JPMorgan’s tokenized dollar is quietly rewiring the way Wall Street moves money

Just a few years ago, it was virtually unthinkable that a Wall Street giant like JPMorgan would embrace cryptocurrencies, but the recent arrival of the bank’s tokenized deposits on Coinbase’s layer 2 blockchain infrastructure is evidence that the world’s largest banks are finally heading into exotic realms like decentralized finance (DeFi).

Moves by the banking giants last month include a blockchain-based dollar, the so-called JPM Coin (JPMD), which, unlike traditional stablecoins, is a digital claim on existing bank funds and can earn interest (under GENIUS law, stablecoin issuers are not allowed to offer interest directly), offering new options to both institutional and retail investors.

While it may seem bold for a Wall Street giant to suddenly enter the more obscure realms of cryptocurrencies, such as DeFi via tokenized deposits, this is a move that has been in the works for some time and has a simpler logic of growing customer demand.

JPMorgan began offering blockchain deposit accounts to institutional clients on a permissioned version of Ethereum (then called Onyx, now called Kinexys) in 2019, before recently adopting Base, a public blockchain. This move from JPMorgan’s homegrown private chain to Coinbase’s base was simply driven by demand, according to Basak Toprak, product lead for deposit tokens at JPMorgan’s Kinexis Digital Payments.

“Right now, the only cash or cash-equivalent options available on public chains are stablecoins,” Toprak said in an interview. “There is a demand for payments to be made on the public chain using bank deposit products. We saw this as particularly important for institutional customers.”

JPMD’s attack on Base, a fast and cheap public Ethereum overlay blockchain, was met with breathless anticipation by some, noting that JPMorgan had just linked its $10 trillion per day payments engine to the exchange.

But Toprak takes a sober view when it comes to use cases.

“A payment is a payment,” she said. “Cash is used as collateral in traditional finance today, so cash can be used as collateral in the on-chain world as well. There is nothing new about this.”

Beyond meeting growing customer demand, there is another, perhaps more cynical, view of banks’ adoption of cryptocurrencies and crypto-related products. In other words, banks are beefing up their defenses by staking out on-chain space for their deposit-taking businesses in the face of a rapidly expanding stablecoin world and increased adoption by investors.

The parameters of the bank’s beachhead are clear. JPMD is a permissioned token that can only be transferred between whitelisted parties, i.e. clients registered on the JPM Coin platform.

“Deposits are clearly the primary form of currency in the traditional world today, and we believe very strongly that deposits should have their place in the on-chain world as well,” Toprak said.

As it turned out, this was a move that many of JPMorgan’s clients had wanted. Toprak said the bank is responding to requests from many stakeholders as accounts are gradually moved on-chain. For now, those stakeholders are primarily cryptocurrency companies and other players in the digital asset ecosystem.

“For example, there are asset managers and broker-dealers that have a trading relationship with Coinbase. They store collateral on Coinbase and also pay margin. These customers are asking us about use cases,” she said.

Currently, some of this is done via stablecoins or traditional off-chain bank accounts. These represent different types of risk profiles and inefficiencies, Toprak said. While off-chain bank accounts have cut-off time issues, stablecoins present a different risk profile, especially for institutional customers who are new to the space and accustomed to bank deposits.

“So this is the use case that they are introducing and using, for example, using JPM Coin as a means to hold collateral or pay margin on transactions related to the purchase of cryptocurrencies,” Toprak said.

cousin of stablecoins

Could JPMorgan offering tokenized deposits to its large customer base create direct direct competition with stablecoins? After all, both are likely to be used for a similar range of purposes, with payments involving institutional flows of funds between companies, as well as settlements and collateral at trading venues.

The similarities are close enough that Brian Foster, Coinbase’s global head of wholesale, calls tokenized deposits “stablecoin cousins.”

Foster remains neutral on the proliferation of tokenized deposits and traditional stablecoins, other than the obvious interoperability challenges faced by fixed assets within banks.

“I’m not here to say one is better than the other. The market will tell you that,” Foster said in an interview. “I think banks need to think, ‘How do we export this? How can we distribute this new product outside of the bank?'” Arguably, it’s easy for banks with huge distribution and customer bases to create new things that work within their own ecosystems. But I think the journey that these banks are on now is taking it one step further to, “How can we leverage this outside of our four walls?” ”

Looking to the future, Foster sees a spectrum ranging from off-chain TradFi to areas such as DeFi, and where banks sit on this continuum will determine their comfort level over time.

“We have a very simple infrastructure that is fully stored and ring-fenced, which is a great starting point,” Foster said. “From a trading perspective, we have something that’s in the middle, a little bit in the middle, but still able to provide access to DeFi. And of course we have more non-custodial, fully on-chain tools. So it’s kind of a choose-your-own-adventure that’s suitable for every client archetype in that spectrum.”

Managing risk

But when a bank of JPMorgan’s size implements new technology, burning questions often arise: What will happen to risk management?

After all, the mere fact that systemically important banks are now openly interacting with public blockchains is surprising, especially since major institutions like the Bank for International Settlements (BIS) have repeatedly warned about the risks associated with the open cryptocurrency universe.

BIS declined to comment for this story.

JPMorgan’s Toprak said he is regularly asked how the bank has become comfortable deploying on public blockchains.

“That’s the work we’ve been doing over the past few years. Of course, anything we roll out and launch necessarily goes through internal governance and monitors every aspect of the risks associated with new products,” she said.

“We have shown our internal teams that we can do this in a very controlled way because we are in control of the smart contract, and no one else is. We are storing the keys the right way and have separated roles. We are the sole custodians of the tokens we deploy and have the ability to move them from any address to another,” Toprak said.

Additionally, public blockchains have been in operation for years and have proven stable and secure, she said.

“It’s not too different from using another technology layer to deploy applications. There’s a lot of innovation in public chain infrastructure, and I think that’s where you’ll see a lot of use cases being deployed,” Toprak said. “That’s where we’re going to see more and more of our customers, and that’s where we want to be.”