- A new report released this week by JPMorgan poured cold water on blockchain technology, saying it wasn't likely to transform the global payments system.
- The real potential in blockchain is its potential to streamline cumbersome banking processes, such as trade finance, JPMorgan said.
Blockchain enthusiasts on Wall Street herald the technology as transformative to the financial world and insist that it will challenge legacy payment institutions. Billions of dollars in venture funding have been poured into blockchain startups. And companies from Facebook to IBM to Accenture are hiring up a storm for blockchain specialists.
But a new report from JPMorgan on Thursday is throwing cold water on some of the hype.
"Blockchain is unlikely to re-invent the global payments system, but instead can provide marginal improvements to various parts of the process," the report said.
JPMorgan is just is the latest prominent firm to express skepticism that the technology - which underpins cryptocurrencies - can revamp the world's financial system anytime soon.
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European Central bank President Mario Draghi, the CEO of Spain's second largest bank BBVA, and consulting firm McKinsey & Co. all have said blockchain is immature and needs further development to truly revolutionize the global economy.
JPMorgan laid out two reasons it doesn't buy the hype. First off, the existing payments system is already highly digitized. In addition, a blockchain-powered payments system appears to be far-fetched with present regulatory restrictions.
"Blockchain solutions making a meaningful difference for banks are at least three to five years away," JPMorgan said.
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On the contrary, the bank believes the true potential of blockchain lies in its capability to streamline and automate cumbersome banking processes - for instance, it says that trade finance, which refers to monetary activities facilitating domestic and international trade) will benefit the most. The industry is worth $2 trillion and accounts for 15% of global trade, according to the report.
On the cryptocurrency side, JPMorgan cast doubt on their value as an asset class to diversify portfolios and hedge against market risks.
With bitcoin in free fall, the cryptomarket lost 85% in value from its peak in 2018. Amid the prevailing downtrend, participation from financial institutions has wound down, leaving retail investors and small businesses dominating the market, the report said.
On top of that, the report added, asset managers have yet to gain the regulatory approval to launch the much-anticipated bitcoin ETF - which was widely believed to be the doorway for institutional investors to come into the cryptomarket.The Security Exchange Commission has noted concerns about the potential for crypto fraud and manipulation and its relatively small market size.
"Cryptocurrencies' value as diversification remains unproven in most environments other than a dystopian one, marked by loss of faith in all major currencies and the payments system," the report said.
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