Not a cryptocurrency. End of.

The media recently reported, somewhat breathlessly (eg, CNBC), that JP Morgan Chase (JPMC)is launching a “cryptocurrency to transform the payments business”. This sounded amazing so I was very excited to learn more about this great leap forward in the future history of money.

As CNBC reported, it seems to herald new forms of business. Umar Farooq, the head of JPMC’s blockchain projects, sets put this vision clearly, saying that the applications for this innovative use of new transaction technology “are frankly quite endless; anything where you have a distributed ledger which involves corporations or institutions can use this.

Wow.

Now, many people took a look at this and pointed out that it is simply JPMC deposits by another name, and uncharitable persons (of whom I am not one) therefore dismissed it as a marketing gimmick. But it is more interesting than that. Here is the problem that it is trying to solve…

Suppose I am running apps (referred to by less well-informed media commentators as “smart” “contracts” when they are neither) on JPMC’s Quorum blockchain. Quorum is, in the terminology that I developed along with Richard Brown (CTO of R3) and my colleague Salome Parulava, their double-permissioned Ethereum fork (that is, it requires permission to access it and a further permission to take part in the consensus-forming process). I’m quite partial to Quorum (this is what I wrote about it back in 2017) and am always interested to see how it is developing and helping to define what I call the Enterprise Shared Ledger (ESL) software category.

Now suppose my Quorum app wants to make a payment – not in imaginary internet play money, but in US dollars – in return for some service. How can it do this? Remember that our apps can’t send a wire transfer or use a credit card because they can only access data on the blockchain. If the app has to pay using a credit card, and that app could be executing on a thousand nodes in the blockchain network, then you would have a thousand credit card payments all being fired off within a few seconds! You can see why this can’t work.

One way to solve this problem would be to have “oracles” reporting on the state of bank accounts to the blockchain and “watchers”  (or “custom executors” as Darius calls them here) looking for state changes in the blockchain bank accounts that they could then instruct in the actual bank accounts. But that would mean putting the safe-to-spend limits for millions of bank accounts on to the blockchain. Another more practical solution would be to add tokens to Quorum and allow the apps to send these tokens to one another. This is, as far as I can tell from a distance, is what JPM Coins are for.

I have to say that this is a fairly standard way of approaching this problem. A couple of months ago, Signature Bank of New York, launched just such a service for corporate customers — with a minimum $250,000 balance — using another permissioned Ethereum fork, similarly converting Uncle Sam’s dollars into ERC-20 tokens. If you’re interested, I gave a presentation to the Dutch Blockchain Innovation Conference last year on this approach and why I think it will grow and the video is online [23 minutes].)

Animal, vegetable or mineral?

These JPM Coins (I simply cannot resist calling them Dimon Dollars, or $Dimon, for obvious reasons) have attracted considerable discussion but I thought I might contribute something different to the debate by trying to reason my way through to a categorisation. I talked about this on the panel in the “Blockchain and Cryptocurrencies” session at Merchant Payments Ecosystem in Berlin today, and you can see my slides here:

 

On the panel, I said that the $Dimon is e-money. Here’s why…

Is it “money”? No it isn’t. It is certainly a cryptoasset – a digital asset that has an institutional binding to a real-world asset – that in certain circumstances exhibits money-like behaviour. Personally, I am happy to classify such assets as forms of digital money, the logical reason that they are bearer instruments that can be traded without clearing or settlement. 

Is it a “cryptocurrency”? No, it isn’t. A cryptocurrency has a value determined, essentially, by mathematics in that the algorithm to produce the currency is known and the value of the cryptocurrency depends only that known supply and the unknown demand (and, of course, market manipulation of various kinds). It is not set by an institution, government or otherwise.

Is it a “stablecoin”? No, it is isn’t. A stablecoin has its value maintained at a certain level with reference to a fiat currency by managing the supply of the coins. But the value of the $Dimon is maintained by the institution of JP Morgan irrespective of the demand for it.

Is it a “currency board”? No, it isn’t. A currency board maintains the value of one currency using a reserve in another currency. So, for example, you might have a Zimbabwean currency board that issues Zim Dollars against a 100% reserve of South African Rand.

In fact, as far as I can tell, the $Dimon is e-money, which is one particular kind of digital money. There are two main reasons for this:

First, according to the EU Directive 2009/110/EC, “Electronic money” is defined as “electronically, including magnetically, stored monetary value as represented by a claim on the issuer which is issued on receipt of funds for the purpose of making payment transactions […], and which is accepted by a natural or legal person other than the electronic money issuer”. This sounds awfully like, as Bloomberg put it, the $Dimon is “a digital coin representing United States Dollars held in designated accounts at JPMorgan Chase N.A.”. It is a bearer instrument (so “coin” is a reasonable appellation) that entitles the holder to obtain a US dollar from that bank and therefore seems to fall within that EU definition since people other than JPMC, albeit customers of JPMC, accept it in payment. (I would pull back from calling it digital cash because of this need to establish an account with JPMC in order to hold it.)

Second, because my good friend Simon Lelieveldt, who knows more about electronic money than almost anyone else, says so. Simon and I have long agreed that the trading of digital assets in the form of tokens is the most interesting aspect of current developments in cryptocurrency, a point I made more than once in my MPE talk.


Following my logic then, in European regulatory terms then, the $Dimon is “e-money” and I think that is a quite reasonable definition. Case closed.

Don’t listen to me, listen to Christine Lagarde

Now, you may think that all this talk about digital currencies is just unhinged techno-determinism when it comes from me, and you can safely ignore it, but when it comes from Christine Lagarde, the head of the International Monetary Fund (IMF) and pillar of the Washington Consensus, you have to take it seriously. In a talk given to the Bank of England conference on “Central Banking and Fintech” (29th September 2017), she said that virtual currencies [by which she means digital currencies in my taxonomy] could actually become more stable than fiat currencies. She says “for instance, they could be issued one-for-one for dollars, or a stable basket of currencies”. This idea of creating a what is strictly speaking a digital currency board is not new and I was interested to see Ms. Lagarde’s mention of a basket of currencies as a viable option. In my recent book “Before Babylon, Beyond Bitcoin” I discuss this as one of the potential futures for money, with reference to the vision of a former Chancellor of the Exchequer. Many years ago, John Major proposed just such an extremely sensible alternative to the euro, which at the time was labelled the “hard ECU”.

The idea of the hard ECU was to have a pan-European digital currency (it would never exist in physical form) but still be accepted in all member states. I am not alone in thinking that this was a missed opportunity. Keith Hart, author of the brilliant “The Memory Bank“, a book about money from an anthropological perspective, wrote that it was a big mistake to replace national currencies with the euro. He further pointed out that the hard ECU would have meant politically-managed fiat currencies alongside a low-inflation alternative, a plural option enjoyed by countries that didn’t join the euro, like Britain and Switzerland. I couldn’t agree with Keith more.

The hard ECU, or as I used to like calling it, the e-ecu was always a better idea than the Euro but when John Major proposed it, he was ignored. He envisaged a cross-border currency for businesses and tourists to use. Thus, businesses could keep accounts in hard ECUs and trade them cross-border with minimal transaction costs and no foreign exchange risk and tourists could have hard ECU payment cards that they could use across the continent. But each state would continue with its own national currency — you would still be able to use Sterling notes and coins and Sterling-denominated cards — and the cost of replacing them would have been saved.

 Global money

Real Money.

When researching the hard ECU concept for my book, I discovered that the proposal goes back well before Ms. Lagarde and Mr. Major and back into the early days of Margaret Thatcher’s government, in a 1983 report of the European Parliament on the European Monetary System. The proposal was at that time supported across the political and national groups in the parliament, including by the Germans so long as the central bank only concerned itself with stability of the currency (as subsequently transpired). It was taken up by Mrs. Thatcher’s government as a practical single currency for Europe, a means to expand the UK’s financial services industry across a European single market. But it never made it and the later political drive for the euro sidelined it. 

The point is, though, that it was a feasible option and that a digital currency that is backed by a reserve (whether of dollars or some basket of currencies or, indeed, commodities) is a sensible idea. In fact, it’s already being tried in a couple of places. In Kenya, where M-PESA is a private currency backed 1-1 by Kenyan shillings. And in Ecuador, where the government has been trying to launch a Central Bank digital currency. Any Ecuadorian over the age of 18 can open an account for free and transfer money to other people for free. 

An interesting aspect of this otherwise fairly straightforward value transfer system is that is denominated in US Dollars. The US Dollar has been legal tender in Ecuador since 2000, when the post-gold standard “Sucre” was abandoned although, apparently, the “centavo” coins are still in use. This is a practical solution to the big problem of small change under “dollarisation” and most countries that use the dollar still mint local coins: thus, Ecuador uses the dollar as legal tender but mints centavo coins. The government guarantees that anyone who wants to exchange 100 Ecuadorean centavos for a genuine United States dollar can do so. As the economist John Kay noted when he reflected on the coins in his pocket in Ecuador, is in itself an interesting comment on the subject of money. He also pointed out that there is a 50 cent coin minted for the government of Ecuador while the US does not issue 50 cent coins. So “while everyone in the Galápagos or the national capital Quito would accept my 50 cent coin, no one in Washington would”. He went on to note the curiosity that “genuine dollar coins, minted for the US Treasury, have not proved popular in the US but are widely circulated in Ecuador”. It is important to understand that the US Federal Reserve banknotes that are in circulation in Ecuador, stuffed under mattresses in Ecuador and fuelling the less-formal sections of the Ecuadorian economy are in essence an interest-free loan to Uncle Sam. By replacing these with digital currency, the Ecuadorian central bank can reclaim the seigniorage for itself.

All well and good and the ability to transact electronically will also be of the great benefit to the citizens and should cut transaction costs across the economy. If the central bank were to ask the advice of people with knowledge of the creation of a national non-bank mobile payment system (e.g., my colleagues at Consult Hyperion) I am sure that they would be advised to make the system a platform for innovation to encourage entrepreneurs to build local solutions on top of it. The lack of APIs in the initial roll-out of M-PESA was, in hindsight, a mistake and Ecuador could clearly learn from this to capture even more benefits from its transition to digital currency.

Ecuador Demo

 

Unreal Money.

The Ecuadorian Digital Dollar has, I have to say, not been universally well-received. A suggestion for governments thinking of introducing such a system in the future is that it  would benefit greatly from transparent auditing as citizens will not hold the electronic currency unless they are sure that it will remain redeemable at par for US dollars (or other basket of currencies or commodities) themselves. Any suspicion of fractional reserve is disastrous. If the government were to fall prey to the temptation to put more of the digital dollars in circulation than they have (or have the equivalent of) in reserve then, as the Wall Street Journal observed at the time of launch, they will simply be creating doomed electronic assignats that will never obtain traction in the wider economy and Ecuador will be unable to reap the many benefits of its transition away from cash. Christine makes this point herself, saying that the issuing of such a digital currency could be “fully transparent, governed by a credible, pre-defined rule, an algorithm that can be monitored…or even a ‘smart rule’ that might reflect changing macroeconomic circumstances”. I agree strongly: the use of shared ledgers and other such technology may be of maximum benefit in delivering the robustness and availability that a national cash replacement system and the radical transparency that it is required to give people faith in the system.

P.S. In case you see any tweets, newspaper comment or learned articles that refer to the Ecuadorean digital experiment in monetary futures as a “cryptocurrency” please bear in mind that it isn’t.