tough industry market conditions by taking swift action to cut costs and refocus our strategy."

"While it is disappointing to make this shift after delivering better-than-expected growth during our first six months as a consumer business, we need to be prudent and act decisively in order to ride out the downturn and be in a strong position when industry fundamentals improve."