JPMorgan Trade on Public Blockchain ‘Monumental Step’ for DeFi

JPMorgan has used the Polygon blockchain to trade tokenized cash deposits — the latest case of banks moving into DeFi markets.

The trade occurred as part of the Monetary Authority of Singapore’s (MAS) Project Guardian pilot, first said in May. The tokenization experiment completed trials for foreign exchange (FX) and government bond trading, powered by crypto lending protocol Aave and decentralized exchange (DEX) Uniswap.

JPMorgan’s Onyx – the bank’s wholesale payments blockchain arm – joined Singapore’s DBS Bank, Japan’s SBI Digital, Singapore Exchange’s digital asset platform Marketnode and Temasek in the first test phase.

For foreign exchange transactions, Onyx tokenized Singapore dollar (SGD) deposits, as well as SBI Digital Assets tokenized Japanese yen (JPY) assets.

“[SGD] is a deposit token that is a general responsibility of JPM,” Ty Lobban, Head of Onyx Digital Assets, tweetedadding that the native token provides “stable on-chain value without the scalability issues of stablecoins.”

In the second trial, DBS and SBI Digital Assets traded against liquidity pools of tokenized government bonds with DBS tokenizing SGD currency and Singapore Government Securities bonds. SBI did the same for Japanese bonds and JPY currency.

The public good marks a milestone for JPMorgan, which maintains three private blockchains used regularly by its businesses and clients.

The Bank’s Liink network of banks shares transaction data and related insights, while the Coin Systems network facilitates the transfer of dollars and other fiat currencies across a blockchain. The Onyx Digital Assets network enables the tokenization of traditional assets, such as US Treasuries and money market products.

“We have long held the view that over time, more and more traditional financing will take place on public blockchains, provided there are solutions for key aspects such as scalability and privacy,” Lobban told Blockworks in a statement.

Aave Companies CEO Stani Kulechov called the blockchain trade “a monumental step forward for DeFi.”

Added Kulechov: “Using the Aave protocol to deploy a liquidity market on the Polygon network to deliver and lend tokenized currency transactions … is the first time the world has seen a real use case for institutional-grade DeFi protocols.”

Lobban tweeted Polygon was chosen for the trade because they wanted to operate on Ethereum and “needed cheap gas fees.”

The team forked Aave Arc, a permissioned version of the popular DeFi lending protocol in compliance with anti-money laundering regulations, and distributed a modified version to the Polygon network. This allowed the banks to set their own specialized transaction parameters.

In addition, JPMorgan built verifiable credential (VC) chain verification to provide compatible access to Aave and other DeFi protocols. The goal was to eliminate DeFi interfaces from having to do know-your-customer (KYC) checks.

“On-chain VK verification is huge,” according to Lobban, because “it brings identity compatibility … providing further standardization and portability to identity.”

Banks are becoming more comfortable with public blockchains

This is not the first time banks have used permissionless chains, as a number of traditional financial institutions have explored blockchain technology to improve efficiency.

The European Investment Bank (EIB) launched a digital bond issue on a blockchain platform in April 2021, implementing this distributed ledger technology for recording and settling digital bonds in partnership with Goldman Sachs, Santander and Societe Generale.

That same month, Societe Generale issued the first structured product as a security token directly registered on Tezo’s public blockchain – roughly two years after the company issued 100 million euros in covered bonds as a security token on the Ethereum blockchain.

Continuing the trend, JPMorgan Chase hired an executive director of regulatory policy for digital assets last month, despite CEO Jamie Dimon calling cryptocurrencies “decentralized Ponzi schemes” in congressional testimony in September.

The bank’s blockchain trading also comes after JPMorgan published a video last month describing a digital wallet that will allow users to control their digital identity and assets across platforms.

The company noted in disclaimers that the wallet is “a proof of concept” and that there is no guarantee that the company will launch such a solution.

Fidelity Digital Asset Management CEO Chris Tyrer said during a panel at Blockworks’ Digital Asset Summit last month that banks have come around to crypto over the past year and are “the future access points” for the market.

Previn Singh, head of Credit Suisse’s Distributed Ledger Technology Center of Competency, added during the panel that traditional finance and blockchain technology are set to become intertwined over time.

“I think there’s this somewhat cartoonish picture in terms of competition where it’s TradFi versus DeFi and never the twain shall meet,” Singh said. “I’m really starting to think that will never be the case — it’s the best of both worlds that you can use.”

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