Hi all,

Money flowing into your industry is generally a good thing. Money flowing through your industry may be even better, at least when it comes to blockchains. That's why we're looking at some recent announcements here.

So what’s up?

Banks are not necessarily fond of change. When financial institutions announce tech-heavy innovations, many internal hurdles have already been overcome. Keep that in mind when reading about:

• JP Morgan's recent announcement

• Some of the promise blockchains holds for the world of finance

• How it all fits into ongoing discussions about regulation

Let’s get started! 🤓

JP Morgan Chase & Co. is a real giant in the banking world. And when a giant starts to move, others are likely to follow.

The official launch of JP Morgan's Tokenized Collateral Network (TCN) is therefore a noteworthy development. It signals a large step towards blockchain adoption by financial institutions. The TCN had only been used for internal tests before. Its first external user was BlackRock, another important player in the finance sector.

BlackRock used the TCN to turn shares in one of its money market funds into digital tokens. These tokens were then transferred to Barclays (in case you didn’t know: that’s another banking heavyweight).

The transfer was necessary for a specific type of trade. More important in this context is the fact that blockchain tech in the background led to a very fast transaction: almost instantaneously rather than over the course of a day.

What's the big deal?

It's safe to say that banks are not the biggest proponents of cryptocurrencies. Nevertheless, various institutions have started experimenting with the technology at the core of crypto. Why? Because blockchains could be much more efficient than long-established processes.

Rather than taking slow steps to improve legacy tech, blockchains are a giant leap. Unsurprisingly, such a leap isn't easy.

Various large banks and asset managers have already spent years testing how blockchains could be used to improve complex systems. However, very few applications are actually in use. Critics have therefore questioned the technology itself and whether it is useful in the world of finance.

With JP Morgan's TCN – as well as other platforms for digital assets which are already live or should be available soon – the picture seems to be changing. According to the bank, the TCN already has a “significant number” of potential clients and transactions.

How does the tech work?

JP Morgan's blockchain activities are conducted by Onyx Digital Assets, an 'asset tokenization platform'. In addition to the TCN, Onyx provides other services such as the JPM Coin. That’s a token which can be used for dollar or euro-denominated payments.

It works similar to a stablecoin on a public blockchain, although JPM Coin can only be used for transactions on a permissioned blockchain. In the future, JPM Coin may be used to pay for tokens which represent client assets – such as the money market shares that BlackRock created through the TCN.

Access to JP Morgan's blockchain services will be limited to financial institutions for the time being. However, the blockchain itself was built on Quorum, an enterprise version of Ethereum.

As a consequence, it wouldn't be overly complicated to develop a bridge for tokens – representing real assets – from JP Morgan's privately-run blockchain to the public Ethereum blockchain or its extensions. (We'll look into those extensions, the so-called layer 2s, in detail later but you can find a very good overview here.)

Why is all that stuff useful? It can be used, for example, to create a larger market for niche assets like shares in Nigerian companies or corporate bonds issued in Chile. These markets get access to more liquidity, investors are able to diversify their investments. An easy win-win, and this example is really just the tip of the iceberg.

The bigger picture

Various other large financial institutions are also interested in offering platforms for digital assets. In January 2023, HSBC was part of a consortium that helped the European Investment Bank with its first digital bond.

Spain's Banco Santander has even started to look for innovative startups to support its own long-standing interest in blockchain technology.

One aspect holding back the broader use of blockchain-based services in the financial sector is regulation. Progress has been slow, arguably because the close connection between blockchain tech and cryptocurrencies which are deeply unpopular with policymakers around the world.

In recent months, the situation seems to be changing. We've touched on the European Union's MiCA framework in a previous post (read it here). Singapore introduced stablecoin regulation in August. In Brazil, a regulatory sandbox for tokenized assets is set to be launched in 2024.

Overall, the growing number of specific examples shows that blockchain adoption is set to make significant progress in the near future.

It may have taken a bit more time than early adopters predicted back in 2017. That, however, may turn out to be a blessing in disguise. Five years ago, blockchains were not ready for mainstream adoption. Progress has been rapid since then and the technology continues to mature and improve – we'll cover those developments in more depth over the coming months.

That’s the end for today! 😢