Not long ago, it seemed impossible for a financial giant like JPMorgan to venture into cryptocurrency. However, the recent launch of the bank’s tokenized deposits on Coinbase’s layer-2 blockchain, Base, indicates that major banks are indeed moving towards innovative areas like decentralized finance (DeFi).
Last month’s initiative by the banking powerhouse features blockchain-based currency—known as JPM Coin (JPMD)—which, unlike conventional stablecoins, represents digital claims on actual bank funds and can bear interest (according to the GENIUS Act, stablecoin issuers cannot directly provide interest), presenting a novel option for both institutional and retail investors.
The bold step of a leading Wall Street institution into the more niche aspects of crypto, such as DeFi through tokenized deposits, may appear daring, but it has been in development for some time and is driven by straightforward reasoning: increasing customer demand.
JPMorgan kicked off its blockchain deposit accounts for institutional clients back in 2019 on a restricted version of Ethereum (originally called Onyx, now Kinexys), prior to its recent adoption of Base, a more open blockchain. This transition from JPMorgan’s private chain to Coinbase’s Base is solely motivated by demand, according to Basak Toprak, Product Head of Deposit Tokens at JPMorgan’s Kinexys Digital Payments.
“Currently, the only cash or cash-equivalent option on public chains is stablecoins,” Toprak remarked in a recent interview. “There’s a need for making payments on public chains using a bank deposit product. We deemed this particularly vital for institutional clients.”
The arrival of JPMD on Base, a speedy and cost-effective public Ethereum layer, was met with excitement by several, highlighting that JPMorgan has linked its $10 trillion-per-day payment network to the platform.
However, Toprak maintains a pragmatic perspective on the potential uses.
“A payment is a payment,” she stated. “Cash serves as collateral in traditional finance today, and it can similarly act as collateral in the on-chain ecosystem. There’s nothing particularly novel about it.”
In addition to accommodating growing customer needs, there’s another, arguably more skeptical perspective on banks’ adoption of crypto and related assets: banks are essentially defending their turf, establishing a presence in the on-chain space for their deposit-collecting operations against a rapidly growing stablecoin market and increasing investor participation.
The scope of the bank’s new venture is explicit: JPMD is a permissioned token, transferable only among approved parties, meaning clients who have been onboarded to the JPM Coin network.
“Deposits undoubtedly represent the primary form of currency today within traditional finance, and we firmly believe they should have a spot in the on-chain ecosystem too,” Toprak asserted.
It turns out this was the initiative many of JPMorgan’s clients had anticipated. As accounts gradually transition to the on-chain space, the bank has been responding to numerous inquiries, according to Toprak. Currently, these interested parties mainly include crypto firms and players within the digital asset ecosystem.
“There are asset managers or broker-dealers with transactional ties to Coinbase, for example. They keep collateral at Coinbase and manage margin payments. These are precisely the types of clients inquiring about use cases,” she explained.
Presently, some of this activity is conducted using stablecoins or through traditional, off-chain bank accounts, which offer varying risk profiles and inefficiencies, Toprak highlighted. Off-chain bank accounts come with cutoff time complications, while stablecoins introduce distinct risk factors, particularly for institutional clients who may be new to this realm and prefer bank deposits.
“Thus, that’s the use case they aim to adopt: JPM Coin as a means to either maintain collateral or execute margin payments linked to their crypto transactions,” Toprak noted.
Relative of stablecoins
Could JPMorgan’s provision of tokenized deposits to its sizable client base compete directly with stablecoins? After all, both assets could be employed similarly for a range of purposes including payments, encompassing business-to-business institutional transactions, as well as collateral and settlement in trading venues.
The similarities are significant enough that Coinbase’s Global Head of Wholesale, Brian Foster, referred to tokenized deposits as the “relative of stablecoins.”
Foster takes a neutral stance on tokenized deposits versus the proliferation of conventional stablecoins, apart from acknowledging the evident interoperability challenges with an asset confined within a banking institution.
“I’m not here to assert that one is superior to the other; the market will determine that,” Foster remarked in an interview. “I believe banks must address: ‘How do I disseminate this? How do I extend the reach of this new offering beyond the confines of my institution?’ Clearly, it is feasible for a bank with a vast distribution network and client base to create a new product that’s beneficial within its ecosystem. However, I think the ongoing journey for these banks is to explore how to make this useful beyond their institutional walls.”
Looking forward, Foster envisions a spectrum from traditional finance to realms such as DeFi, and the positioning of banks on this continuum will depend on their evolving comfort levels.
“We have infrastructure that is fully custodial, secured, and quite standard, which is a solid starting point,” Foster stated. “From a trading standpoint, we have offerings that are somewhat intermediated, allowing access to DeFi. Lastly, we have more non-custodial and entirely on-chain instruments. Therefore, it’s a customizable approach that aligns with every client archetype on that continuum.”
Managing risk
Nonetheless, the integration of new technology by a substantial institution like JPMorgan inevitably raises a critical inquiry: what of risk management?
After all, the fact that a systemically crucial bank is now interacting with a public blockchain is noteworthy, especially since leading organizations like the Bank for International Settlements (BIS) have traditionally cautioned about the risks linked to the open crypto landscape.
BIS opted not to comment for this article.
JPMorgan’s Toprak mentions that she frequently receives questions about how the bank has become comfortable utilizing a public blockchain.
“That has been the focus of our efforts over the past few years. Naturally, any deployment we undertake goes through our internal governance processes, assessing risks linked to any new product,” she explained.
“We demonstrated to our internal teams that we can navigate this in a highly controlled manner, as we oversee the smart contract. No one else does. We manage key storage responsibly. We ensure role separation. We are the exclusive controllers of the token we’ve deployed, with the capacity to transfer it between addresses,” Toprak emphasized.
Moreover, Toprak added, public blockchains have been functioning for several years and have shown a track record of stability and security.
“This is not fundamentally different from leveraging another layer of technology for your application deployment. I believe public chain infrastructure is where a considerable amount of innovation will occur, and where we are likely to observe numerous use cases emerging,” Toprak remarked. “That’s where our clients are increasingly heading, and that’s our desired direction.”
