Yesterday the FT published a report that JPMorgan Chase had filed a patent for a currency/payment system that resembled bitcoins. In reality, the original patent was filed in 1999, with the current news in relation to the bank making an update. As the retail focused Chase bank, as well as their commercial and investment banking businesses, it is reasonable to assume that this is one of many patents JPMorgan holds in relation to payment processing.
The patent mentioned by the FT can be considered similar to bitcoins as it allows for the transfer of currency between anonymous payment addresses. It also utilizes a central public accounting ledger to report payment transfers, which resembles the blockchain. An important part of the patent isn’t so much the technology involved, as much as the rationale behind the invention. Similar to Satoshi Nakamoto’s bitcoin essay, the JP Morgan patent goes into detail about the current state of affairs of internet payments and while credit cards provide an acceptable means of purchase, they are laden in fees and vulnerable to fraud. They also add that credit card payments are based on the two parties having a mutual third party; thus limiting to who and from where one can send and receive money (for example, you can’t use an AMEX card, even if it’s a Centurion at IKEA in the US).
The Corporate Bitcoin
Unlike fiat currencies, or other alt coins like the defunct eGold and Liberty Reserve systems, as well as the thriving WebMoney and PerfectMoney wallets, the arrival of bitcoin brought a non-centrally controlled or backed monetary system to the market (or at least legitimized it). However, just because of its current success, it doesn’t mean that the global public has a preference for a non-centrally backed currency. The simple reason for the success of credit cards as a source of payment is that they are easy to use. Despite the fees, with a Visa or Mastercard, paying for things around most of the world is fairly efficient.
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While it is too early to tell whether JP Morgan is seriously interested in building out its own virtual currency network, it wouldn’t be at all surprising to see a consortium of banks combine to create a bitcoin-like product. On a historical perspective, credit cards have evolved from being a single bank issued product to both users and merchants, to an interbank credit system that connects countless merchants and financial institutions. Therefore, were numerous banks to create their own virtual currency systems network of customers and merchants, and seamlessly connects to a bank account, there is precedence that multiple banks would work together to increase their coverage.
No Bitcoin Competitor
Although a bank led virtual currency would seemingly be a potential rival of bitcoin, they would most likely have many key differences. More likely than not, a bank creation would probably be a rival of the current card system. As banks spearheaded the mass distribution of credit cards, there is no reason to doubt that they would be important players in creating its replacement. In terms of the present, beside the efficiency of credit cards for users, for banks, they serve the purpose of creating customer debt and its high fees. As such, in regards to banks, the question isn’t whether they would be willing to create and back a virtual currency, since the precedence is yes, but whether it would be credit based? Even if it were to be debit based, the virtual currency would most likely have a central backing and be limited in its use to countries with a globally recognized banking system. For these reasons, bitcoin, and its anonymous and globally accepted network would still provide a unique value unserved by a potential banking consortium.
In terms of currency, if the past is an indication of the future, a bank led virtual currency would also most likely be backed by fiat. As such, although cross-currency payments would be available, there is little reason to suspect a removal of values pegged to the existing sovereign monetary system.
Overall, it would be more surprising if the banking world stayed out of the digital currency world, than participates in it. Due to their ownership and involvement with creating credit card networks, banks and major financial institutions are already fully entrenched in the transferring of money around the world. For them, the question becomes how they leverage their existing relationships with account holders and merchant customers in creation of a credit card replacement, rather than if.