Authored by the company’s head of global FX strategy, John Normand, the new one-page report – available publicly to JPMorgan’s clients – draws comparisons between bitcoin exchanges and traditional central banks.
Perhaps, most notably, Norman addressed the inability of Mt. Gox customers to transfer funds to third parties, writing:
“If such a restriction sounds a bit like the exchange controls that pop up intermittently with fiat currencies (Cyprus in 2013, Argentina this year), that’s because there are some parallels.”
He added: “From a corporate or investor perspective, an exchange control is any restriction which limits financial transfers or imposes a different exchange rate for certain transactions.”
Normand’s original report concluded that though bitcoin had some benefits, certain issues – including its price volatility and the lack of a central authority – would limit its usefulness for merchants, investors and consumers.
The latest report, while also critical of bitcoin, indicates interest in digital currencies remains at JPMorgan and that Normand’s report is not simply a one-off project.
The Mt. Gox saga
The report did pay particular attention to the ongoing Mt. Gox “saga”, ultimately concluding that recent events show virtual currencies can give rise to two-tier markets and convertibility risks.
JPMorgan spoke broadly about the challenges experienced by Bitstamp, BTC-e and Mt. Gox, and suggested that the DDoS attacks faced by the companies amounted to a “security breach”, though no bitcoins or customer personal information has been compromised by the attack.
“Due to a security breach affecting all three of the major platforms for swapping bitcoins and fiat currencies (it has been termed transaction malleability), all platforms halted customer withdrawals for some period of time.”
It correctly noted that two exchanges have restarted transfers, and that Mt. Gox plans to do so.
Norman indicated that the current data shows prices are depressed across all exchanges because of the ongoing issues with Mt. Gox, and that this has lead to below-average trading volumes. Furthermore, he added that prices are likely down due to the belief Mt. Gox bitcoins will be later sold on other exchanges, potentially impacting the market.
The author credited this decline as “reflecting some discomfort with broader market architecture”, a claim that is given credence by the many reddit threads devoted to speculating on the company’s future as well as the future of the bitcoins still in its exchange.
Such speculation was likely heightened by CEO Mark Karpeles’ decision to step down from the Bitcoin Foundation board.
An optimistic conclusion?
Though Normand suggests his opinion differs, he did indicate it was possible to view the events at Mt. Gox in a positive light for bitcoin, saying:
“The optimistic view of these events is that a two-tier market in a virtual currency is more benign than one in fiat currencies because it reflects operational risks around a particular exchange rather than those surrounding an entire sovereign and its financial system.”
Still, Normand suggested that he believes the events are proof virtual currencies will require intermediaries, and therefore not be able to deliver the sweeping cost savings they currently provide in the absence of such financial networks in the future.
“From that perspective, it will be difficult to ensure than virtual currencies deliver frictionless exchange as they evolve over time,” he concluded.
Image credit: Chase Tower | Joe Mabel