JP Morgan Adds To Controversy Around Bitcoin With Patent Application

Tom Burroughes

11 December 2013

Despite regulatory frowns and concerns about sharp price gyrations, interest in the electronic money system known as Bitcoin has taken a further twist following media reports that has filed a US patent application for a computerised payment system resembling the cyber-currency.

In a way that is similar to Bitcoin, JPMorgan’s proposed system would allow people to make anonymous, electronic payments over the internet, without having to reveal their name or account numbers or pay a fee, according to the patent application, the Financial Times said.

To view a recent WealthBriefing interview with a firm investing in Bitcoin, see here.

This publication is in contact with JP Morgan about the matter to seek further details.

The patent application highlights how financial institutions are battling to obtain a market share of the expanding business of providing mobile and internet payments. And it also taps into how Bitcoin, a form of money designed to provide a fixed, inelastic monetary base similar in some ways to metal-based currencies, especially gold, appeals to people concerned about money-printing by central banks.

Bitcoin is seen as an inelastic type of money as its quantity cannot be indefinitely increased. According to one description on Wikipedia, Bitcoin “is a digital currency first described in a 2008 paper by pseudonymous developer Satoshi Nakamoto, who called it a peer-to-peer, electronic cash system”.

Such electronic money, given its supposedly anonymous nature and freedom from government control (arguably an attraction rather than a cause for criticism), is controversial. According to media reports, Apple, the electronics firm, has forced a secure messaging app to remove the ability to send bitcoin payments or be booted off the the iOS App Store. South Korean regulators have rejected Bitcoin as a legitimate currency. China and Thailand have also reportedly warned about Bitcoin. On the other hand, Swiss legislators have proposed treating Bitcoin as any other foreign currency in order to end legal uncertainties.

The creation and exchange of Bitcoin is based on an open-source cryptographic protocol and is not managed by any central authority. Each Bitcoin is subdivided down to eight decimal places, forming 100 million smaller units called satoshis. Bitcoin can be transferred through a computer or smartphone without an intermediate financial institution such as a bank. Using an analogy with the language of the gold market, Bitcoin processing is secured by servers called “Bitcoin miners”. These servers communicate over an internet-based network and confirm transactions by adding them to a ledger which is updated and archived periodically. Each new ledger update creates some newly-minted Bitcoin; a crucial feature is that the number of new Bitcoin units or “Bitcoins” created in each update is halved every four years until the year 2140 when this number will decline to zero. After that time no more Bitcoins will be created - the total number of Bitcoins will have reached a maximum of 21 million Bitcoins.

JPMorgan’s patent application – which dates back to 1999 but has been updated, will, according to the FT, compete with debit and credit cards as the predominant way of making online transactions.

“While new internet payment mechanisms have been rapidly emerging, consumers and merchants have been happily conducting a growing volume of commerce using basic credit card functionality,” JPMorgan is quoted as saying in its application by the newspaper.

“None of the emerging efforts to date have gotten more than a toehold in the market place and momentum continues to build in favour of credit cards,” it said.