JPMorgan (JPM) hopes it has discovered a method for decentralised finance (Defi) developers to capitalise on the yield-generating potential of non-crypto assets.
Tyrone Lobban, head of Onyx Digital Assets at JPMorgan, spoke with CoinDesk at Consensus 2022 in Austin, Texas, about the bank’s institutional-grade Defi ambitions and the value of tokenised assets waiting in the wings.
“Over time, we think tokenising U.S. Treasurys or money market fund shares, for example, means these could all potentially be used as collateral in DeFi pools,” Lobban said. “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.”
Institutional Deficit Finance
Institutional Defi often entails placing know-your-customer (KYC) regulations on crypto’s permissionless lending pools, which has begun to occur in pockets of innovation such as Aave Arc and a recently announced initiative with Siam Commercial Bank and Compound Treasury.
JPMorgan’s efforts to tokenise conventional assets indicate a far larger scale. Lobban noted that Onyx Digital Assets views two complementary components as necessary for realising bank-grade Defi.
JPMorgan’s blockchain-based collateral settlement system was expanded last month to incorporate tokenised copies of BlackRock’s money market fund shares, a kind of mutual fund investing in cash and highly liquid short-term debt instruments. Lobban noted that this application on the Onyx Digital Assets blockchain, which is paid in the bank’s proprietary digital token JPM Coin, has a trading volume of $350 billion.
JPMorgan desires to bring tokenised assets to Defi. Image: demerzel21 / BigStock Photo
The second element of the jigsaw is “Project Guardian,” a recent experiment run by the Monetary Authority of Singapore and including JPMorgan, DBS Bank, and Marketnode. It tries institutionally-friendly Defi utilising tokenised bonds and deposits in permissioned liquidity pools.
These forays towards Defi will utilise public blockchains with a permissioned structure comparable in many aspects to what Aave Arc and Fireblocks are doing. Lobban emphasised that, unlike Defi platforms and crypto-native custody businesses, significant financial institutions participating in Project Guardian are responsible for confirming consumer information. In other words, a JPMorgan trader must demonstrate that he is authorised to trade for the Wall Street firm.
Verifiable Credentials
Another distinction is the unique approach to permissioned Defi leveraging digital identity-building elements, such as W3C verifiable credentials.
“We want to use verifiable credentials as a way of identifying and proving identity, which is different from the current Aave model, for instance,” Lobban said. “Verifiable credentials are interesting because they can introduce the scale that you need to provide access to these pools without necessarily having to maintain a white list of addresses. Since verifiable credentials are not held on-chain, you don’t have the same overhead involved with writing this kind of information to blockchain, paying for gas fees, etc.”
According to Lobban, JPMorgan has not yet determined which Defi systems and counterparties it would collaborate with, but it will be among the established options. It will be drawn from a pool of battle-tested regimens with high TVs (total value locked). But we have not yet determined which ones.”
Since two and a half years ago, JPMorgan has been studying digital identification in the context of blockchain and digital assets, according to Lobban.
“If we can put this identity layer in front of DeFi that enables KYC-based access, then each of those protocols should just naturally be able to support institutions without necessarily having to make too many changes to what they’re doing,” Lobban said. “Do we have to set up separate permissioned pools and make changes to the existing protocols? Or can these things work out of the box?”