Analysis, Digital Transformation

JPMorgan’s new programmable payments throw up operational risks

By Natasha Teja
programmable payments
Image: Getty Images

JPMorgan has launched blockchain-based programmable payments through its JPM Coin system, a first-of-its-kind global offering from a major commercial bank. 

But the feature, released earlier this month, has brought with it a new set of operational risks that the bank admits will need additional processes to manage.

Programmable payments schedule transactions based on real-time events, such as automatically debiting an account based on a margin call or automating foreign exchange trades, should an exchange rate swing in a certain direction.  

“One of the problems we are trying to solve with blockchain is to have better payment programmability,” says Naveen Mallela, global head of coin systems at JPMorgan’s blockchain platform Onyx. 

Programmable payments allows customers to break out of the rule-based confines of traditional payment infrastructure – and can reduce headcount by eliminating the need for staff to execute transactions.

Payments without borders

Mallela explains: “It can give the ability to create rules for large multinational corporations trying to make payments when there is a shortfall in one part of the world to fund it from a different location automatically.”

Siemens has already started using JPMorgan’s new ‘if-this-then-that’ interface, which allows their treasury department to calculate shortfalls and make automatic transfers across borders. 

If a JPMorgan customer with multiple accounts around the world detects a shortfall in say Hong Kong, they can fund that shortfall automatically from elsewhere based on pre-defined triggers, such as the amount of shortfall or the time of day. 

Fedex and Cargill are next to sign up to this feature.

Blockchain system poses operational risks

The feature, however, comes with a set of risks that may require JPMorgan to establish new processes that fit within its current operating framework.

“Programmable payments is a new technology targeted at treasury automation, which means that the risks are primarily operational,” Mallela says. Onyx is taking a measured approach by limiting the degree of programmability, and by executing it all within the bank. 

Additional processes need to be set up to identify and address where a rule may be created or executed incorrectly. Mallela says: “Right now the client logs in and sets up the rules and we contain those rules but eventually we want to open it up where the clients can set up rules that they want without the bank being involved.”

Who is the ‘owner’ of operational risks? 

If a rule is executed internally at the bank – based on the programmable instructions by the client – the bank would be on the hook for any losses arising from gross negligence or fraud on its part. However, the client is the one responsible for submitting instructions accurately, without errors. 

“If the JPM Coin system is externalised in the future, the risk would likely be shared with other parties, as the programmable instructions will be executed on a shared ledger,” says Mallela. 

Ultimately, banks would be responsible for accurate updates to this ledger, but risks around incorrect coding or deployment of smart contracts would lie with the clients or entities using the shared ledger.

“When we create products that leverage blockchain technology, the actual infrastructure is set up in a way that is completely compliant with all of our internal controls processes,” says Tyrone Lobban, head of digital assets at Onyx.

These controls include those for: payments, anti-money laundering, know-your-customer processes and screening or altering client risk profiles.

“What will change is the underlying ledger itself, but the payment controls remain unchanged,” adds Mallela.

JPM Coin is not crypto

While JPMorgan defines JPM Coin as neither a stablecoin nor a cryptocurrency, it admits it would still consider dabbling in the technology in the future.

“Provided that we get some regulatory clarity from our home regulator, then stablecoins would be an area we can consider,” says Mallela.

Work is currently underway to examine the use of deposit tokens, especially deposit tokens that are equal to stable coins that are not backed one to one. According to Mallela, because the bank already faces stringent capital requirements, “we don’t need to prove our credit worthiness by one-to-one backing”. 

Last year, JPMorgan participated in Project Guardian, an initiative led by the Monetary Authority of Singapore that explored asset tokenisation and cross chain interoperability on permissioned blockchain networks. More pilots to test the application of asset tokenisation are expected to come.

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