• JPMorgan intends to bring trillions of dollars in tokenized assets to DeFi

  • JPMorgan (JPM) believes it has discovered a way for DeFi developers to capitalize on the yield-generating potential of non-crypto assets.

    JPMorgan’s Onyx Digital Assets head, detailed the bank’s institutional-grade DeFi plans and underlined how much value is waiting in the wings in tokenized assets.

    “Over time, we think tokenizing 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.”

    In general, institutional DeFi entails placing know-your-customer (KYC) requirements on crypto’s permissionless lending pools, which has begun to happen in pockets of innovation such as Aave Arc, as well as a recently announced collaboration with Siam Commercial Bank and Compound Treasury.

    JPMorgan’s intentions for tokenizing traditional assets lead to a far greater scale. Lobban highlighted that Onyx Digital Assets sees two complementing aspects to bringing bank-grade DeFi to fruition.

    JPMorgan’s blockchain-based collateral settlement system, which was extended last month to incorporate tokenized copies of BlackRock’s money market fund shares, a type of mutual fund investing in cash and highly liquid short-term debt instruments, is one component. According to Lobban, this type of application on the Onyx Digital Assets blockchain, which is settled in the bank’s in-house digital token JPM Coin, has had $350 billion in trade volume.

    The second piece of the puzzle is a recent pilot dubbed “Project Guardian” that is being run by the Monetary Authority of Singapore and comprises JPMorgan, DBS Bank, and Marketnode. It puts institutional-friendly DeFi to the test by using permissioned liquidity pools made up of tokenized bonds and deposits.

    These DeFi enterprises will use public blockchains and a permissioned framework similar to what Aave Arc and Fireblocks are doing. One distinction, according to Lobban, is that in Project Guardian, user information is verified by large financial institutions rather than DeFi platforms and crypto-native custody organizations. In other words, a JPMorgan trader must demonstrate that he has the legal authority to trade on behalf of the Wall Street bank.

    Credible credentials

    Another distinction is the new approach to permissioned DeFi that is implemented utilizing 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 decided which DeFi systems and counterparties it will work with, but it will be among the recognized solutions. “It’ll be from the bench of protocols that you’d expect, battle-tested with high TVLs (total value locked). But we haven’t yet worked out which ones yet.”

    JPMorgan has been quietly studying digital identification in the context of blockchain and digital assets for the past two and a half years, 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?”

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