Just a few years ago, it was virtually unthinkable that a Wall Street titan like JPMorgan would embrace crypto, but the recent arrival of the bank’s token deposits on Coinbase’s Layer 2 blockchain is proof that the world’s biggest banks are finally moving into exotic areas like decentralized finance (DeFi).
The move last month by the banking giant involves blockchain-based dollars – called JPM Coin (JPMD) – which, unlike traditional stablecoins, are digital claims on existing bank funds and can bear interest (under the GENIUS Act, stablecoin issuers are not allowed to offer interest directly), providing a new option for institutional and retail investors.
A Wall Street giant suddenly jumping into the darker corners of crypto, like DeFi via tokenized deposits, may seem bold, but it’s a move that’s been in the works for some time and has a simpler logic: growing customer demand.
JPMorgan began offering blockchain custodial accounts to institutional clients in 2019 on a permissioned version of Ethereum (then called Onyx, now called Kinexys), before its recent adoption of Base, a public blockchain. This move from JPMorgan’s artisanal private chain to Coinbase’s foundation is simply driven by demand, according to Basak Toprak, product manager, deposit tokens at JPMorgan’s Kinexys Digital Payments.
“Right now, the only cash or cash equivalent option 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 particularly important for institutional clients.”
JPMD hitting Base, a fast and inexpensive public Ethereum overlay blockchain, was greeted with breathless anticipation by some, pointing out that JPMorgan just tied its $10 trillion-a-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 today is used as collateral in traditional finance, so it can also be used as collateral in the on-chain world. There is nothing new about this.”
Beyond simply responding to growing customer demand, there is another, perhaps more cynical, way of looking at banks’ adoption of crypto and crypto-adjacent products: Banks are mounting a defense, staking out some on-chain territory for their depository activities 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 only transferable between whitelisted parties, i.e. customers who have been onboarded to the JPM Coin platform.
“Deposits are obviously the dominant form of money today in the traditional world, and we believe they should have a place in the online world as well,” Toprak said.
It turned out to be the move many of JPMorgan’s clients were looking for. As the accounts gradually evolve, the bank has responded to requests from many parties, Toprak said. For now, interested parties are largely crypto companies and other players in the digital asset ecosystem.
“There are asset managers or brokers who have a transactional relationship with Coinbase, for example. They hold collateral at Coinbase and also pay margins. Those are the kind of clients who ask us about use cases,” she said.
Currently, some of this is done either with stablecoins or through traditional off-chain bank accounts. These have different types of risk profiles or inefficiencies, Toprak said. Off-chain bank accounts have cutoff time issues, while stablecoins present a different risk profile, especially for institutional clients who may have just entered this space and are more comfortable with bank deposits.
“So that’s the use case they’re looking to adopt and use: JPM Coin as a way to hold collateral or make margin payments for transactions related to their crypto purchases, for example,” Toprak said.
Cousin of stablecoins
Could JPMorgan’s offering of tokenized deposits to its large customer base come into direct and direct competition with stablecoins? After all, both are likely to be used for similar purposes, such as payments, which would include inter-company institutional financial flows, as well as settlement and collateral on trading platforms.
The similarities are close enough that Coinbase Global Head of Wholesale Brian Foster called tokenized deposits “the cousin of stablecoins.”
Foster remains neutral on tokenized deposits versus the proliferation of traditional stablecoins, except for the obvious interoperability challenge faced by an asset fixed within a bank.
“I’m not here to tell you one is better than the other; the market will tell us that,” Foster said in an interview. “I think banks need to ask themselves: ‘How can I export this? How can I distribute this new product outside of the four walls of my bank?’ There is no doubt that it is easy for a bank with a huge distribution and customer base to create a useful novelty within its own ecosystem. But I think the journey that these banks are taking now goes even further and is about asking, “How can I make this useful outside of my four walls?” »
Looking ahead, Foster sees a spectrum from off-chain TradFi to areas like DeFi, and where banks stand on this continuum depends on their comfort level over time.
“We have a completely secure, fenced, very simple infrastructure that is a great starting point,” Foster said. “From a business perspective, we have things that are in the middle, that are a little bit in-between, that can still give you access to DeFi. And then, of course, we have more non-custodial and fully on-chain tools. So it’s choose your own adventure that works for every customer archetype on that spectrum.”
Control the risks
However, the adoption of new technologies by a bank as large as JPMorgan often raises a burning question: what about risk control?
After all, the mere fact that a systemically important bank is now openly interacting with a public blockchain is something to marvel at, especially since major institutions like the Bank for International Settlements (BIS) have repeatedly warned of the risks associated with the open crypto universe.
BIS declined to comment for this story.
JPMorgan’s Toprak says he’s regularly asked how the bank became comfortable deploying on a public blockchain.
“This is the work that we have done over the last few years. Of course, everything that we deploy and launch, we make sure that it goes through our internal governance and that it takes into account all aspects of the risks associated with any new product,” she said.
“We have shown our internal teams that we can do this in a very controlled way, because we control the smart contract. No one else does. We have the keys stored in the right way. We have a separation of roles. We are the only controller of the token that we have deployed and have the ability to move it from one address to another,” Toprak said.
Additionally, public blockchains have been operating for several years and have demonstrated stability and security, she said.
“It’s not much different than using another technology layer to deploy your application. I think the public chain infrastructure is where a lot of the innovation is and where we’re going to see a lot of use cases deployed,” Toprak said. “That’s where our customers will be more and more and that’s where we want to go.”
