JPMorgan believes it has identified a method for decentralised finance (DeFi) developers to anchor yield generating potential of non-crypto assets.
JPMorgan’s Institutional DeFi to Help Tokenize Traditional Assets
When speaking at the Consensus Festival in Texas, Austin, Tyrone Lobban, the head of the bank’s Onyx Digital Assets, highlighted the DeFi plans and the awaiting value in tokenized assets.
“Over time, we think of tokenizing the U.S. Treasury or money market fund shares, for example, which could all potentially be used as collateral in DeFi pools,” explained Lobban. “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 added.
Institutional DeFi implies adding know-your-customers (KYC) structures on the crypto pools. This has already started happening in some parts, such as Aave Arc and recently announced projects that involve Siam Commercial Bank and Compound Treasury.
The plan by JPMorgan to add the tokenization of traditional assets is an indicator of a larger scale. The bank aims to bring two complementary parts to help make DeFi successful.
One, the bank aims at using the blockchain-based collateral settlement system that was extended in May to include the tokenized version of BlackRock’s money market fund shares. This is a sort of mutual fund that is invested in cash and liquid short-term debt instruments. According to Lobban, this type of application has had about USD350 billion in trading volume.
The second part is the latest pilot that is being undertaken together with the Monetary Authority of Singapore (MAS). This project, which is known as Project Guardian, includes a number of financial organisations, such as JPMorgan, Marketnode and DBS Bank, and is testing institutional-friendly DeFi using permissioned liquidity pools.
These forays into DeFi will include public blockchains and employ a permissioned model similar to what is happening to Fireblocks. However, Lobban noted that it has a notable difference in that customer information verification in Project Guardian is running under large financial institutions as opposed to startups.
Use of Verifiable Credentials
Another notable variation of JPMorgan’s model is that it is using permissioned DeFi via digital identity blocks. “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.
JPMorgan is yet to decide the DeFi platforms and counterparties that it will with, but it will be one of the recognised offerings. “It’ll be from the bench of protocols that you’d expect, battle-tested with high TVL (total value locked). But we haven’t yet worked out which ones yet,” added Lobban.
JPMorgan has, over the last two years, been exploring digital identity in blockchain and digital assets. “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,” noted Lobban.
