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Banking Giant JPMorgan Spearheads Global Tokenization Initiatives

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Banking Giant JPMorgan Spearheads Global Tokenization Initiatives

The market is abuzz with tokenization, and for good reason. Asset tokenization is seen as a promising opportunity worth trillions of dollars. After all, tokenization makes financial transactions more convenient and transparent, boosts liquidity, helps secure ownership rights, and enables asset fractionalization.

Putting real-world assets (RWAs) on the blockchain can empower: 

  • instant and atomic settlement
  • enable process automation
  • enhance asset ownership mobility.

Tokenized assets can further be the foundation for open marketplaces and empower asset owners to participate in DeFi systems and access services such as cross-border trading, decentralized lending, collateralization, and capital optimization.

Asset tokenization stands to benefit all asset classes, such as asset-backed securities, money market funds, ETFs, private capital markets, fixed income, and intellectual property — suggesting a vast, nearly limitless untapped available market for tokenization. 

Bain Capital estimates the notional value of private assets outside the financial system at around $540 trillion, while the current tokenized assets amount to only $77 billion, representing a mere 0.01% market penetration. This highlights the massive potential for both investors and issuers as these assets become more accessible through tokenization.

All this potential has giants like JP Morgan leading the charge in tokenization initiatives focused on traditional assets, such as the US Treasuries and money market fund shares, through Onyx, which is developing digital asset infrastructure.

At the Forefront of Blockchain Usage

Asset tokenization can help save $20 billion in just the global clearing and settlement costs, as per Boston Consulting Group. This can unlock a $16 trillion global market for tokenized illiquid assets by 2030. Even at such a level, it could only account for less than two percent of the total notional value of public and private assets.

This is why JP Morgan's Onyx division is developing digital asset networks, which also hosts the Liink network designed to make cross-border transfers more efficient. 

What we're looking to do with Onyx Digital Assets is address the limitations in today's settlement infrastructure that prevent certain asset classes or certain newer financial products from really forming and achieving newer forms of utility in today's world,

– Keerthi Moudga, Head of Product at Onyx, at Security Token Market's inaugural conference, TokenizeThis.

There's also JPM Coin, which is a digital representation of the USD and is used for internal blockchain-based transactions. 

JPM Coin is a system that allows wholesale clients to transfer dollars to and from their various JPMorgan accounts worldwide. JPM Coin payments operate 24/7, helping reduce processing time so client transactions are executed more quickly. Back in June, the bank said that JPM Coin has been used to process about $300 billion worth of transactions since its launch.

J.P. Morgan has actually been at the forefront of Wall Street's efforts to leverage blockchain technology to streamline banking processes and continues to be actively involved in testing and launching various blockchain as well as crypto-centered services.

Special Focus on Tokenization 

Tokenization isn't new for the mega-bank. It has actually been JPMorgan's mission since beginning its blockchain program back in 2015. The bank then released Quorum, its permissioned fork of the Ethereum code, in 2016, which was later sold to Ethereum powerhouse ConsenSys in 2020 for an undisclosed sum.

Now, the focus is on Onyx as the bank remains steadfast in its plan to “tokenize” traditional financial assets. Tyrone Lobban, head of Onyx Digital Assets at JPMorgan, has called tokenization “a killer app for traditional finance.”

Besides tokenizing assets that are traditionally hard to finance, such as money-market funds, and using them as collateral, Onyx also plans to issue a wider range of blockchain-based assets, including private funds. Lobban has talked about how private markets — credit, equity, and real estate — are double the size of public markets but significantly less liquid, creating a “huge disparity.”

Back in June 2022, Lobban shared the bank's crypto strategy, stating that JPMorgan has institutional-grade DeFi Plans, which include trillions of dollars worth of tokenized assets it will be making use of.

“The overall goal is to bring these trillions of dollars of assets into DeFi so that we can use these new mechanisms for trading, borrowing [and] lending, but with the scale of institutional assets,” he said at the time.

Tokenized Collateral Network Captures Interest 

Earlier this month, the largest US bank by assets went live with its first collateral settlement for clients using blockchain. JPMorgan's Ethereum-based Onyx blockchain and Tokenized Collateral Network, or TCN, was used by BlackRock to turn shares in one of its money market funds into digital tokens. These tokens were then transferred to Barclays as collateral for an OTC derivatives trade between the two institutions.

The first internal test of the TCN was conducted by the bank in May 2022, with a pipeline of other clients and transactions now that TCN is live. 

TCN is an application that allows investors to utilize assets as collateral and transfer their ownership without moving assets in underlying ledgers. The network was launched to streamline and scale the process of traditional settlements on a blockchain. 

The platform unlocks capital and allows it to be used as collateral in ongoing transactions, said Lobban. TCN also enables the creation, transfer, and settling of tokenized traditional assets along with the movement of collateral nearly instantly.

According to Ed Bond, head of trading services at the bank, the ultimate goal of JPMorgan's in-house blockchain network is to allow clients to use other assets, including equities and fixed income, as collateral. He also said in an interview that:

Institutions on the network can use a wider scope of assets to meet any collateral requirements they have on the back of trading.” 

Ongoing Development at JPMorgan

Global financial institutions frequently employ intraday credit facilities and overnight repo agreements to handle intraday cash flows, which are expensive and susceptible to operational challenges, as part of their liquidity management and regulatory compliance. 

Here, the Onyx platform offers a digital financing solution that allows these institutions to access faster, more cost-effective, and more secure intraday funding without relying on balance sheets. The average daily repo volume is $3 trillion in the US.

Recently, JPMorgan's Onyx Coin Systems completed a blockchain-based cross-border payments pilot project with First Abu Dhabi Bank (FAB) after Bank ABC in Bahrain tested the Onyx system and proceeded to a limited launch of services. Additionally, Onyx has been used in Europe for euro-denominated payments for several months now. During that time, it also launched interbank USD settlements in India with a consortium of six banks.

Onyx is also used by: 

  • Goldman Sachs
  • BNP Paribas
  • DBS Bank

And several other banks and broker-dealers are looking to sign up for it now.

Additionally, JPMorgan has been a participant in Project Guardian, which was developed by the Monetary Authority of Singapore (MAS) and the Bank for International Settlements (BIS) to create a liquidity pool of tokenized bonds.

Regulatory Clarity Needed for Adoption

In September, reports emerged that JPMorgan was exploring the creation of a blockchain-based digital deposit token to speed up cross-border payments and settlement, and that is waiting on final approval from US regulators. A deposit token is a transferable digital coin that represents a deposit claim against a commercial bank with the benefit of more accessibility and instantaneous settlement.

If approved, the idea is to launch the deposit token for use by its corporate clients within a year. Unlike JPM Coin, the deposit token would enable easy money transfers to clients of other banks as well as settling trades of tokenized securities issued on a blockchain.

Back in Feb., JPMorgan said in a study that bank-issued deposit tokens are much safer than stablecoins for major institutions looking to transfer value across chains and that stablecoins would fall short of meeting serious regulated banking needs. It further noted that surging interest and continued advancements in blockchain underscore the necessity for blockchain-based “cash equivalents.” 

As for bringing stablecoins like USDC onto the Onyx platform, Moudgal said that they thought of it previously, especially because JPMorgan Coin can only be held by clients who already have a relationship with the bank, which is “restrictive” in tapping into larger pools of liquidity. But with stablecoins, it comes down to two things: demand and “it's not something that we've actually had clients request” and regulation. 

Increased regulatory clarity across the board, according to Moudgal, would help overcome challenges to adoption in addition to hesitation regarding using or connecting to a blockchain.

Tapping into New Potential 

All of this shows that the US banking giant has come a long way from its early days of criticizing the crypto world, although recently, JPMorgan CEO Jamie Dimon still termed cryptocurrencies as “decentralized Ponzi schemes.” 

Talking about the future at the TokenizeThis conference, Moudgal said they're looking at the products to focus on for the next decade to incorporate into their live platforms. Currently, the focus here is on topics such as digital identity and figuring out how to introduce wallets to the bank's institutional clients. 

With its asset tokenization platform, the bank is intended to be multi-asset and multi-functional by adding layers of programmability and “building a system that's extremely composable.”

Since we've gone live, we've seen nearly a trillion dollars in value transacted across these rails to date, which is really a testament to the fact that what we did through the active tokenization is introduce a new functionality that our clients and ourselves weren't able to tap into previously,” said Moudgal.

Gaurav started trading cryptocurrencies in 2017 and has fallen in love with the crypto space ever since. His interest in everything crypto turned him into a writer specializing in cryptocurrencies and blockchain. Soon he found himself working with crypto companies and media outlets. He is also a big-time Batman fan.