A few years ago, it was almost unimaginable that a Wall Street titan like JPMorgan would embrace crypto, but the recent arrival of the bank’s tokenized deposits on Coinbase’s layer-2 blockchain base is proof that the world’s largest banks are finally moving toward exotic areas like decentralized finance (DeFi).
The banking giant’s move last month includes the creation of blockchain-based dollars – so-called JPM coins (JPMD) – which, unlike traditional stable coins, are digital claims on existing bank funds and can be interest-bearing (under the GENUINE Act, stablecoin issuers are not allowed to pay interest directly), offering a new option for institutional and retail investors.
The Wall Street giant suddenly jumping into more obscure corners of crypto, such as DeFi through token deposits, may seem audacious, but it’s a move that has been in the works for some time and has a simple logic: growing customer demand.
JPMorgan recently began offering blockchain deposit accounts to institutional clients on a permissioned version of Ethereum (then called Onyx, now called Kinexis) in 2019, before adopting a public blockchain base. According to Basak Toprak, product lead for deposit tokens at JPMorgan’s Kinexis Digital Payments, the move from JPMorgan’s homespun private chain to Coinbase’s Base is driven simply by demand.
“Right now, the only cash or cash equivalent alternatives available on public chains are stablecoins,” Toprak said in an interview. “There is demand to make payments on public chains using a bank deposit product. We thought this was especially important for institutional clients.”
JPMD Hitting Base, a faster and cheaper public Ethereum overlay blockchain, was received with breathless anticipation by some, indicating that JPMorgan has tied its $10 trillion-a-day payments engine to the exchange.
But Toprak takes a sober approach as far as use cases are concerned.
“Payment is payment,” he said. “Cash is used as collateral in traditional finance today, so it can be used as collateral in the onchain world as well. There is nothing new in this.”
Beyond meeting growing customer demand, there is another, perhaps more cynical, way to look at the adoption of crypto and crypto-adjacent products by banks: banks are reserving some on-chain area for their deposit-taking businesses in the face of a rapidly expanding stablecoin universe and increasing investor adoption.
The parameters of the bank’s beachhead are clear: JPMD is a permissioned token that is transferable only between whitelisted parties, i.e. clients who are included on the JPM Coin platform.
“Deposits are clearly the dominant form of money today in the traditional world, and we think very strongly that they should have a place in the onchain world as well,” Toprak said.
As it turned out, this was the move many of JPMorgan’s clients were looking for. Toprak said that as accounts gradually become onchain, the bank is fielding requests from multiple parties. For now, those interested parties are largely crypto companies and other digital asset ecosystem players.
“For example, there are asset managers or broker-dealers that have a transaction relationship with Coinbase. They hold collateral at Coinbase, and they also pay margin. These are the customers who are asking us about use cases,” she said.
Currently, some of this is being done either with stable coins or through traditional, offchain bank accounts. These present a variety of risk profiles or disabilities, Toprak said. Offchain bank accounts tend to have cutoff time issues, while stablecoins present a different risk profile, especially for institutional clients who are perhaps just entering the space and are more comfortable with bank deposits.
“So this is the use case they are considering adopting and using: JPM Coin as a means of either holding collateral or making margin payments for transactions related to their crypto purchases, for example,” Toprak said.
Cousin of stablecoins
Could JPMorgan’s offering of token deposits to its large client base bring direct, head-to-head competition with stablecoins? After all, both are likely to be used for similar purposes, such as payments, which would include business-to-business institutional money flows, as well as settlements and collateral at trading venues.
The similarities are so close that Coinbase’s Global Head of Wholesale, Brian Foster, has called token deposits a “cousin of stablecoins.”
Foster remains neutral on token deposits compared to the proliferation of traditional stablecoins, other than noting the obvious interoperability challenge facing assets settled within a bank.
“I’m not here to tell you that one is better than the other; the market is going to tell us that,” Foster said in an interview. “I think banks need to figure out: ‘How do I export this? How do I get distribution of this new product outside the walls of my bank?’ No doubt, for a bank that has a huge distribution and customer base, it is easier to create a new thing that is useful in its own ecosystem. But I think the journey these banks are on right now is going a step further than saying, ‘How can I make this useful outside my four walls’?
Looking ahead, Foster sees a spectrum from offchain trades to areas like DeFi, and where banks are on this continuum depends on their comfort level over time.
“We have infrastructure that is fully protected, ring-fenced and very plain vanilla which is a great place to start,” Foster said. “From a business perspective, we have things that are in the middle, that are a little bit intermediate, that can still give you access to DeFi. And then, of course, we have more non-custodial and fully onchain tools. So it kind of works that way for every client archetype on that spectrum.
risk control
However, for a large bank like JPMorgan the adoption of new technology often raises a burning question: What about risk controls?
After all, the mere fact that a systemically important bank is now openly interacting with a public blockchain is surprising, especially since major institutions like the Bank for International Settlements (BIS) have repeatedly warned about the risks associated with an open crypto universe.
BIS declined to comment for this story.
JPMorgan’s Toprak says he is regularly asked how the bank became comfortable deploying on public blockchains.
“This is work we have done over the years. Of course, whatever we deploy and launch, we make sure it goes through our internal governance, and it looks at all aspects of the risks associated with any new product,” she said.
“We showed our internal teams that we can do this in a very controlled way, because we are controlling the smart contract. No one else is. We have the keys stored correctly. Our roles are separate. We are the sole controller of the token that we have deployed and have the ability to move it from any address to another,” Toprak said.
Furthermore, public blockchains have been in operation for many years and have demonstrated stability and security, he said.
Toprak said, “It’s not much different than using any other technology layer to deploy your application. I think public chain infrastructure is where a lot of innovation happens, and where we’ll see a lot of use cases deployed.” “That’s where our customers will grow fastest, and that’s where we want to go.”