Just a couple of years ago, it was virtually unthinkable for a Wall Street titan like JPMorgan to embrace cryptocurrencies, but the recent arrival of tokenized bank deposits on Coinbase’s layer 2 blockchain is evidence that the world’s largest banks are ultimately heading toward exotic realms like decentralized finance (DeFi).
Last month’s move by the banking giant involves blockchain-based dollars, so-called JPM Coin (JPMD), which, unlike traditional stablecoins, are digital assets on existing bank funds and can earn interest (under the GENIUS Act, stablecoin issuers cannot offer interest directly), offering a new option for institutional and retail investors alike.
For a Wall Street giant to suddenly jump into the darker corners of cryptocurrencies, like DeFi via tokenized deposits, may seem bold, but it’s a move that’s been in the works for a while and has a simpler logic: growing customer demand.
JPMorgan began offering blockchain deposit accounts to institutional clients in 2019 on a permissioned version of Ethereum (then called Onyx, now called Kinexys), prior to its recent adoption of Base, a public blockchain. This move from JPMorgan’s homegrown private chain to Coinbase is simply driven by demand, according to Basak Toprak, head of product, deposit tokens at JPMorgan’s Kinexys Digital Payments.
“Right now, the only cash or cash equivalent option available on public chains is stablecoins,” Toprak said in an interview. “There is a demand to make payments on public chains using a bank deposit product. We thought this was particularly important for institutional clients.”
The launch of JPMD a Base, a fast and affordable public Ethereum overlay blockchain, was met with great anticipation by some, noting 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,” he said. “Cash is used as collateral in traditional finance today, so it can also be used as collateral in the onchain world. There is nothing new in that.”
Beyond simply meeting growing customer demand, there is another, perhaps more cynical, way to view banks’ embrace of cryptocurrencies and crypto-adjacent products: Banks are mounting a defense, carving out some on-chain territory for their deposit-taking businesses in the face of a rapidly expanding stablecoin universe and growing investor adoption.
The bank’s beachhead parameters are clear: JPMD is a permissioned token that is only transferable between whitelisted parties, i.e. customers who have joined the JPM Coin platform.
“Deposits are obviously the dominant form of money today in the traditional world, and we strongly believe that they should have their place in the on-chain world as well,” Toprak said.
Turns out, it was the move many of JPMorgan’s clients were looking for. As the accounts gradually move up the chain, the bank has received requests from many parties, Toprak said. For now, those stakeholders are largely crypto companies and other players in the digital asset ecosystem.
“There are asset managers or broker-dealers that have a transaction relationship with Coinbase, for example. They hold collateral on Coinbase and also pay margin. These are the type of clients that ask us about use cases,” he said.
Currently, some of this is done with stablecoins or through traditional off-chain bank accounts. These present different types of risk profiles or inefficiencies, Toprak said. Off-chain bank accounts have issues with time limits, while stablecoins present a different risk profile, especially for institutional clients who may be just entering this space and are more comfortable with bank deposits.
“So that’s the use case they’re looking to adopt and utilize: JPM Coin as a means to hold collateral or make margin payments for transactions related to their cryptocurrency purchases, for example,” Toprak said.
Cousin to stablecoins
Could JPMorgan’s offering of tokenized deposits to its large customer base lead to direct and direct competition with stablecoins? After all, both are likely to be used for a similar variety of purposes, such as payments, which would include institutional money flows between companies, as well as settlements and collateralization on trading venues.
The similarities are so close that Coinbase global head of wholesale Brian Foster called tokenized deposits the “cousin to stablecoins.”
Foster remains neutral on tokenized deposits versus the proliferation of traditional stablecoins, except to point out the obvious interoperability challenge faced by an asset that is fixed within a bank.
“I’m not here to tell you that 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 get distribution for this new product outside the four walls of my bank?’ It is certainly easy for a bank that has a large distribution and customer base to create something new that is useful within its own ecosystem. But I think the path that these banks are taking now goes a step further and says, ‘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 fall on this continuum depends on their comfort levels over time.
“We have a very simple, fully guarded, protected infrastructure that 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 intermediated, that can still give you access to DeFi. And then, of course, we have more non-custodial and fully on-chain tools. So choosing your own venture works for every customer archetype on that spectrum.”
Control risk
However, the adoption of new technology for a bank as large as JPMorgan 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 something to marvel at, especially since major institutions like the Bank for International Settlements (BIS) have repeatedly warned about the risks associated with the open crypto universe.
BIS declined to comment for this story.
JPMorgan’s Toprak says he is regularly asked how the bank felt comfortable implementing on a public blockchain.
“That’s the work we’ve done over the last few years. Of course, anything we implement and launch, we make sure it goes through our internal governance and looks at all aspects of the risks associated with any new product,” he 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 keys stored in the right way. We have role separation. We are the only controller of the token that we deploy and we have the ability to move it from any address to another address,” Toprak said.
Additionally, public blockchains have been in operation for several years and have demonstrated stability and security, he said.
“This is not much different than using another layer of technology to deploy your application. I think the public chain infrastructure is where a lot of the innovation is and where we will see a lot of the use cases being deployed,” Toprak said. “That’s where our customers will increasingly be and that’s where we want to go.”
