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CommentByte Me

Byte Me: Jamie Dimon’s big mouth speaks truth

Jamie Dimon, long known to be among the mouthiest of the titans of investment banking and the loudest bitcoin sceptic of all, now presides over the first ever cryptocurrency from a major bank.

Dimon’s name carries a dark and permanent stain in the cryptocurrency community. In 2017, he put a speed bump in the path of bitcoin’s bull run, denouncing the original cryptocurrency as “a fraud” and saying it “will not end well for investors”. In doing so, he attracted the ire of the world’s crypto-fans — a spectacularly vociferous bunch.

They were drunk on the market’s strongest ever bull run. At long last, they were getting the attention they felt they had always deserved, and some fusty old banker had started throwing shade. The bitcoinistas of Twitter absolutely savaged him.

The more generous ridiculed the JP Morgan boss as a perfect example of the unconscionable Luddism typical of the banking industry. The harsher critics denounced him as a shill of the Illuminati-riddled upper echelons of finance — an establishment figure doing his best to stamp on the digital age’s champion in the fight against the corrupt world order.

In hindsight, Dimon’s calls look prescient. While nothing has yet been proved, a growing chorus agrees with him that bitcoin’s value growth was driven by fraud. The accusations of wash trading and price manipulation at Bitfinex, the world’s largest cryptocurrency exchange, remain the subject of much online speculation but, even without proof, the rumours have undoubtedly done more to damage the bitcoin market cap than Dimon’s doom-mongering.

But now, his bank has launched its very own cryptocurrency. Lazy commentators have been swift to claim this as a damning revelation of Dimon’s hypocrisy. Emphatically, it is no such thing.

Dimon’s comments were reserved for bitcoin, rather than blockchain projects as a whole. The difference might seem trivial, but it isn’t.

Despite its ambitions as a decentralised method of transferring value, bitcoin has always been a speculative asset. While a few people bought bitcoin in the hope of spending it, the vast majority bought in the hopes of funding their Lamborghini ambitions with Dacia Duster money.

JPM Coin is different. For a start, it has a fixed value. One JPM Coin equals one dollar. It’s a stablecoin . That puts it in the same category as Tether, a product of the much maligned exchange Bitfinex. Hopefully, JP Morgan will have a more respectable accounting system than Tether, which fired its auditor in early 2018.

JPM Coin will not be a competitor for the Tethers of the world, nor the Winklevoss-produced equivalent Gemini dollar. It will only be available to JP Morgan’s corporate and institutional clients. They will deposit money in JP Morgan accounts, and receive a JPM Coin for every dollar. These will be used to provide instant settlement for cash transactions — either the movement of money or the cash leg of securities transactions.

It’s such a common sense idea, you’d expect other people to have thought of it first — and they did. Various small brokerages have facilitated the cash leg of blockchain securities transactions with something similar. A consortium of 17 banks has been developing a utility settlement coin for almost two years but, at a stroke, JP Morgan has overtaken them.

The power of a JPM Coin isn’t limitless. In order to cash out JPM Coins for good old-fashioned dollars, you’ll need to be a JP Morgan customer and have completed their usual KYC compliance paperwork, which limits the universe of potential counterparties. However, that’s not a huge limitation — JP Morgan has a lot of customers.

There seems little doubt that, by providing instant settlement, this system will be a considerable improvement on the comically outmoded wire transfer protocol, but there remains the eternal question of “does this need to do be done on blockchain?”

The simple answer seems to be “no”. The point of using a blockchain, or a distributed ledger system, is decentralisation — removing the necessity of trusting a central party by allowing anyone to take part in the process of verifying the record-keeping.

The JPM Coin will operate on Quorum, its own permissioned version of the Ethereum blockchain. Its verification will likely be limited to a few hand-picked nodes. Users will still have to trust JP Morgan. Obviously, that’s not a problem because they already trust JP Morgan in the current system — it’ll just happen faster using JPM Coin. But the fact remains, it’s not exactly a blockchain.

How secure is too secure?

As a palate cleanser from this tale of the sensible employment of blockchain technology in capital markets, let us return once more to the silly side of the game.

Gerald Cotten, chief executive of QuadrigaCX cryptocurrency exchange, practised impeccable data security. Client money was kept in unhackable “cold storage” (offline to ordinary non-techies). He did not use any system for generating new passwords that anyone has been able to figure out, nor did he write his passwords down or share them with anyone, as far as anyone can find out.

Sadly, Cotten died of Crohn's disease while travelling in India at the end of 2018 and, in doing so, taught the world an obvious but overlooked lesson about the double-edged sword of password security.

The problem, in essence, is that his profoundly encrypted laptop contains the information required to access some $145m of client holdings, and the exchange has no idea how to break into it. What’s worse is that someone at the exchange apparently fat-fingered another $400,000 into the inaccessible hoard this week.

Perhaps we should have seen this coming. Some estimates put the amount of bitcoin rendered inaccessible by lost passwords as high as 20% of total supply. In fact, this might prove to be the most secure check on the downward spiral of bitcoin’s price. Weak hands can’t fold if they’ve lost their cards.

But for this to happen to a medium-sized institution is simply incredible. Then perhaps incredulity is the correct response. The Chronicle Herald, a publication in Cotten’s native Canada, pointed out that the cost of a legal death certificate in India is $450. Byte Me hopes that someone is keeping a very close eye on that cash.