The JP Morgan Stablecoin Project. Interview with Bianca Bates, Head of Payments JP Morgan ANZ

Transcript

Nick Abrahams:

Hello. And today we are going to focus on a topic which has been very much at the forefront of media attention in recent times, and that is around stablecoins. And I’m delighted to have joining me on the show today. Bianca Bates. And Bianca is the head of payments at JP Morgan for Australia and New Zealand. Bianca, welcome to the show.

Bianca Bates:

Thank you very much, Nick. Lovely to be here today with you.

Nick Abrahams:

Terrific. I really appreciate you coming on because it’s a fascinating topic, and we know that JP Morgan has been a trailblazer in the Web3 space. And so, back in 2019, you released the JPM coin and that was the first of its kind. We’ll hear a little bit more about that, but that we’ve obviously seen terrific rise in stablecoins over recent times. And we had, of course the collapse of Terra (LUNA) recently. And so, maybe just to give people a sense of what it is that we’re talking about, could you give us a sense of what do you see as a stablecoin, and also, what’s the essence of the JPM coin?

Bianca Bates:

Yeah, no, thanks Nick. And I think it’s great to start off with this because I think, given that these are quite new concepts, a lot of people use a lot of terminology interchangeably. So great that we can benchmark and level set what we’re actually talking about. So to me, a stablecoin, it is a type of cryptocurrency, but the nature of the stablecoin is that it’s pegged to an actual physical asset. So whether that asset, for instance, in the case of [inaudible 00:01:59] recently launched stablecoin, the Aussie dollar, so a fiat currency of sorts, or whether it’s backed by some other type of commodity or measure of value. So for instance, Tether, that stablecoin is supposed to be backed by cash and other types of assets like commercial paper.

Bianca Bates:

So stablecoin really differs from cryptocurrency. The cryptocurrency we’re talking about, such as Bitcoin, in that it has a pegged and measured value underlying it. The cryptocurrency actually, its value is determined by the supply demand for actually the Bitcoin itself. And I think the essence of why stablecoins have come about is because people do want to trade in the digital asset space. It’s becoming a lot more prevalent, a lot more common, and they wanted some type of a way to transact, so to make the payments, which is essential to a digital asset, but have a little bit more confidence in terms of the value of what they’re getting. So the stablecoin has come up that can be used in the context of trading in the digital asset world.

Nick Abrahams:

Great. So I guess, in a sense, it’s really rather than paying for something with Bitcoin, and obviously there’s a lot of volatility in Bitcoin. If you are uncomfortable with that, you would request payment in a stablecoin or do a payment by way of stablecoin because basically, depending on which sort of stablecoin… But we assume that the stablecoin is pegged to that physical asset via the US dollar, Aussie dollar, et cetera. But the idea is to give confidence to people that, in effect, what they’re using is, I guess, the technical infrastructure of crypto to facilitate a payment, but without that sort of volatility that you get in crypto, and more just the volatility or lack of volatility that exists in a fiat currency. Is that the sort of proposition to customer?

Bianca Bates:

Yeah, exactly. I think that’s exactly what the stable client is designed to do and why it has come about as well.

Nick Abrahams:

Yeah. And so, you guys started with JPM. And it is called JPM Coin, I’m correct?

Bianca Bates:

Correct. Yeah.

Nick Abrahams:

Yeah, great. So I mean, you launched that… I think it’s a few years ago. Well, in crypto terms, 2019 is at least two crypto winters ago. So it was a very early mover. Can you give us a bit of a sense, are there specific use cases? Which sort of customers are asking for it? I assume it has application in terms of cross-border money transfer, but what sort of organizations are reaching out to use JPM Coin?

Bianca Bates:

Yeah, yeah, sure. And maybe I might start by just giving a little bit of an introduction on JP Morgan Coin.

Nick Abrahams:

Perfect. That would be great.

Bianca Bates:

So the name is a little bit of a misnomer. So we don’t see that the JP Morgan Coin is a stablecoin or a cryptocurrency itself. So the way we describe it, the JP Morgan Coin, it’s a deposit-keeping system on a blockchain. So it uses the underlying blockchain technology, but essentially, it’s a ledger deposit that reflects it. So it’s a tokenized deposit. At the moment, we’ve got it in US dollars, although we are looking to expand that in the future. So really needed to make it very clear that we view it as a tokenized deposit and not kind of a stablecoin, as such. So I think maybe somewhat controversially, I think we don’t believe that we need new forms of money, but we are really interested in using the technology that’s underpinning Web3 and et cetera to try and make the system a lot more efficient and try and solve some of the existing pain points that actually operate in the system today.

Bianca Bates:

So for instance, as you mentioned, the JP Morgan Coin is designed to move cash around the world 24/7. So in the current world of payments and money movements, cross-border transactions, you run into things like that, cutoff times, et cetera. So this is really meant to reflect that new movement to 24/7, and also then going to link in with the digital asset world and facilitate the payment leg of that. And that digital asset world is really working 24/7 now.

Nick Abrahams:

You raise a fantastic point, which is, I think… Well, many of us have had that problem, which is, oh, no, the banks cut up. If you’re waiting for a big payment to come in, a transaction, and it’s like, oh no, we need to get it done by 12:30 or 1:00 PM where the money’s coming from because they need that time before the banks close. I hadn’t really thought of that. That’s a very sort of old concept, isn’t it, given we operate in a 24/7 world. And so, the proposition with JP Morgan Coin is that you wouldn’t have that issue. So if you needed to transfer, let’s say, it’s $10 million to complete an M&A transaction, you could do that. There would be no get it done by 2:00 PM in order for it to occur. You could do it at any time during that 24/7. And would it be significantly quicker? Does it take a period of time for the transaction to occur and to be recorded in, I guess, the receiving bank to the extent that such a thing exists?

Bianca Bates:

Yeah. Look, it’s 24/7 and it’s instantaneous, so pretty much within seconds. And it operates, as I said, seven days, so Saturday, Sunday, which traditionally hasn’t been the way that the payments have worked. So at the moment, the JP Morgan Coin systems are internal systems, so we move money just around the JP Morgan network.

Nick Abrahams:

Okay. Sure.

Bianca Bates:

But there is work underway and there is a company that’s been established for partier. JP Morgan’s one of the founding members of Partior together with DBS and Temasek. And what that’s designed to do is to move multi-currency, multi-country movements of money around the world. So that’s really the next extension of the JP Morgan Coin, multi-bank, multi-currency movements on the blockchain. So making sure that we still get the benefits of that instantaneous 24/7 movement.

Bianca Bates:

I think the other aspect of the technology that is really powerful, not only is there the 24/7 movement, but there’s also the element of program ability that’s available through using blockchain technology for this. So it means that clients, customers, can actually make triggers for themselves as to how and when they want to make payments, and smart contracts can also be linked to this. And so, once a condition of the contracts being fulfilled, then you can have payment being made instantaneously. So it takes away the need for people to actually be looking at tracking, monitoring, releasing, giving instructions to release that payment as well. So I think that’s another important element and benefits that we also see in terms of the adoption of this technology.

Nick Abrahams:

Yeah. It’s a fantastic way to, I guess, innovate on what is… And critically so that there are a lot of checks and balances and so forth and payment directions, that it feels like we’ve been working. With that similar-ish system for a while, there’s been obviously advances in it. But yet to be able to pre-program that, and then I guess the smart contract, depending on how smart it is, allowing reporting. And then, I imagine allowing regulators and so forth to get more comfortable with that, so that’s fantastic. And so, the future of the JP Morgan Coin is that at some stage, it will be available to clients and together with those other banks or the other organizations that you mentioned in that consortium. And so, there would be the ability to send money around between each of those banks. Is that correct?

Bianca Bates:

Yeah. Look, and I think that’s what we’re working towards, distributed systems, but shared networks. So there has to be an element of interoperability, which is one thing that I think we are working towards. It’s just at the initial stages, but certainly, we want to have this shared network. And we need that to have that network and really benefit the community as a whole. Yeah.

Nick Abrahams:

Yeah… Oh, sorry, go ahead. So with Terra (LUNA), I think that really shown a very bright light on the stablecoin world, if you like. And I think just to clarify for folks, that you mentioned Tether. So you’ve got Terra (LUNA) as an algorithmic stablecoin, and then you’ve got Tether, which we believe to be a backed stablecoin, represented, as you said, by US dollars and some forms of commercial paper. And there’s obviously a lot of discussion and there was some regulatory inquiries in relation to Tether. And I know the JP Morgan coin isn’t a stablecoin, but maybe just to put it into context because I think people need to get comfortable that what happened with Terra (LUNA) is not going to happen to these others.

Nick Abrahams:

So Terra (LUNA) algorithmic, so no, there’s a small amount of actual cryptocurrency backing behind it. But effectively, the peg between the crypto or the stablecoin and the US dollar was kept in place by some brilliant maps by some market assumptions that turned out to be a bit flawed. And so, the peg got broken and that algorithmic stablecoin collapsed, but then you come to Tether. So hopefully, you should be a bit more comfortable with that. From a JP Morgan Coin point of view, how do people get comfortable that this actually reflects value? Is it because it’s backed by JP Morgan? Or how do we get that level of comfort that I should trust that when I’m receding these funds, that actually there’s real funds behind them?

Bianca Bates:

Yeah. So the JP Morgan Coin, it’s actually a book record keeping systems. We have the coin system that is a ledger system, but in the back of that, there’s actually US dollars. That is that. So it’s just a reflection in terms of on a recordkeeping system, on a bookkeeping system. So in that case, look, it’s certainly very different, I think, kind of two stable points, as I said. It’s actually a tokenized deposit, so it’s just a ledger in terms of what it is.

Nick Abrahams:

Okay. So you are actually sitting on, let’s say, fiat currency, and the JPM Coin is really a bookkeeping representation of that fiat deposit that you’ve got. Is that…

Bianca Bates:

Correct, correct. Yeah. So exactly. It’s a great way to explain what it is. Yeah.

Nick Abrahams:

Okay. Great. Well, I mean, it seems like stablecoins have some wonderful applications in payments, but given what we see with Terra (LUNA) and so forth, the US has just looked at that regulating stablecoins, I guess. Can you give us a bit of a sense of what are your thoughts around, I guess, the need for regulating stablecoins and how that might be done?

Bianca Bates:

Yeah. So look, I think recent events have really put the spotlight well and truly onto stablecoins. And I do think it’s just a matter of time before regulated in all jurisdictions, look and get around to regulating the stablecoins. I think stablecoin need to be backed by whatever they’re meant to be pegged to. So I think their recent events that you’ve been been talking about has really shone a spotlight into whether that’s actually the case or not in terms of that. And given that they need to hold these assets, they also take liquidity out of the system, out of the ecosystem that could be used for other things such as lending. So I do think there’s got more discussion in terms of stablecoins and how they operate and their broader impact and the need to regulate them.

Bianca Bates:

So stablecoins have been an evolution out of the cryptocurrency space, and that was really quite an unregulated space. And there’s also a lot of talk about transparency that might exist in that system, so particularly when we are talking about money laundering type of how do you know who’s actually holding and who people are. So I do think with recent events with the Ukraine and Russia and the impact of sanctions, et cetera, certainly there’s been more focus as well on making sure that we are thinking about regulation from that perspective as well. So there’s been a lot of conversation lately in the US, as you referenced. I think there’s some draft legislation. The treasury secretary spoke recently given the events that happened in the stablecoin space about regulation and the links to stablecoins for the broader economy.

Bianca Bates:

And from an Australian perspective, I know that there’s some discussion about whether stablecoins should be linked more to the existing store of value regulation that we have in Australia. But I do think it will take a little while for regulation to catch up with the speed of innovation that’s happened in that space. So I think in Australia, they’re talking about consultations this year into 2023 and probably looking to formulate something in the next couple of years. But I do think it’s caught the attention of regulators. But given the speed of which things are developing in this space, regulators also have to really get up to speed with how things are working and the actual impacts that it might have. So I think it’s an education game as well in terms of that. So yes, look, I think it will come, but I don’t know how quickly it will come and what the final form will be in terms of that.

Nick Abrahams:

Yeah. Yeah. And I think that’s right. And I think it’s probably a need for us to think about this at a global level. And obviously, global regulation is incredibly difficult to pull off because banking and payments is, of its nature, a global business. So presumably, there’ll need to be some sort of commonality across geography. So it does strike me that if we look at what happened with Terra (LUNA), it’s a lot of money, somewhere between 40 and 80 billion of value disappearing in a space for a couple of days. And then, you see what’s happened with the DeFi protocol Celsius just effectively suspending deposit or withdrawals. And I think there are parts of the Web3 community and I think it’s great to experiment with these things, but I am concerned for consumers, particularly who can possibly you’ll afford to lose that sort of money.

Nick Abrahams:

And particularly with things like DeFi, we’re seeing interest rates of 18% to 20%, and that defies logic. And I guess the old saying, if something’s too good to be true, there might be something to that. But perhaps it’s a subject for another day. I’m just interested. You mentioned at the outset that there is interest from your clients. And what’s driving the way JP Morgan looks at Web3, and particularly the JP Morgan Coin? Are there particular clients who are saying, we want to understand how you JP Morgan can innovate to help us? Is that the pull through, or is it more JP Morgan looking to the future and saying, you know what? There’s a good opportunity for us. We should get there.

Bianca Bates:

Yeah. Look, I think that we have a lot of clients, whether they’re financial institutions, corporates that really want to partner and co-create with us in this space. And I know a lot of people that believe that this technology will fundamentally change the way that we will be operating. So for instance, for the coin, one client we’re working with is Siemens. So they’re using JP Morgan Coin to move money around their accounts. And the reason they’re looking at it is really from an operational manual processing stage. So as their business is becoming more focused on delivering to the consumer, so as everyone’s going online, as eCommerce becomes more prevalent, traditional models of selling to a distributor and a distributor selling to consumers, it’s really breaking down.

Bianca Bates:

So, as you get more focused up directly on consumers, the volume of payments that you need to move, and also the value also changes somewhat as well. So if you can become a lot more efficient in terms of the way that you are making your payments move around, you can really maximize your working capital and liquidity. So what Siemens is doing is using particular triggers. So going back again to the point of the program ability of these technology, and at certain triggers, will move money around their accounts. And so, that really helps them from a operational as well as a liquidity perspective. And it’s something that we’ve spent a fair bit of time developing. We have a dashboard that clients can actually go.

Bianca Bates:

And it’s relatively easy to use, so I’ve seen it. And I’m not a coder or anything like that by background, but I thought even I can use it. So my children use scratch for learning how to code. It’s very similar to that, the way it looks and feels. So a client can kind of can go in there and say, okay, if X occurs, then move a hundred dollars. We’ll count Y. And you can get very detailed and have a lot of [inaudible 00:23:46] over. If that account is less than a hundred dollars, then leave it in that account. So it really gives a lot of power to customers to be able to manage their working capital and their liquidity in a much more efficient manner. So that’s certainly what we’re seeing from clients.

Nick Abrahams:

Oh, I think it’s like a CFO’s dream come true, that ability to set in place those sorts of waters and just have the machinery do that. And so, just to clarify, so right at the moment, JP Morgan Coin would work for a large organization. You mentioned Siemens, but only with respect to their ability to move funds within that particular organization. So you’re not actually paying third parties, but you are sweeping accounts and moving funds between operating entities. I imagine cross-border. Is that…

Bianca Bates:

Correct, that’s exactly how it works. Yeah. And I think as I touched on before, it’s just within JP Morgan network at the moment.

Nick Abrahams:

Of course. Yeah.

Bianca Bates:

That is something that we are looking at trying to build a broader network so you can do multi-bank as well. And I think that’s a goal of what the company part here is attempting to do as well. But for that, we really need to have some protocols that we all agree on, and I think we’re a little bit away from that. And it’s something that the industry has to move towards.

Nick Abrahams:

Yeah, no, there’s obviously significant complexity in working on those sorts of arrangements across so many different stakeholders. I guess just one final piece or of advice, I guess, that you might have to CFOs and others who engage with the banking solutions for their organizations. What advice do you have about… What should they be doing right now? At what level does it make sense to start thinking about, hang on, maybe I can do this a bit smarter. Maybe I can use JP more in coin, et cetera.

Bianca Bates:

Yeah. Look, I think it’s the right time at the moment to start thinking about this. So the technology has been proven. I think everyone thinks that we are going to move more towards that DeFi technology. So the sooner the organization can have a look at what benefits that technology can give to them from their operations through to their liquidity management and working capital, I really think that it’s a time to start thinking about it now, whether you’re large or small. And particularly as things are moving more towards eCommerce, I think it’s only going to become more instantaneous real time is the requirement now, and it’s because of the expectation of consumers in this day and age

Nick Abrahams:

Absolutely. I think that’s fantastic. And so, I guess for those that are listening, if you are CFOs, then you should make your way to the anchor’s door. And if you’re not a CFO, you should send a link to this interview to your CFO. I’m sure they would enjoy it. So Bianca, thank you very much. Really appreciate it. Very exciting. Congratulations to you and the whole JP Morgan team on really being a leading light in this space, and wish you all the very best. Thank you very much.

Bianca Bates:

Thank you.