Today’s news on Bloomberg about JPM coin is intriguing and we can explain you why the big American bank chose to follow this path. Last month JP Morgan announced that it was launching a “JPM Coin” product to allow large corporate clients to settle payments instantly on a distributed ledger. This is entirely different from open, decentralized technologies like Bitcoin. But it seems like a ready-made use case for blockchain technology; right now, international wire transfers, for example, take days to settle, and JP Morgan already operates a staggering $6 trillion-per-day payments business.
From those who have been part of the blockchain movement, preaching the end of big banks like JP Morgan for years, such announcements can be frustrating and easy to criticize, especially given CEO Jamie Dimon’s notorious crypto criticism a year ago. But to understand why the technology may end up strengthening financial intermediaries that it could in theory topple, one needs to fully appreciate the economic concept of path dependence.
Economist Paul David first used the phrase in a 1985 paper discussing the QWERTY keyboard. Makers of mechanical typewriters first adopted the standard to slow people’s typing down and avoid breaking machines. But that decision long ago impacts the decision of whether to roll out a superior keyboard today. (It turns out that the story was largely fiction, but that is another matter.)
If you think “history matters” is yet another instance of economists finding profundity in obvious concepts we already know, you’re right. But the best economic ideas often sound disposable until we think of how many times people disregard them.
The equilibrium models that dominated the field in the ’80s and continue to do so today mostly disregard path dependence. The equations would get far too complicated. Only as evolutionary and complexity economics have gained steam have economists started to adopt computer simulations that can deal with such long chains of history.
The claim that blockchain will topple Wall Street disregards path dependence. A decentralized, open financial system based on something like Bitcoin may be superior along many lines to today’s system, brokered by big financial intermediaries. In fact, many of us might choose it over the status quo.
Big banks like JP Morgan have many, many very wealthy customers who trust the bank to safely execute frequent large transactions. Even if the circumstances of a bygone era have changed, that bygone era resulted in these relationships, which don’t evaporate overnight. Adopting blockchain technology makes sense as it allows the incumbent JP Morgan to appropriate some of the advantages of blockchain technology while continuing those relationships.
Path dependence in part explains why we can’t predict the future when it comes to new technologies. There are too many past decisions influencing today’s landscape to fully account for in some rigorous calculation. Financial intermediaries know that they don’t stand a chance against blockchain technology, so they are now betting on path dependence to survive. They know a storm is brewing, and this is why also Citigroup wants to launch a similar coin.
Financial intermediaries know that the US dollar is a scrap paper currency which, since the gold standard was abolished, is not anchored to any asset. Financial intermediaries know that Bitcoin is a non-inflationary currency (only 21 million can be mined). In other words, they know perfectly that, as in the case of gold, Bitcoin is scarce. Financial intermediaries know perfectly that Bitcoin, unlike fiat money, is not issued by any central authority. Financial intermediaries know that if states hadn’t replaced market money (gold) with unbacked fiat money issued by central banks and imposed on people as a means of exchange by the use of force, there would have been no need to invent Bitcoin and the blockchain technology.
Financial intermediaries know that value isn’t intrinsic in things, but is conveyed by people (subjective theory of value). Financial intermediaries know that Bitcoin, among other things, allows you to be the owner of your money (as opposed to what happens in the case of bank deposits), that doesn’t expose you to bail-in banks that are intrinsically bankrupt due to fractional reserve banking (supported by the existence of central banks as lenders of last resort), that doesn’t expose you to forced withdrawals and monetary inflation.
Financial intermediaries know that if by absurd Bitcoin will to end up like the continental dollar, there would be no need to “ban it” (as if it were possible), “regulate it” (as if it were possible), denigrate it, etc. as it would fall by itself. Financial intermediaries know that Bitcoin price is not a bubble: Bitcoin is the needle that is bursting the fiat money bubbles.
JP Morgan knows all these things and others. However, it also knows that most of the 99.9% of people who don’t use Bitcoin yet, are not aware of all these things. Big banks are afraid. And afraid they must be, because by choosing to launch such coins they are telling the world: “We are defenseless against Bitcoin and blockchain technology”. JPM is resorting to path dependence in order to survive, because thanks to Bitcoin more and more people are questioning monetary socialism.