13 February, 2018
Cryptocurrencies could one day help investors diversify their equity and bond portfolios, analysts for JPMorgan Chase wrote in a new, 71-page research report focused on the tech.
The report, entitled "Decrypting Cryptocurrencies: Technology, Applications and Challenges" and dated Feb. 9, was drafted by the bank's Global Research unit. A copy obtained by CoinDesk explores a range of subjects related to cryptocurrency and blockchain, notably exploring the implications for investors, financial firms and central banks, among others.
Perhaps the most notable part of the report is that it – albeit cautiously – predicts that cryptocurrencies might one day play a role in the diversification of global bond and equity portfolios. The report states:
"If past returns, volatilities and correlations persist, [cryptocurrencies] could potentially have a role in diversifying one's global bond and equity portfolio. But in our view, that is a big if given the astronomic returns and volatilities of the past few years."
"If [cryptocurrencies] survive the next few years and remain part of the global market, then they will likely have exited their current speculative phase and would then have more normal returns, volatilities (both much lower) and correlations (more like that of other zero-return assets such as gold and JPY)," the authors continue.
That sentiment perhaps stands in contrast with comments from the bank's chairman, president and CEO, Jamie Dimon, who last year issued his now-infamous remark that bitcoin is a "fraud." As posited by the report's authors, cryptocurrencies are "unlikely to disappear completely."
"[Cryptocurrencies] are unlikely to disappear completely and could easily survive in varying forms and shapes among players who desire greater decentralization, peer-to-peer networks and anonymity, even as the latter is under threat," they wrote.
Looking past the investment picture, the bank's report looks at the wider question of blockchain use, particularly by private firms who would maintain their own gated or "permissioned" blockchains.
The authors write that blockchain is a "superior database," and that despite concerns from regulators, the tech itself is potentially "regulation friendly."
"In our view, the biggest appeal of blockchain will be in the ability to deliver efficiency gains across the value chain," the report states, going on to explain:
"The proposed uses a distributed ledger in the financial sector are likely to be based on known participants defined in advance, with appropriate KYC/AML documentation with tightly authorized access. Consequently, we believe that distributed ledger technology has the potential to offer regulators greater degrees of transparency, higher levels of resiliency and shorter settlement times, reducing counterparty and market risk."
Likewise, the authors argued that blockchain has the potential to disrupt "cross-border payments, settlement/clearing/collateral management as well as the broader world of TMT, transportation and healthcare." That said, the report cautions that any benefits would be seen "only where any cost efficiencies offset regulatory, technical and security hurdles" to implementing the technology.
The report also touches on the topic of a so-called "Fedcoin," or a kind of cryptocurrency (or digital currency) created by a central bank.
And while Fed officials themselves have largely said "no time soon" to the idea (in contrast with other central banks who are actively investigating applications), JPMorgan's report digs into the possible implications – and ramifications – of such an issuance.
The report's authors make the case that, in one sense, a Fedcoin would be supportive of a "central bank-provided payment services" within a cashless system, and that this could help banks implement negative interest rates, which some economists endorse.
However, they also point out that the issuance of such a currency "would give non-banks access to the Fed balance sheet," which could in turn "endanger the economically and socially important financial intermediation function of commercial banks."
Likewise, the authors claimed that a state-issued cryptocurrency could impact the extension of credit to the private sector because it would undermine fractional reserve banking, writing:
"If cryptocurrencies were seen as superior to bank deposits, prompting a wholesale shift into cryptocurrencies, then a much larger share of savings would go to the central bank's assets (government debt) and less to commercial banks loans, thus potentially dramatically increasing private credit risk premia and reducing the flow of credit to the private sector"
The report also grapples with the problem of anonymity for a state-issued cryptocurrency.
"On the one hand, privacy has come to be seen as an implicit constitutional right, and that may extend to monetary transactions," the authors note. "On the other hand, there are several laws on the books intended to prevent the financial system from being used to launder money or finance terrorism and other activities."
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