J.P. Morgan has a new twist on blockchain

Stocks and Financial Services Press Releases Tuesday October 4, 2016 16:46
The Asian Banker--4 Oct--Asian Banker
J.P. Morgan Chase & Co. is working on a new twist on the technology behind bitcoin that would allow the bank to use a publicly available system for confidential transactions.

The move is a break with how some banks have approached the use of a bitcoin-style network, known generally as the blockchain, to try to replace creaking old systems with faster new technology. Instead of creating a completely new private blockchain, J.P. Morgan engineers say they have found a way to limit access to transactions shared via a network to people who need to know the details, like parties to the trade or a regulator.

The project—called Quorum—is being built off the publicly accessible Ethereum network code. J.P. Morgan, run by Chief Executive James Dimon, plans to share its new code for its system with outside developers, something the bank has recently started doing as a way to entice top engineers to work with the bank and take advantage of the latest developments in blockchain.

It also is a vote of confidence in Ethereum, which is the network where a separate application created by venture-capital firm DAO was hacked, leading to the theft of $55 million worth of digital currency. Ethereum's founders said the hack didn't affect the core network, but the problem split holders of the digital currency between those who wanted to undo the hack and others who wanted to maintain the idea that blockchains are immutable.

Despite high-profile hacks and other technical problems with bitcoin, Ethereum, and other virtual currencies, banks remain enamored with the idea of using the new technologies to cut costs and make a whole host of processes simpler and more efficient.

"We have people building the most stress-tested financial systems in the world," Amber Baldet, program lead for J.P. Morgan on Quorum and other blockchain projects. "Bringing that enterprise expertise [to blockchain] is one of our strengths."

In recent months, engineers at J.P. Morgan have been jumping into Ethereum to solve a problem that has complicated the use of blockchains at banks: making it private enough for traders, but public enough for regulators.

The Quorum project joins a technology arms race with numerous other Wall Street firms, software giants and assorted startups. The goal is to use such systems to save huge costs and build faster and more stable systems that benefit both customers and the bank itself.

If Quorum catches on, it could give the bank a head start over rivals who have invested in separate, private blockchain networks.

In banking, blockchain is still in an embryonic phase, with projects in testing and little clarity regarding the technology's ultimate usefulness. It also isn't clear how regulators might view the idea of banks working off more public networks.

The hope among Quorum's developers is that blockchain can solve some of banks' most intractable problems by replacing a web of connected databases with a single, shared, immutable record of transactions. The problems targeted include long and expensive settlement times, system breakdowns and lack of clarity about risk exposures. Banks will spend more than $1 billion this year on blockchain investments, Greenwich Associates has estimated.

Skeptics say that blockchain may ultimately be a hyped-up version of banks' existing, struggling systems. But for the first firms to devise a new system, success could be very lucrative, resulting in big cost savings and possibly new revenue from selling software services.

U.S. regulators haven't yet taken a strong stance on blockchain. But most agencies have said they are hoping that it would give them a detailed, real-time view of what is going on in opaque markets, while not sacrificing anything on the important goal of keeping banks' data secure from hackers.

In a speech earlier this year, Federal Reserve governor Lael Brainard said that she was "optimistic" about new technologies, but added that they "must be robust in practice, not just in theory, to attacks on security, and must be able to maintain appropriate confidentiality for records and data."

The bitcoin blockchain, as it was first developed in 2008, creates a public history of all transactions in the cryptocurrency, but keeps the parties anonymous.

A cottage industry has emerged to apply bitcoin technology to banks. Startups such as R3 CEV, Digital Asset Holdings, Symbiont and Axoni have been joined by technology giants Microsoft Corp. and International Business Machines Corp.

--www.theasianbanker.com (Oct 04, 2016)--

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