JPMorgan Chase is sending signals that its homegrown blockchain, Quorum, is alive and well despite a recent shake-up and rumors it will be spun off altogether.
On Friday, JPMorgan Chase publicly tested a new application it created on Quorum to handle finance instruments.
It phantom-issued a $150 million, one-year, floating-rate Yankee certificate of deposit on the blockchain, in parallel with the actual issuance of the CD. Investors in the CD included Goldman Sachs Asset Management, Pfizer and Western Asset.
The bank said the trial proves its blockchain technology can handle financial instruments of all kinds.
“Overall, the promise of blockchain is that you’re sharing infrastructure between participants — so issuer, dealer, investors, custodians and administrators can all see one golden source of truth of a trade or in this case a debt instrument,” said Christine Moy, program lead for JPMorgan Chase’s Blockchain Center of Excellence. “And being able to trust that golden source and then correspondingly, not having to spend as many resources reconciling deal terms, tracking and tracing wires, or agreeing on interest rate calculations.”
In other words, the ability to do deals with more certainty and less cost.
In October, JPMorgan announced that it would be using Quorum to build an interbank payments platform alongside Australia and New Zealand Banking Group and the Royal Bank of Canada.
The test follows reports In late March, based on anonymous sources, that claimed JPMorgan was planning to spin off its blockchain group. In a move that seemed to support the rumors, Amber Baldet, who was the public face of Quorum, oversaw its construction and led the bank's Blockchain Center of Excellence, left in April to start her own business. Baldet did not respond to a request for comment. Her Twitter account simply says “unemployed.”
Chase doesn’t deny the selloff rumors, but suggests that it might spin off only a group that would be dedicated to providing technical support to the external companies that use the distributed ledger technology, while remaining committed to using Quorum within the bank.
Friday's CD test would seem to prove the point, though it's possible it was in the works for several months.
In addition to the trial last week, in October, the bank launched a new interbank payments platform powered by Quorum, along with partners ANZ and Royal Bank of Canada. The bank said the new system, which is still under development, would decrease the time and costs associated with resolving payment delays.
Quorum for Wall Street
Yankee CDs are a way for foreign banks to raise capital from American investors. To issue a Yankee CD, a Canadian bank needs to partner with an American bank to issue CDs denominated in U.S. dollars in the U.S.
To help National Bank of Canada issue its CD on a blockchain, Chase had to turn Quorum into a platform for issuing and managing financial instruments.
Quorum is a permissioned version of the Ethereum blockchain that has private smart contract execution, a software enclave and a key distribution system.
To make Quorum CD-ready, the bank wrote smart contracts that could handle the offering, framing and structuring of the deal; the distribution, order management and order book filling; the settlement and the ability to automatically calculate quarterly interest payments and return cash back to the investors.
“In the existing financial instrument life cycle, it is a siloed process: one technology handles the originations, then another system handles distribution and settlement elsewhere, while post-trade interest payment and asset servicing are somewhere else,” Moy said. “The platform we built has the potential to automate and handle most of the financial instrument through its entire life cycle.”
There are some manual stages, for instance when investors have to confirm orders or the issuer has to confirm the structure of the deal.
But many aspects of issuing the debt are “set it and forget it” because recurring activities are automated by the smart contracts. So interest payments can automatically be paid, eliminating manual handling, wires being passed back and forth between parties and different parties having to reconcile books with each other.
At National Bank of Canada, David Furlong, senior vice president of artificial intelligence, venture capital and blockchain, said the experiment is viewed as an opportunity to learn about the legal, regulatory, system and ecosystem impacts of using blockchain technology.
“What skills do we need as an organization, what changes in how we interact with our partners and potential purchasers or clients?” Furlong said. “Learning for this helps strengthen a great deal our understanding of the road map going forward of other assets over the long haul.”
The Canadian bank also seemed pleased at the opportunity to work with one of its largest trading partners.
“I can’t overstate how much having JPMorgan as a partner was a decision factor” to running this test on Quorum, Furlong said.
National Bank of Canada’s overall hope for blockchain technology is that it will enable it to revamp its processes to become more efficient, providing a better, “frictionless” experience for clients and staff, he said.
When will blockchains become real in financial services?
A common complaint in the financial services industry is that there are many proofs of concepts and tests of blockchain technology, but not much going on in production and at scale.
Moy noted that building technology takes time and banks have to be cautious with it.
“If you think about it from the perspective of a global bank with a large number of clients, being a highly regulated entity, working in systemically important financial markets and having a reputation to uphold, we have to be extremely responsible and careful about the technology we build, making sure that it’s enterprise grade, safe, secure, cybersecurity tested and resilient,” she said. “All of that takes time and that is something we are all hands on deck and full-steam ahead working towards.”
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