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 tokenized deposits on Coinbase’s layer-2 blockchain Base is proof that the world’s biggest banks are eventually moving 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 claims on existing bank funds and can be interest-bearing (under the GENIUS Act, stablecoin issuers are not allowed to directly offer interest), providing a new opportunity for institutional and retail investors.
A Wall Street giant suddenly jumping into the more obscure corners of crypto, such as 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 an approved version of Ethereum (then called Onyx, now called Kinexys), before its recent embrace of Base, a public blockchain. This move from JPMorgan’s homegrown private chain to Coinbase’s Base is simply driven by demand, according to Basak Toprak, Product Head, Deposit Tokens at JPMorgan’s Kinexys Digital Payments.
“Right now, the only option for cash or cash equivalents available on public chains is stablecoins,” Toprak said in an interview. “There is demand to make payments in public chains using a bank deposit product. We thought that was particularly important for institutional customers.”
JPMD hitting Base, a fast and cheap public Ethereum overlay blockchain, was met with breathless anticipation by some, pointing out that JPMorgan just connected its $10 trillion-per-day payments engine to the exchange.
But Toprak has a sober attitude when it comes to use cases.
“A payment is a payment,” she said. “Cash is used as collateral today in traditional finance, so it can also be used as collateral in the onchain world. There is nothing new in that.”
Beyond simply meeting rising customer demand, there is another, perhaps more cynical, way of looking at banks’ embrace of crypto and crypto-adjacent products: banks are setting up a defense, carving out some onchain territory for their deposit-taking businesses in the face of a fast-growing stablecoin universe and growing investor adoption.
The parameters of the bank’s beachhead are clear: JPMD is a permitted token that can only be transferred between whitelisted parties, i.e. the customers who have been onboarded on the JPM Coin platform.
“Deposits are obviously the dominant form of money today in the traditional world, and we believe very strongly that they should also have their place in the onchain world,” said Toprak
As it turns out, that was the move many of JPMorgan’s clients were looking for. As accounts gradually move up the chain, the bank has fielded requests from many parties, Toprak said. For now, the interested parties are largely crypto companies and other players in digital asset ecosystems.
“There are asset managers or broker-dealers that have a transactional relationship with Coinbase, for example. They hold collateral with Coinbase and they also pay margins. Those are the kinds of clients that ask us about use cases,” she said.
Currently, some of this happens either with stablecoins or via traditional, off-chain bank accounts. These present different types of risk profiles or inefficiencies, Toprak said. Offchain bank accounts have issues with cut-off times, 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 use: JPM Coin as a means of either keeping security or making margin payments for transactions related to their crypto purchases, for example,” Toprak said.
Cousin to stablecoins
Could JPMorgan’s offer of tokenized deposits to its large client base bring direct, head-to-head competition with stablecoins? After all, both are likely to be used for a similar range of purposes, such as payments, which will include institutional business-to-business cash flows, as well as settlement and security on trading venues.
The similarities are close enough that Coinbase’s head of global wholesale, Brian Foster, called tokenized deposits the “cousin of stablecoins.”
Foster remains neutral on tokenized deposits versus the proliferation of traditional stablecoins, except to highlight the obvious interoperability challenge faced by an asset that is stuck in a bank.
“I’m not here to tell you one is better than the other; the market will tell us,” Foster said in an interview. “I think the banks have 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 no doubt easy for a bank that has a huge distribution and a huge customer base to make a new thing that is useful in its own ecosystem. But I think the journey that these banks are on now is going one step further to say, ‘How do I make this useful outside of my four walls’?
Looking ahead, Foster sees a spectrum from offchain TradFi to areas like DeFi, and where banks are on this continuum depends on their comfort levels over time.
“We have an infrastructure that is completely libertarian, ringfenced and very plain vanilla, which is a good place to start,” Foster said. “From a trading 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 onchain tools. So it’s choose-your-own adventure that works for any client archetype on that spectrum.”
Control of risk
However, the introduction of new technology to a bank as large as JPMorgan often raises a burning question: what about risk control?
After all, just the fact that a systemically important bank is now openly interacting with a public blockchain is something to wonder about, 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 she is regularly asked how the bank became comfortable deploying on a public blockchain.
“That’s the work we’ve done over the last few years. Of course, everything we implement and launch, we make sure it goes through our internal governance and it looks at all aspects of risk related to any new product,” she said.
“We showed to our internal teams that we can do this in a very controlled way because we control the smart contract. No one else is. We have keys stored in the right way. We have separation of roles. We are the only controller of the token that we have implemented and have the ability to move it from any address to another address,” said Toprak.
Also, public blockchains have been in operation for several years and have demonstrated stability and security, she said.
“This is not much different than using another technology layer to deploy your application. I think public chain infrastructure is where a lot of the innovation is and where we’re going to see a lot of the use cases being implemented,” Toprak said. “That’s where our customers increasingly want to be, and that’s where we want to go.”
