Enterprise Cryptocurrencies: A Corporate Attack on Crypto?

Key takeaways

  • Contrary to previous statements in news reports, Bitcoin is not threatened by Enterprise Blockchain coins such as JPM Coin or Facebook’s rumored stablecoin.
  • If anything, JPM Coin’s real competitor is Ripple, as both services provide interbank transaction solutions to institutionals.
  • Being able to leverage its large global user base, Facebook’s coin may have the potential to outrun competing messenger payment service providers in the race to become the top cross-border payment application.

Currently, many cryptocurrency applications are struggling with mass adoption as they fail to overcome problems in scalability and usability. This becomes apparent when observing the number of daily users of dApps across multiple platforms, such as Ethereum or EOS. At the same time, more and more corporates are exploring Blockchain technology for their own use cases and develop Enterprise Blockchain solutions. As opposed to permissionless, public Blockchains such as Bitcoin or Ethereum, enterprise Blockchains are mostly permissioned and private. They form a closed ecosystem in which a central organization decides who joins the network in which the transaction history can only be viewed by members. By design, they evade the problems of scalability and usability, as companies and consortia rely on weak consensus mechanisms (if one at all) and can tailor the user interface specifically to the needs of their internal target group and use case.

Lately, news about two possible Enterprise Blockchain projects from Facebook and J.P. Morgan Chase have been circulated through the media:

Based on statements by five people “who have been briefed on this subject”, the New York Times reported (28/02/2019) that the social media platform Facebook is planning on releasing its own cryptocurrency. It is speculated to be a stablecoin pegged to a basket of fiat currencies. Being coupled to government-issued money, the coin would maintain a stable value, thereby avoiding the volatility of current cryptocurrencies. Facebook’s coin would enable WhatsApp users – WhatsApp is owned by Facebook since February 2014 – to send money instantly to each other via their accounts. The project is allegedly in an advanced stage and negotiations with crypto-asset exchanges about possible coin listings have been presumably initiated.

While Facebook is yet to publicly comment on this, the US bank J.P. Morgan Chase has officially announced (14/02/2019) the creation and successful internal testing of JPM Coin. This digital asset is pegged 1:1 to the US dollar and would enable instantaneous transfer of payments between institutional accounts (e.g. B2B money movement flows between banks, broker dealers, corporates). It is issued on the underlying Ethereum Quorum Blockchain, which is an enterprise-focused version of Ethereum developed by J.P. Morgan Chase.

The two projects – even though much remains speculative about Facebook’s secret coin – seem to be developing permissioned Blockchains and share similar starting conditions as corporates. Both Facebook and J.P. Morgan Chase are international companies with large global customer/user bases. The development of a cryptocurrency seems to be a logical next step for them in order to facilitate efficient money transfer.

However, they differ in their target group: JPM Coin is primarily designed to serve as a digital asset enabling interbank transactions for institutionals (cp. slide 25, investor information deck). The current main advantage for J.P. Morgan Chase is asset liquidity (i.e. the instantaneous exchange of USD against JPM Coin), as JPM Coins can replace dollars held in subsidiary banks. This feature is comparable to Ripple’s XRP, which also provides on-demand liquidity, thus rendering the pre-funding of nostro accounts in destination currencies superfluous. Ripple’s alternative payment and settlement infrastructure RippleNet also enables frictionless, faster and cheaper cross-border payments and is allegedly used by more than 200 financial institutions according to a Ripple press release from January 2019.

Meanwhile, Facebook is targeting the retail sector. These are specifically young individuals, who want to use easy and quick payment solutions via messenger apps on their mobile phones. A first practical application of this could be remittances, which is money that foreign workers send cross-border to families and friends in their origin countries. Global revenues in remittances amounted to USD 1.9tr in 2017, which is an 11% growth from 1.7tr in 2016 and thereby the largest annual increase measured in the past five years according to a study by McKinsey. In 2017, India was the world’s leading receiver of US remittances, adding up to USD 69bn (cp. China USD 64bn, Philippines USD 33bn; World Bank Group/KNOMAD study). As WhatsApp has more than 200mn users in India, Facebook might target this specific user group in a first step. However, with the rumored ongoing integration of Facebook’s three major properties WhatsApp, Messenger and Instagram, Facebook could eventually have a far more extended global reach to over 2.3bn accounts, thus pushing itself towards the top of the list of retail payment providers. In this way, Facebook might become the Western equivalent of the Chinese multi-purpose messaging app WeChat (1.08bn users/month) and its popular feature WeChat Pay, which allows instant payments via QR codes and online payments. Other potential competitors could be PayPal, Visa and Mastercard, which process global electronic fund transfers.

Some news reports indicated that Facebook’s coin or JPM Coin could potentially succeed where Bitcoin failed, which is mainstream adoption. However, when comparing the functionalities of Facebook’s potential coin and JPM Coin to “classical cryptocurrencies” such as Bitcoin or Ethereum, decisive structural differences become obvious. The three components of the scalability trilemma – decentralization, security and scalability –  can serve as a framework for comparison here. As both projects presumably build permissioned and private Blockchains, this comes with tradeoffs in the degree of decentralization and security in favor of scalability. Facebook and J.P. Morgan Chase require efficient, high-capacity networks which can sustain their large customer/user bases and quickly process a high volume of transactions, which shifts the focus on scalability. Yet, being centralized, private organizations, they also want to maintain a certain degree of control over ownership and influence on the Blockchain. Consequently, the network could be less decentralized, which bears security risks in terms of single point of failure. In terms of privacy, the central organization has potentially access to private customer/user data and controls Blockchain governance. With this design setup, both projects are similar to Ripple’s infrastructure, which equally places scalability over decentralization. While its network can theoretically process 50,000 TPS according to Ripple’s own account, the highest throughput in practice was ca. 19.02 TPS (January 16, 2018). Moreover, Ripple still controls 61% (26/42) of its UNL validators (i.e. block producers). In comparison, classical cryptocurrency networks process less transactions, but are more decentralized. For instance, Ethereum has an estimated capacity of 20 TPS, while the highest throughput was ca. 15.6 TPS (January 4, 2018). In terms of network distribution, the top three pools are necessary to combine 61% of Ethereum’s hashrate. Bitcoin’s estimated network capacity is 7.3 TPS, while the highest throughput was measured on January, 4 2018 with 4.9 TPS. In Bitcoin’s case, the top four mining pools aggregate 61 % of the hashpower at the time of writing. Bear in mind that mining pools by design do not necessarily have the same power as a single company. With a focus on decentralization and security, Bitcoin and Ethereum may have experienced problems with scalability, which have been addressed with recent implementations (cp. Lightning Network, Ethereum 2.0). Contrary to the reports in some news, JPM Coin is therefore not directly threatening Bitcoin, but rather Ripple.

If J.P. Morgan Chase can facilitate adoption of its coin, Kyle Samani (Managing Partner at MultiCoin Capital) and Anthony Pompliano (Founder of Morgan Creek Digital Assets) argue that J.P. Morgan Chase could try to establish a second standard that competes against the central US banking system – a second central bank. Pompliano’s assumption is based on J.P. Morgan Chase CEO Jamie Dimon’s recent statement regarding JPM Coin’s potential future use case as a retail currency. This opens up the possibility of mainstream adoption but bears risks of inflation once J.P. Morgan Chase decides to decouple the digital asset from its fixed USD standard. However, while this scenario may be prevented by regulatory intervention, J.P. Morgan Chase is yet at the beginning and needs to bring partner institutions on board to test its system for interbank operability. Additionally, like everyone else in the crypto space, the bank has to solve regulatory issues.

This might also become an issue for Facebook if it chooses to extend its already existing payment system across borders via its coin. Facebook Messenger Payments has been up and running in the US since 2015, and in Great Britain and France since 2017. It allows users, which are in the same country and over 18, to fund payments with debit cards and send zero-fee transactions to friends via Facebook Messenger. The new coin could add the feature of cross-border payments between international Facebook users, with one possible use case being remittance payments as mentioned above. At the same time, other messaging services such as Telegram (200mn global users in March 2018, token: GRAM) and Signal (number of users unknown, >10,000,000 downloads on GooglePlay in March 2019, token: mobilecoin) are also developing their own or associated payment tokens. Even though they cannot compete with Facebook in terms of user base size, their crypto endeavours may be met with more trust than Facebook’s. With the recent security breach in September 2018, where over 50mn user accounts got hacked, Facebook may have forfeited the trust of many users when it comes to privacy issues. These would equally have to be addressed by Facebook, if they were to build a private Blockchain. Commenting on this, Chris Burniske (partner at Placeholder VC)  drew a bold comparison: A private Facebook Blockchain would be to “crypto what the Microsoft internet explorer was to the internet”. To regain the trust of its users, Facebook might instead consider developing a public Blockchain. However, this would come hand in hand with loss of control over Blockchain governance by Facebook.

The past month’s news of the two corporate heavy weights J.P. Morgan Chase and Facebook entering the crypto space have stirred up the media and given rise to many speculations. Yet, not much confirmed or detailed information has been officially released about these two projects. This impairs a comprehensive evaluation including possible future projections. Still, news reports on how Facebook’s enterprise coin could potentially rival Bitcoin have to be relativized. Whilst corporates may initially focus on exploring private Blockchains for internal use cases, this can be still viewed as a sign of progressing crypto adoption.