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Why America’s Biggest Bank Digs Anonymous Cryptocurrency

A JPMorgan collaboration with the tiny startup Zcash shows how serious financial institutions are about blockchain technology.
November 24, 2017

Whatever JPMorgan Chase CEO Jamie Dimon meant last month when he called Bitcoin a “fraud,” he sure doesn’t seem to view its blockchain in the same light.

His bank is at the forefront of the effort to adapt the technology for use in the financial industry. Even more surprising, though, is JPMorgan’s collaboration with the people behind a digital currency that’s like Bitcoin except completely anonymous.

It would be understandable if Dimon and other bank CEOs viewed Bitcoin and its cryptocurrency siblings as a threat. After all, Bitcoin, launched during the height of the Great Recession, shows it’s possible to use software and thousands of computers connected via the Internet—instead of a bank—to facilitate the peer-to-peer exchange of money. The computers in the network maintain a secure ledger of every transaction, called a blockchain, and use it to prevent counterfeiting (see “What Bitcoin Is, and Why It Matters”).

No matter what bank executives think about Bitcoin’s currency, though, they see in its blockchain a revolutionary platform that could lead to more secure, reliable, and cost-effective systems for managing all kinds of financial transactions. It’s early, though, and most of the work on so-called “enterprise blockchains” is experimental. What’s not yet clear is the degree to which financial institutions can adapt the technology to their own needs without sacrificing its advantages—particularly its decentralized nature, which is key to protecting the information in the ledger from getting corrupted.

Privacy is a particularly complicated challenge. Contrary to widespread perception, cryptocurrencies like Bitcoin and Ethereum are not anonymous. Users are represented on the public ledger by a string of characters called an address. Someone who manages to connect your identity to your address can see every transaction you’ve ever made (see “Criminals Thought Bitcoin Was a Perfect Hiding Place, But They Thought Wrong”).

That model doesn’t work for financial institutions, says Amber Baldet, blockchain lead at JPMorgan. Not only are they bound by anti-money-laundering laws to know exactly who their customers are, but their customers want to transact confidentially. Shifting from Bitcoin’s privacy model to one in which participants are known but their transactions are confidential—while maintaining the benefits of a blockchain—is a “nontrivial” endeavor, says Baldet.

Fortunately for Baldet’s team, this thorny problem is similar to another one that already appears to be solved: cryptocurrency that’s as private as cash. In May, JPMorgan announced that it would team with the developers of Zcash, a year-old cryptocurrency whose Bitcoin-derived software gives users the option to “shield” their transactions from public view. Last month, the bank revealed that it had integrated Zcash’s privacy technology into Quorum, its open-source, Ethereum-derived, permissioned blockchain platform.

Zcash relies on an emerging cryptographic protocol called a zero-knowledge proof. One of several techniques that make it possible for cryptocurrency users to hide their transactions, zero-knowledge proofs are generating a huge amount of excitement in the blockchain world, largely because of the mind-bending power they can give a user: the ability to prove something about yourself to someone else without having to reveal any additional information.

In the case of Zcash, users can use this method to prove that they have sufficient funds to make a valid transaction. In an enterprise system like JPMorgan’s Quorum, customers could use it to do things like prove they are accredited investors.

Zooko Wilcox, the company’s CEO, says Zcash’s ultimate goal is to “provide economic opportunity and financial freedom to every human.” He calls Zcash’s openness—as with Bitcoin, anyone can join the network—a “moral imperative,” and his team is stacked with world-renowned cryptography experts who share his vision (see “Why People Get Religious about Bitcoin”).

Why would a tiny startup made up of crypto-idealists team up with America’s biggest bank, the very kind of centralized authority that Bitcoin was designed to circumvent?

Wilcox and his colleagues seem, above all else, devoted to advancing zero-knowledge technology—whether that be in open blockchain systems like Zcash, Bitcoin, and Ethereum or in the private networks that financial institutions are building. In a statement last month touting JPMorgan’s integration of zero-knowledge functionality, Wilcox said, “The momentum that is growing behind enterprise blockchain adoption is one of the most exciting trends in technology.”

That JPMorgan is interested in the same cutting-edge privacy technology so attractive to cryptocurrency nerds is not surprising at all, says Emin Gün Sirer, a computer scientist at Cornell University. Zero-knowledge proofs are not about skirting the law, he says, but about proving things though selective disclosure. That promises to have plenty of applications in the world JPMorgan inhabits. “The finance industry thrives on privacy,” Gün Sirer says.

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