One currency to rule them all

JP Morgan recently came up with a digital currency called JPM coin. This currency or some such will make crypto  currencies useless. This blog discusses the reasons for that conclusion.
Addendum: Facebook's libra is similar to JPM except it is based on a basket of currencies not just the US dollar.

Brief History of Currency. 

At the dawn of human history there was no private property. The tribe honcho decided who gets what. Next came division of labour and job specialisation. People had to exchange goods because they could not or would not produce everything themselves. This barter system gave way to one commodity being used as currency. Cattle, sheep, salt , vegetables and other commodities were used as currency.

Later the ruler issued a token such as  gold or silver coins to represent the commodity. These coins were then replaced with cheaper tokens like paper and metal coins that represents a fixed amount of say gold or or silver. The government issuing the tokens began to issue more tokens than they had gold or silver to back them up with. Quantitative easing is the modern name for this ancient practice.

The US dollar used to be backed by gold for a long time. Bretton Woods convention established the US dollar as a reserve currency pegged to the price of gold. This came to an end in 1973 when the Bretton Woods Agreement was  formally dissolved.

Now a US dollar represents nothing other than the US dollar. It is not underpinned by any commodity. 

Bitcoin

Satoshi Nakamoto, who is rumoured to be a group of individuals, sprung a new digital currency called Bitcoin in 2008. This currency has only a digital token. Admittedly, most currencies are by and large digital currencies with only a small portion of it in the form of currency notes and coins. The difference is that there is no central authority controlling the flow; only a set rules that govern the creation and transfer of bitcoins. Bitcoin is a distributed ledger. All transactions are public, although the physical identity of an account holder may not be known. After more than ten years the actual identity of Satoshi Nakamoto is not public knowledge. 

After the initial creation of coins new Bitcoins are minted by a process known as mining. This limits the rate at which new coins can be minted.  Since then many crypto-currencies have sprung up. Almost all of them are based on the same model with some distinct attributes. The fact that crypto-currencies are initially created out of nothing makes it look like a Ponzi scheme and has many traditional economists worried.

The original paper by Satoshi Nakamoto is well worth reading. A modicum of understanding of  public key cryptography is enough to appreciate some of the issues that the paper addresses and the solutions it suggests.

JPM Coin

J P Morgan Inc. (JPM) after stating as much has now come up with their digital own currency with a crucial difference in that one JPM coin is backed by one dollar. Why bother with an intermediate coin? Why not just use the US$ as the reserve currency?

Within the US, JPM coin makes no sense. Outside the US there are a number of benefits. If there are n countries trading then there are n(n-1)/2 exchange rates. But with JPM coins there are just n exchange rates. Thus if two banks dealing with currencies X and Y have sufficient JPM coins to their credit then the transfer between the two can be done outside the purview of existing international transfer systems like SWIFT. In other words it will be as simple as transferring money from one account to another within the same bank.

For a start JPM coin will be restricted to institutional investors of JPM. But JPM plans to extend it to individual users. For example one could buy JPM coins in England; and then assuming JPM operates in New Zealand, have those JPM coins sold for NZ$ and the money transferred to a New Zealand account; all in a matter of minutes.

In addition to speed of transfer the other advantage would be stability. The US$ changes slowly. Twenty years back one Australian dollar bought US$ 0.66 now it buys US$ 0.70 or thereabouts. Hence keeping the JPM coins without converting to local currency will not incur much loss.

Crypto-currency is a Passing Fad

 Most crypto-currencies will die due to a number of reasons. Their currency supply cannot expand fast nor can they contract at all. JPM coin can expand or contract depending on economic situation. Secondly JPM coins are more stable. This will reduce speculation and the coins will be used mostly for exchange. People outside the US may use it to hedge against inflation in their own countries. Finally the transactions can be done extremely rapidly in the order of hundreds per second, a far cry from what VISA does now but still much better the crypto currencies like Bitcoin.


I would speculate that JPM coin or its equivalent will replace both centralised  crypto currencies like Ripple's XRP or decentralised blockchains like Bitcoin for the most part. Only a  few anarchists who do not believe in the state or government having a monopoly over currency will find any need for crypto currency that is not linked to something external like the US$ or the price of gold. The rest of us are better off dealing with local currency and using some standard like JPM for exchange between currencies.