Just a few years ago, it would have been almost unthinkable for a Wall Street giant like JPMorgan Chase to embrace cryptocurrencies, but with the bank’s recent tokenization of proof of deposits on Coinbase’s layer 2 blockchain Base, the world’s largest bank is finally heading into exotic areas like decentralized finance (DeFi).
The banking giant’s move last month involved a blockchain-based dollar — the so-called J.P. Morgan Coin (JPMD) — which, unlike traditional stablecoins, is a digital claim on existing bank funds and can bear interest (stablecoin issuers are not allowed to provide interest directly under the Genius Act), providing a new option for institutional and retail investors.
It might seem bold for a Wall Street giant to suddenly branch out into more obscure areas of crypto, like DeFi via tokenized deposits, but the move has been in the works for a while and has a simpler logic: growing customer demand.
JPMorgan Chase began offering blockchain deposit accounts to institutional clients in 2019 on a permissioned version of Ethereum (then known as Onyx, now called Kinexys), and then more recently adopted the public blockchain Base. Basak Toprak, head of deposit token products at JPMorgan’s Kinexys digital payments unit, said the shift from JPMorgan’s modest private chain to Coinbase Base was simply driven by demand.
“Currently, the only cash or cash equivalent options available on public blockchains are stablecoins,” Toprak said in an interview. “There is a need to use bank deposit products to make payments on public chains. We think this is particularly important for institutional clients.”
JPMD’s launch of Base, a fast and cheap public Ethereum-covered blockchain, has some looking forward to it, noting that JPMorgan Chase just connected its $10 trillion-a-day payments engine to the exchange.
But Toprak takes a sober view of use cases.
“A payment is a payment,” she said. “Today, cash is used as collateral in traditional finance, so it can be used as collateral in the on-chain world as well. This is nothing new.”
Beyond meeting growing customer demand, there’s another, perhaps more cynical, way to look at banks’ embrace of cryptocurrencies and crypto-related products: Faced with the rapid expansion of the stablecoin space and rising investor adoption, banks are taking defensive measures to carve out some on-chain territory for their deposit-taking operations.
The parameters of the bank’s beachhead are clear: JPMD is a permissioned token that can only be transferred between whitelisted parties (i.e. customers who have joined the JPM Coin platform).
“Deposits are clearly the dominant form of currency in the traditional world today, and we feel strongly that they should have a place in the on-chain world as well,” Toprak said
It turned out to be a move that many of JPMorgan’s clients were seeking. Toprak said the bank has been responding to requests from multiple parties as accounts are gradually moved on-chain. Currently, interested parties are primarily cryptocurrency companies and other digital asset ecosystem players.
“For example, there are asset managers or broker-dealers that have a trading relationship with Coinbase. They maintain collateral with Coinbase and pay a margin. Those clients ask us about use cases,” she said.
Currently, some of this work is done via stablecoins or through traditional off-chain bank accounts. Toprak said these present different types of risk profiles or inefficiencies. Off-chain bank accounts have cut-off time issues, while stablecoins present a different risk profile, especially for institutional clients who may be new to the space and are more comfortable with bank deposits.
“That’s the use case they’re looking to adopt and use: for example, JPM Coin as a means of retaining collateral or paying margin for transactions related to cryptocurrency purchases,” Toprak said.
Stablecoin’s cousin
Will JPMorgan offering tokenized deposits to its massive customer base create direct, head-to-head competition with stablecoins? After all, both are likely to be used for similar purposes, such as payments, which include business-to-business institutional flows, and settlement and collateral on trading venues.
The similarities are so close that Coinbase’s global head of wholesale Brian Foster calls tokenized deposits “the cousin of stablecoins.”
Foster remains neutral on the proliferation of tokenized deposits versus traditional stablecoins, other than noting the obvious interoperability challenges facing fixed assets within banks.
“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 figure out: ‘How do I export this? How do I distribute this new product outside the four walls of my bank?’ There’s no question that it’s easy for banks with large distribution networks and large customer bases to develop new products that are useful within their own ecosystem. But I think these banks are now taking it a step further and thinking, ‘How do I make this work outside my four walls’?”
Looking ahead, Foster sees a spectrum from off-chain TradFi to areas such as DeFi, with banks’ place on this continuum depending on how comfortable they feel over time.
“We have a fully managed, fenced, very simple infrastructure, which is a great starting point,” Foster said. “We have something in the middle from a trading perspective that still gives you access to DeFi. Of course, we also have more tools that are non-custodial and fully on-chain. So, choose your own adventure fits every customer archetype within that range.”
Control risks
Yet the adoption of new technology by a bank as big as JPMorgan Chase often raises a pressing question: What about risk control?
After all, the mere fact that a systemically important bank is now openly interacting with a public blockchain is stunning, especially since major institutions such as the Bank for International Settlements (BIS) have repeatedly warned of the risks associated with an open crypto world.
The Bank for International Settlements declined to comment for this story.
JPMorgan’s Toprak said she is often asked how easily the bank can deploy on public blockchains.
“That’s what we’ve done over the past few years. Of course, anything we deploy and roll out, we make sure it goes through our internal governance and considers all aspects of the risk associated with any new product,” she said.
“We showed our internal team that we can do this in a very controlled way because we control the smart contract. No one else can. We store the keys in the right way. We do role separation. We are the sole controller of the tokens we deploy and have the ability to move it from any address to another,” Toprak said.
Additionally, public blockchains have been operating for many years and have demonstrated stability and security, she said.
“It’s not that different from using another technology layer to deploy applications. I think public chain infrastructure is where a lot of the innovation is and we’re going to see a lot of use cases being deployed,” Toprak said. “That’s where our customers are increasingly and that’s where we want to be.”