Donovan Choy

Bull markets are the time of exciting mainnet launches, airdrops and announcements.



After the world’s shortest testnet, Kraken brought forward yesterday the <a href="https://blockworks.co/news/kraken-ethereum-layer-2-superchain">mainnet launch</a> of its Ink L2 rollup — months ahead of schedule. Then, Sophon, a consumer-focused validium L2 on the Avail data availability layer, also <a href="https://x.com/sophon/status/1869427009278914935">launched</a> its mainnet.



But the announcement that&#8217;s getting ETH bulls excited today? Banking giant Deutsche Bank is planning an L2 deployment on ZKsync’s Elastic Chain stack, <a href="https://www.bloomberg.com/news/articles/2024-12-18/deutsche-bank-tries-to-tackle-compliance-hurdles-for-public-blockchains?utm_source=telegram&amp;utm_content=crypto&amp;utm_medium=social">Bloomberg</a> reported.



&#8220;Institutions looking to build onchain are coming to ZKsync for the ability to build in Web3 without compromise. ZKsync offers institutions with a customizable architecture to build tailored solutions that enable privacy, scalability and interoperability with other private and public blockchains,” Alex Gluchowski, co-inventor of ZKsync, told Blockworks.



Codenamed <a href="https://www.axelar.network/blog/deutsche-bank-dama-2-announcement">Project DAMA 2</a>, Deutsche Bank’s initiative was first announced in early November as part of the Singapore central bank’s <a href="https://blockworks.co/news/singapore-central-bank-ready-to-try-defi-after-crypto-giants-leave-for-dubai">Project Guardian</a>. Project Guardian is a global consortium of 27 financial institutions and eight key policymaker groups, focused on nudging financial institutions towards experimentation with <a href="https://blockworks.co/news/jpmorgan-tokenized-blockchain-portfolio-avalanche">asset tokenization</a> and <a href="https://blockworks.co/news/ubs-switzerland-tokenized-fund-ethereum">blockchain ledgers</a>.



Deutsche’s L2 is a TradFi development, so all the trappings of a TradFi L2 is to be expected.



That is to say, it’s a permissioned L2 network that needs to prioritize regulatory compliance over the kinds of financial degeneracy replete elsewhere on public blockchains.



Regulators are increasingly coming around to recognizing the merits of blockchain technology, but even the most forward-thinking policymakers aren’t giving up their power in a pinch.



Put simply, financial regulators are saying: Go forth and innovate with blockchains, but not to the point where it undermines our political bottom lines, please.



As AdrianoFeria.eth <a href="https://x.com/AdrianoFeria/status/1869455036880658650">put it</a>: “The only pragmatic choices for institutions that require stringent oversight and interoperability are to either run their own private, permissioned layer-1 chains, or to harness Ethereum’s L2 ecosystems.”



So Deutsche, like other centralized institutions that have launched L2s, has turned to the premier destination for that customizable solution: Ethereum.



Ethereum’s pivot from sharding to a rollup-centric roadmap in 2020 was largely pitched as a technological bet on <a href="https://blockworks.co/news/ethereum-blobs-balancing-act">horizontal scaling</a> rather than the vertical scaling route that Solana has taken. I.e., the global state can’t fit on one blockchain, we need to split it up.



That modular freedom to launch a chain however you want is also what motivates many TradFi institutions to choose Ethereum.



This strategy is, of course, not exclusive to Ethereum. Avalanche too, has pursued this aggressively with its <a href="https://blockworks.co/news/block-explorer-ava-labs-etherscan">subnet model</a>.



Avalanche’s traction, however, has been subpar relative to Ethereum rollup adoption, for the reason that it has been one step behind Ethereum in technology.



“Firstly, Ethereum rollups came out before Avalanche’s subnets. And when subnets were ready, it carried a far higher upfront cost compared to launching an OP Stack rollup. All the while, costs of rollups were trending down with EIP-4844 and new data availability solutions <a href="https://blockworks.co/news/data-availability-transaction-costs-blockchain">like Celestia</a>,” Blockworks Research analyst Nikhil Chaturvedi explained.



But that too is changing for Avalanche.&nbsp;



Avalanche&#8217;s <a href="https://x.com/BlockworksAdv/status/1868710879694635129">Etna</a> upgrade this week is drastically cutting the costs of launching an Avalanche subnet (now rebranded to Avalanche L1s). Previously, P-Chain validators had to stake 2000 AVAX, whereas costs today would be more than 10x smaller.



“The costs are now reduced to be cheaper or comparable to the cost of a rollup on Celestia,” Chaturvedi said.



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Deutsche Bank

Deutsche Bank puts ZKsync in the zeitgeist

Macauley Peterson

This is a segment from the 0xResearch newsletter. To read full editions, <a href="https://blockworks.co/newsletter/research">subscribe</a>.



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<a href="https://blockworks.co/tag/swift">Swift</a>, UBS Asset Management and <a href="https://blockworks.co/tag/chainlink">Chainlink</a> announced today the successful conclusion of a pilot project demonstrating the integration of traditional payment systems with tokenized assets.



Part of the <a href="https://blockworks.co/tag/monetary-authority-of-singapore">Monetary Authority of Singapore</a>’s Project Guardian, the pilot shows how financial institutions can use the Swift network for the settlement of tokenized fund subscriptions and redemptions.



Traditional fund processes, particularly in the $63 trillion mutual fund industry, are often hampered by inefficiencies, manual interventions and settlement delays that lead to increased costs and reduced liquidity. This pilot aims to bridge the gap between digital assets and fiat-based systems across Swift’s extensive global network, streamlining processes for the payment leg without requiring a complete shift to onchain transactions.



Using Chainlink’s platform for token minting and burning alongside Swift’s infrastructure, financial institutions can now facilitate the tokenized fund lifecycle — from subscriptions to redemptions.



Chainlink has been <a href="https://blockworks.co/news/banks-can-10x-the-blockchain-industry-says-chainlink-co-founder">working with Swift</a> since 2023, and the pilot builds on <a href="https://blockworks.co/news/banks-swift-crypto-transaction-trials">previous collaborations</a> aimed at enhancing liquidity and operational efficiency within the tokenized fund landscape.



MAS’s Project Guardian promotes asset tokenization to improve financial market functions, and this trial used existing Swift rails to circumvent the need for new onchain infrastructure.



Swift strategy head Jonathan Ehrenfeld noted the initiative aligns with Swift’s mission to provide secure, scalable options for financial institutions exploring digital asset classes and currencies. <a href="https://blockworks.co/tag/sergey-nazarov">Sergey Nazarov</a>, Chainlink’s co-founder, highlighted the significance of this off-chain payment capability, emphasizing its potential to increase capital flow and expand digital asset accessibility across TradFi institutions.



As the financial industry increasingly explores digital assets, these kinds of interoperable solutions pave the way for broader adoption and operational efficiency across global markets.



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0xResearch Newsletter

Swift, Chainlink wrap tokenization pilot

Katherine Ross

This is a segment from the Empire newsletter. To read full editions, <a href="https://blockworks.co/newsletter/empire">subscribe</a>.



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It’s been a minute since we checked in on the activity over in the tokenized fund space.&nbsp;



Late Friday, UBS — the Swiss bank with $5.7 trillion in assets under management — announced that it was launching uMINT, or the UBS USD Investment Fund built on Ethereum.&nbsp;



“Tokenholders can now access UBS Asset Management’s institutional grade cash management solutions underpinned by high quality money market instruments based on a conservative, risk-managed framework,” the press release said. So it’s unfortunately a bit unclear what financial instruments will make up the fund, whereas other popular funds right now hold US Treasurys. 



To give you some perspective: roughly $2.4 billion of total real-world asset value is US Treasury debt, with commodities coming in second at $1.1 billion, per RWA.xyz data. To be clear, the below chart isn’t including Treasurys held by stablecoin issuers such as Circle and Tether.



<figure class="wp-block-image"><img decoding="async" src="https://lh7-rt.googleusercontent.com/docsz/AD_4nXf6z_xGz58q-2cJYEZgie3S3bRPVQUlLJKnq_9z4xJqCQR5tOAn8J1XLTDAm_upZh3T3qffiTtBHe293RYepZ4t3i6EerXrET6hU7ca67RRXSrrNzF2G_TJlltHr4nvEo2V3Dz1yw?key=ZYRulavpaLJ7XPpr2UcjL1Tg" alt=""/></figure>



The co-head of UBS Asset Management APAC, Thomas Kaegi, acknowledged the “growing investor appetite” in the space. Right now, three firms: BlackRock through its Securitize partnership, Franklin Templeton and Ondo dominate the tokenized fund space.&nbsp;



While BlackRock’s BUIDL and Franklin’s funds might be some of the most well-known, it’s actually Ondo that holds the biggest market cap at $655. Securitize is about $100 million shy, coming in at $533 million (which is BUIDL’s market cap). Franklin Templeton has a market cap of roughly $408 million.



<figure class="wp-block-image"><img decoding="async" src="https://lh7-rt.googleusercontent.com/docsz/AD_4nXcpO9ZBngQkJwZ-CLqCxrvmwmN7AjNLJCm8ylvuQoErjBPO43rxfcox1VqVErpBEglFn3cbmx50mo8f3wWejDcA4zvmUornARk74uPr-clwK-P6RjXVnfrJ5t0cT0BeuYIsQhqwZA?key=ZYRulavpaLJ7XPpr2UcjL1Tg" alt=""/><figcaption class="wp-element-caption">A look at the biggest tokenized treasury funds</figcaption></figure>



UBS itself acknowledged that this launch is a sign that the firm is serious about the potential of tokenization, which isn’t a surprise given that it’s a participant in the Project Guardian initiative (the Monetary Authority of Singapore’s tokenization pilot) and has <a href="https://blockworks.co/news/boc-investment-arm-tokenized-notes">previously partnered</a> to issue tokenized notes in China.



Outside of UBS, it’s worth noting that Securitize surpassed $1 billion in tokenized RWA onchain last week. As I noted above, the RWA platform has seen success through BlackRock’s tokenized fund. And Franklin Templeton launched its OnChain US Government Money Market Fund on Base.&nbsp;



Tokenization may not be one of the sexiest crypto topics, but there certainly is a lot of movement happening in the space.



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Empire Newsletter

‘Growing investor appetite’ in tokenized fund space: UBS

Ben Strack

The TradFi world has been exploring more ways to use blockchain tech for years now.



But the sheer number of financial players involved in the latest proof-of-concept makes it different from most. Not to mention the size of the entities, and their approach.



Payment giants Visa and Mastercard are coming together with banks JPMorgan, Citigroup and others to test a so-called Regulated Settlement Network.&nbsp;



The proof-of-concept sets out to experiment with shared ledger technology to settle tokenized commercial bank money, wholesale central bank money, US Treasury securities and other tokenized assets, a Wednesday news release notes.



Read more: <a href="https://blockworks.co/news/digital-asset-summit-tradfi-crypto">Digital Asset Summit Day 2: Financial giants say they’re here to stay</a>



This project represents a new phase of the Regulated Liability Network. Launched in November 2022, the <a href="https://regulatedliabilitynetwork.org/wp-content/uploads/2022/11/The-Regulated-Liability-Network-Whitepaper.pdf">initiative</a> set out to demonstrate the use of shared ledger technology for regulated money movement on one platform.



The Securities Industry and Financial Markets Association (SIFMA) is set to manage the new proof of concept. Others involved include Swift, TD Bank, US Bank, USDF, Wells Fargo and Zions Bancorp.



Lamine Brahimi, co-founder of crypto platform Taurus, said he welcomes any initiative that puts cash on-chain at scale.&nbsp;



“The real benefits of tokenization will come when both the securities and the cash legs of a transaction are both on-chain,” he told Blockworks.



<h2 class="wp-block-heading">An evolution of projects</h2>



Financial players have long explored how it could unlock greater automation and more standardized data rails via blockchain tech while cutting costs and offering greater transparency.



Blockchain-focused proof-of-concepts and other tokenization efforts have seemed to ramp up in recent months.&nbsp;



JPMorgan’s blockchain arm Onyx last year <a href="https://blockworks.co/news/jpmorgan-tokenized-blockchain-portfolio-avalanche">carried out tests under the Monetary Authority of Singapore’s Project Guardian</a> to explore how fund managers could tokenize portfolios on various blockchains in a permissioned manner.



BlackRock used JPMorgan’s Tokenized Collateral Network to tokenize shares in one of its money market funds around the same time. It then sent those tokenized interests to Barclays as collateral for an over-the-counter derivatives trade.



Also under Project Guardian, Switzerland-based <a href="https://blockworks.co/news/jpmorgan-tokenized-blockchain-portfolio-avalanche">UBS brought a tokenized investment fund</a> on Ethereum in November.



Even more recently, Citi tokenized a private equity fund issued by Wellington Management on Avalanche’s Spruce subnet in February.



Read more: <a href="https://blockworks.co/news/citibank-explores-tokenization-wisdomtree">Citi the latest TradFi player to test out asset tokenization</a>



But the latest efforts revealed on Wednesday appear “incrementally more important” than prior trials, said Colin Butler, global head of institutional capital at Polygon.



“I say that because the parties mentioned are looking to align on a standard, to which they&#8217;re getting closer,” he told Blockworks. “This represents to me the five-yard-line for mass institutional adoption.&#8221;



The financial industry’s approach to more recent blockchain projects is “qualitatively different” than in the past several years, said Ralf Kubli, board member of The Casper Association.



“It is clear that large institutions have decided that shared ledger technology offers a compelling value proposition in many critical areas of the value chain, and that they must be part of this development,” he explained.&nbsp;



Institutional involvement in this space has come through experimentation, or by investing in or acquiring startups with mature technology stacks, Kubli noted.



The Depository Trust and Clearing Corporation (DTCC) closed its deal in December to acquire Securrency — a blockchain-based financial and regulatory technology developer.&nbsp;



The world’s largest asset manager last week led a $47 million funding round for Securitize, a firm focused on bringing physical and traditional financial assets on-chain.



Read more: <a href="https://blockworks.co/news/blackrock-tokenization-investment">BlackRock doubles down on tokenization via investment in Securitize</a>



“This strong commitment by established financial institutions will drive the emergence of enterprise grade infrastructure by startups and spinouts, as well as provide a glimpse on the future interaction between public chains and permissioned environments,” Kubli told Blockworks.&nbsp;&nbsp;



<h2 class="wp-block-heading">Proof-of-concept expectations</h2>



The proof-of-concept will publish an analysis of whether the network could operate under existing laws or guidance in the United States. Findings intend to inform “next generation settlement models,” SIFMA said in a news <a href="https://www.sifma.org/resources/news/members-of-the-u-s-financial-sector-to-explore-multi-asset-settlement-using-shared-ledger-technology/">release</a>.



Brahimi said he hopes to see “the confirmation of major efficiency gains” by having both securities and cash on-chain. The experiment could also demonstrate reduced counterparty risk and improved collateral transfers between institutions.



“A legal assessment of what needs to be modified to scale these activities will also be useful,” he added. “Based on the projects Taurus is involved in, it will be faster than what people think.&#8221;&nbsp;



Read more: <a href="https://blockworks.co/news/taurus-custody-tokenization-platforms">Tokenization top of mind for Taurus in 2024 after FINMA approval</a>



Morgan Krupetsky, who leads business development for institutions and capital markets at Ava Labs, said she is encouraged by the array of entities involved.&nbsp;



Still, more buy-side participation from asset managers, corporates, hedge funds and pension funds, for example, in such blockchain trials would be beneficial. Having that segment’s buy-in and support will be critical, she added.



“They often experience comparable pain points, [and] they&#8217;re increasingly viewing this space as a strategic imperative,” she told Blockworks. “[It] would provide valuable input and insight to the banks who ultimately service these, and other, clients.”



Those anxiously awaiting an overhaul of legacy financial services infrastructure and systems will have to stay patient.&nbsp;



The lengthy experimentation ultimately helps financial institutions, infrastructure providers and regulators assess the benefits of dedicating resources to ultimately building products that use shared ledger tech, Krupetsky explained.&nbsp;&nbsp;



Kubli added: “I believe we will see serious and productive environments in the coming six to 12 months as part of the various peer-to-peer engagement…and more importantly, through the various sandbox approaches and <a href="https://blockworks.co/news/bis-tokenization-central-banks-cryptocurrencies">central bank-led initiatives</a>, including <a href="https://blockworks.co/news/cbdcs-tokenized-deposits-unified-ledger">the [Bank for International Settlements</a>].”



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JPMorgan

How the latest TradFi blockchain trial could mark the ‘five-yard-line’ for mass adoption

Bessie Liu

JPMorgan blockchain arm Onyx has collaborated with a suite of industry startups to create a proof of concept that could show how tokenization can help better manage financial assets.



The tests were carried out under the Monetary Authority of Singapore’s <a href="https://blockworks.co/news/ubs-switzerland-tokenized-fund-ethereum">Project Guardian</a> and was designed specifically to enable fund managers to tokenize their portfolios on chosen blockchains. 



Wealth managers could also purchase and rebalance their positions across these different interoperable blockchain networks. 



The blockchain stacks chosen for this proof of concept include Provenance Blockchain, JPMorgan’s own Onyx Digital Assets and Avalanche. Cross-chain communication protocol Axelar and issuance-slash-trading platform Oasis Pro also contributed to the initiative.



It is important to note that these transactions were done in a permissioned manner, meaning access was limited to a select few participants on private blockchain networks. So, the transactions won&#8217;t show up on public chain explorers such as Axelarscan, Mintscan or Snowscan, though example transactions are detailed in a recent JPMorgan and Apollo <a href="https://www.jpmorgan.com/onyx/documents/portfolio-management-powered-by-tokenization.pdf">report</a>. 



Galen Moore, global communications lead at Axelar, told Blockworks that Axelar created a permissioned instance for connecting different chains by modifying its existing cross-chain configuration so that it was in alignment with the privacy and access management requirements set by the proof of concept. 



“The purpose of this Project Guardian was to demonstrate a system that would allow a portfolio manager to manage a large number of discretionary portfolios comprising tokenized assets across multiple blockchains,” Moore said. “In that, it was successful.”



<figure class="wp-block-image size-large is-resized"><img loading="lazy" decoding="async" width="1623" height="1269" src="https://blockworks-co.imgix.net/wp-content/uploads/2023/11/jpmorgantokenized.png?w=1024&amp;h=1024" alt="" class="wp-image-73760" style="aspect-ratio:1.2784019975031211;width:840px;height:auto" srcset="https://blockworks-co.imgix.net/wp-content/uploads/2023/11/jpmorgantokenized.png?w=1623 1623w, https://blockworks-co.imgix.net/wp-content/uploads/2023/11/jpmorgantokenized.png?w=300 300w, https://blockworks-co.imgix.net/wp-content/uploads/2023/11/jpmorgantokenized.png?w=1024 1024w, https://blockworks-co.imgix.net/wp-content/uploads/2023/11/jpmorgantokenized.png?w=768 768w, https://blockworks-co.imgix.net/wp-content/uploads/2023/11/jpmorgantokenized.png?w=1536 1536w, https://blockworks-co.imgix.net/wp-content/uploads/2023/11/jpmorgantokenized.png?w=329 329w, https://blockworks-co.imgix.net/wp-content/uploads/2023/11/jpmorgantokenized.png?w=334 334w, https://blockworks-co.imgix.net/wp-content/uploads/2023/11/jpmorgantokenized.png?w=280 280w, https://blockworks-co.imgix.net/wp-content/uploads/2023/11/jpmorgantokenized.png?w=80 80w" sizes="auto, (max-width: 1623px) 100vw, 1623px" /><figcaption class="wp-element-caption">How JPMorgan&#8217;s tokenized portfolios worked across multiple private blockchains</figcaption></figure>



It is uncertain whether public chains or mainnets will be involved in future deployments. Though this is the case, JPMorgan has been actively exploring possibilities in the blockchain technology space. Also for Project Guardian, JPMorgan <a href="https://blockworks.co/news/jpmorgan-trade-on-public-blockchain-monumental-step-for-defi">processed tokenized foreign exchange trades</a> on Polygon’s mainnet last year via a modified version of the permissioned DeFi platform Aave Arc.



Most recently, it gave institutional clients more <a href="https://blockworks.co/news/jpmorgan-blockchain-payments">programmability</a> over its payment offerings on its blockchain-based accounts with the JPM Coin system, allowing users to set parameters around payments based on different requirements. 



The bank has also been exploring <a href="https://blockworks.co/news/jpmorgan-exploring-applications-of-digital-identity">on-chain digital wallets,</a> allowing users to store and control digital identity on its platform.&nbsp;



“Consistent with the goals of Project Guardian, we believe our POC is a critical moment at the intersection between traditional finance and blockchain technology,” JPMorgan <a href="https://www.jpmorgan.com/onyx/documents/portfolio-management-powered-by-tokenization.pdf">wrote in a report</a>.&nbsp;



“We view our contribution to Project Guardian as the first step of a journey into the complex business of delivering higher quality discretionary investment portfolios in a thoughtful and efficient manner to improve the end investor’s experience and results.”



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Avalanche

JPMorgan tests tokenized portfolios with Avalanche blockchain tech

Shalini Nagarajan

The asset management arm of Swiss banking giant UBS has launched a tokenized investment fund on Ethereum.



The tokenized Variable Capital Company (VCC) fund was launched as part of Singapore&#8217;s Project Guardian pilot, an initiative by the Monetary Authority of Singapore announced in May last year. UBS said it aims to carry out more pilot programs under Project Guardian.



The fund is structured as a smart contract on Ethereum and was launched using the bank’s proprietary tokenization service, UBS Tokenized, according to an <a href="https://www.ubs.com/global/en/media/display-page-ndp/en-20230927-first-blockchain-native.html?caasID=CAAS-ActivityStream">announcement</a> on Monday.



It allows UBS Asset Management to perform various functions, such as processing fund subscriptions and redemptions.



“This is a key milestone in understanding the tokenization of funds, building on UBS’s expertise in tokenizing bonds and structured products,” said Thomas Kaegi, Singapore and Southeast Asia head at UBS asset management.&nbsp;



“Through this exploratory initiative, we will work with traditional financial institutions and fintech providers to help understand how to improve market liquidity and market access for clients,” he added.



According to a recent <a href="https://blockworks.co/news/bis-tokenization-central-banks-cryptocurrencies">report</a> by the Bank of International Settlements, tokenization has the potential to significantly enhance efficiency and transparency in financial markets.



Research by Bank of America <a href="http://booking.com/hotel/id/villa-kayu-lama.en-gb.html?aid=356980&amp;label=gog235jc-1DCAsoaEIPdmlsbGEta2F5dS1sYW1hSDNYA2hsiAEBmAEJuAEHyAEM2AED6AEBiAIBqAIDuAKMpoWoBsACAdICJDdkYmM5NWJmLWUyYWUtNDY2Ni1hYzVmLWMyMTc2OTdjODk1ZdgCBOACAQ&amp;sid=d41683a7c1d27e1b1751f79b27f4d7df&amp;dist=0&amp;keep_landing=1&amp;sb_price_type=total&amp;type=total&amp;">suggests</a> that the total value of tokenized assets could represent as much as 10% of global GDP, amounting to $16.1 trillion, by the year 2030.



Companies such as Goldman Sachs, JPMorgan, Hamilton Lane and Siemens have <a href="https://blockworks.co/news/2023-year-of-asset-tokenization">previously announced their involvement</a> in asset tokenization projects.



UBS first ventured into the blockchain realm in November last year, <a href="https://blockworks.co/news/european-institutions-public-blockchains">issuing</a> a $370 million bond on SIX Digital Exchange’s private blockchain platform.



That bond was designed for regulated tokenized offerings and was also made available on the Six Swiss exchange.&nbsp;



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Ethereum

UBS trials tokenized money market fund on Ethereum

Sebastian Sinclair

Bank-issued deposit tokens are much safer than stablecoins for major institutions looking to transfer value across chains, JPMorgan says.



Surging interest and continued advancements in blockchain underscore the necessity for blockchain-based &#8220;cash equivalents,&#8221; the bank said alongside consulting firm Oliver Wyman in a recent joint study.



To date, stablecoins have predominantly fulfilled this demand. But JPMorgan and Oliver Wyman believe stablecoins — while having previously proved successful — would fall short of meeting serious (regulated) banking needs.



Enter “deposit tokens,” a separate concept from central bank digital currencies (CBDCs). These function similarly to traditional deposits held by licensed financial institutions such as commercial banks, except they exist and operate on-chain.



Last November, JPMorgan <a href="https://blockworks.co/news/jpmorgan-trade-on-public-blockchain-monumental-step-for-defi" target="_blank" rel="noreferrer noopener">traded tokenized Singaporean dollars</a> for tokenized Japanese yen as part of Singapore’s Project Guardian, with help from DBS Bank and SBI Digital Asset. The banks used a permissioned smart contract protocol, a fork of Aave Arc, powered by Polygon for the on-chain trade.



It’s those kinds of tokenized fiat currencies which JPMorgan refers to as “deposit tokens.”



They’re seen by traditional types as a secure and “stable form of money” that can operate on a large scale, says the <a href="https://www.oliverwyman.com/content/dam/oliver-wyman/v2/publications/2023/feb/oliver-wyman-jp--morgan-deposit-tokens-report-final.pdf" target="_blank" rel="noreferrer noopener">report</a>. 



Deposit tokens would be supported by the issuer&#8217;s regulatory framework, capital and liquidity requirements, contingency funding access as well as “robust” consumer protection policies.



From the perspective of the issuing bank, the tokens simply represent a reorganization of the bank&#8217;s deposit liabilities on its balance sheet, without altering the bank&#8217;s asset composition.



As blockchain-based, tokenized assets thread deeper into payments infrastructure and other intricate commercial dealings, institutional-level participation means determining the most appropriate digital currencies, the pair said.



<figure class="wp-block-image size-large"><img loading="lazy" decoding="async" width="1024" height="700" src="https://blockworks-co.imgix.net/wp-content/uploads/2023/02/Screen-Shot-2023-02-10-at-05.20.44-1024x700.png" alt="" class="wp-image-46934" srcset="https://blockworks-co.imgix.net/wp-content/uploads/2023/02/Screen-Shot-2023-02-10-at-05.20.44-1024x700.png?w=1024 1024w, https://blockworks-co.imgix.net/wp-content/uploads/2023/02/Screen-Shot-2023-02-10-at-05.20.44-1024x700.png?w=300 300w, https://blockworks-co.imgix.net/wp-content/uploads/2023/02/Screen-Shot-2023-02-10-at-05.20.44-1024x700.png?w=768 768w, https://blockworks-co.imgix.net/wp-content/uploads/2023/02/Screen-Shot-2023-02-10-at-05.20.44-1024x700.png?w=376 376w, https://blockworks-co.imgix.net/wp-content/uploads/2023/02/Screen-Shot-2023-02-10-at-05.20.44-1024x700.png?w=382 382w, https://blockworks-co.imgix.net/wp-content/uploads/2023/02/Screen-Shot-2023-02-10-at-05.20.44-1024x700.png?w=320 320w, https://blockworks-co.imgix.net/wp-content/uploads/2023/02/Screen-Shot-2023-02-10-at-05.20.44-1024x700.png?w=80 80w, https://blockworks-co.imgix.net/wp-content/uploads/2023/02/Screen-Shot-2023-02-10-at-05.20.44-1024x700.png?w=1530 1530w" sizes="auto, (max-width: 1024px) 100vw, 1024px" /></figure>



<h2 class="wp-block-heading">JPMorgan sees deposit tokens going DeFi</h2>



The rise of decentralized finance (DeFi) protocols may also result in the creation of liquidity pools for deposit tokens, according to the report.



These pools would be established by token holders who supply their deposits as liquidity on decentralized exchanges.



If the pools persist and serve a practical purpose, such as fostering market-based fungibility between deposit tokens, then tokenization should not cause a pricing disparity commonly seen in today&#8217;s stablecoin liquidity pools, the bank said.



Rather, the liquidity pools should reflect the deposit tokens&#8217; fungibility as financial assets.



JPMorgan, one of the largest investment banks in the world, has been actively involved in blockchain development and implementation for at least six years.&nbsp;



It has previously toyed with blockchain-based solutions for various use cases including as supply chain management, trade finance, and digital identity verification.



In 2016, the bank spun up Quorum, an enterprise-focused version of the Ethereum blockchain to explore blockchain in financial services. JPMorgan sold Quorum to Ethereum powerhouse ConsenSys in 2020 for an undisclosed sum.



JPMorgan is now focused on tokenization platform Onyx, a permissioned interbank protocol for transferring value, settled in its USD-backed stablecoin JPM Coin.



David Canellis contributed reporting.



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‘Deposit Tokens’ Could Trade On DeFi Like Stablecoins: JPMorgan

Ornella Hernandez

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



The trade occurred as part of the Monetary Authority of Singapore (MAS) Project Guardian pilot, first <a href="https://www.mas.gov.sg/news/media-releases/2022/mas-partners-the-industry-to-pilot-use-cases-in-digital-assets" target="_blank" rel="noreferrer noopener">announced</a> in May. The <a href="https://www.mas.gov.sg/news/media-releases/2022/first-industry-pilot-for-digital-asset-and-decentralised-finance-goes-live" target="_blank" rel="noreferrer noopener">tokenization experiment</a> completed trials for foreign exchange (FX) and the trading of government bonds, powered by crypto lending protocol Aave and decentralized exchange (DEX) Uniswap.



JPMorgan’s Onyx — the bank’s blockchain division for wholesale payments — joined Singapore’s DBS Bank, Japan’s SBI Digital, Singapore Exchange’s digital asset platform Marketnode and Temasek in the first phase of testing.



For FX transactions, Onyx successfully <a href="https://polygonscan.com/token/0x5E85C16A31284cCa21d3eD0f8d86002B00D73142" target="_blank" rel="noreferrer noopener">tokenized</a> Singaporean dollar (SGD) deposits, as well as SBI Digital Assets tokenized Japanese yen (JPY) assets.



“[SGD] is a deposit token which is a general liability of JPM,” Ty Lobban, head of Onyx Digital Assets, <a href="https://twitter.com/TyLobban/status/1587679356067131393?s=20&amp;t=wVZrauBTwBtGBMwy-S0pWQ" target="_blank" rel="noreferrer noopener">tweeted</a>, adding that the native token gives “stable on-chain value without the scalability issues of stablecoins.”&nbsp;



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 trade marks a milestone for JPMorgan, which maintains three private blockchains used regularly by its businesses and clients.&nbsp;



The bank’s <a href="https://www.jpmorgan.com/onyx/liink.htm" target="_blank" rel="noreferrer noopener">Liink</a> network of banks shares transaction data and related insights, while its <a href="https://www.jpmorgan.com/onyx/coin-system.htm" target="_blank" rel="noreferrer noopener">Coin Systems</a> network facilitates the transfer of the dollar and other fiat currencies over a blockchain. Its <a href="https://www.jpmorgan.com/onyx/onyx-digital-assets.htm" target="_blank" rel="noreferrer noopener">Onyx Digital Assets</a> network enables the tokenization of traditional assets, such as US Treasurys and money-market products.



“We’ve long held the view that over time more, and more traditional finance will take place on public blockchains, provided there are solutions for key aspects like 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: “Utilizing the Aave protocol to deploy a liquidity market on the Polygon mainnet for supplying and borrowing tokenized foreign exchange transactions…is the first time the world has seen a real world 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.”&nbsp;



The team forked <a href="https://cms.blockworks.co/aave-arc-to-provide-30-financial-institutions-access-to-private-pools-of-defi-liquidity/" target="_blank" rel="noreferrer noopener">Aave Arc</a>, a permissioned version of the popular DeFi lending protocol compliant with anti-money laundering regulations, and deployed a modified version to the Polygon network. This allowed the banks to set their own specialized transaction parameters.



Additionally, JPMorgan built on-chain verification of verifiable credentials (VC) to provide compliant access to Aave and other DeFi protocols. The aim was to eliminate DeFi front ends from needing to do know-your-customer (KYC) checks.



“On-chain VC verification is huge,” <a href="https://twitter.com/TyLobban/status/1587679368629080064?s=20&amp;t=wVZrauBTwBtGBMwy-S0pWQ" target="_blank" rel="noreferrer noopener">according</a> to Lobban, because “it brings composability to identity…bringing further standardization &amp; portability to identity.”



<h2 class="wp-block-heading">Banks are growing more comfortable with public blockchains</h2>



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



The European Investment Bank (EIB) <a href="https://www.eib.org/en/press/all/2021-141-european-investment-bank-eib-issues-its-first-ever-digital-bond-on-a-public-blockchain" target="_blank" rel="noreferrer noopener">launched</a> a digital bond issuance on a blockchain platform in April 2021, deploying this distributed ledger technology for the registration and settlement of digital bonds in collaboration with Goldman Sachs, Santander and Societe Generale.



That same month, Societe Generale issued the first structured product as a security token directly registered on the Tezos public blockchain — about two years after the company issued 100 million euros of covered bonds as a security token on the Ethereum blockchain.



Furthering the trend, JPMorgan Chase hired an executive director of digital assets regulatory policy last month, despite CEO Jamie Dimon calling crypto tokens “decentralized Ponzi schemes” in congressional testimony in September.&nbsp;



The bank’s blockchain trade also comes after JPMorgan <a href="https://www.jpmorgan.com/onyx/content-hub/digital-identity-in-web3.htm" target="_blank" rel="noreferrer noopener">published a video</a> last month detailing <a href="https://cms.blockworks.co/jpmorgan-exploring-applications-of-digital-identity/" target="_blank" rel="noreferrer noopener">a digital wallet</a> that would 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 the company would launch such a solution.&nbsp;



Fidelity Digital Asset Management Head Chris Tyrer <a href="https://cms.blockworks.co/banks-are-future-access-points-for-crypto-market-execs-say/" target="_blank" rel="noreferrer noopener">said during a panel</a> at Blockworks’ Digital Asset Summit last month that banks have come around on crypto over the past year and are “the future access points” for the market.&nbsp;&nbsp;



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



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



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Aave

JPMorgan Trade on Public Blockchain ‘Monumental Step’ for DeFi

David Canellis

<div id="highlights-block_629694b14c8b7" class="highlights">
 <ul>
 <li>The Monetary Authority of Singapore is partnering with JPMorgan Chase to lead a pilot program exploring DeFi&#8217;s potential</li>
 <li>Binance, Bybit and Crypto.com have all initiated moves into Dubai</li>
 </ul>
 
</div>



The central bank of Singapore is tapping JPMorgan Chase to help lead a new blockchain pilot exploring the potential of DeFi.



The upcoming tests are part of the Monetary Authority of Singapore’s (MAS) Project Guardian initiative, which launched Tuesday.



Project Guardian aims to gauge whether DeFi (decentralized finance) applications running on public blockchains, including Ethereum, can improve wholesale borrowing and lending processes without introducing additional, undue risk. The first step: tokenizing bonds and deposits, with smart contracts powering trade executions.&nbsp;



MAS also enlisted Singaporean multinational bank DBS – one of Asia’s largest financial institutions – alongside local digital asset issuance venture Marketnode to co-lead the program.



Singapore’s Deputy Prime Minister Heng Swee Keat revealed the pilot at the launch of tech event Asia Tech x Singapore Summit on Tuesday. Heng, who also serves as coordinating minister for economic policies, urged retail investors to steer clear of cryptocurrencies — despite the government’s DeFi foray.



According to <a href="https://www.straitstimes.com/tech/tech-news/retail-investors-should-steer-clear-of-cryptocurrencies-singapore-to-approach-tech-with-open-mind-dpm-heng" target="_blank" rel="noreferrer noopener">The Straits Times</a>, Heng said Singapore must “pierce through both the hubris and the veil of suspicion” surrounding digital assets to fully grasp the “potentially transformative underlying technologies.” In other words: “blockchain, not bitcoin.”



The project intends to focus on digital securities, or blockchain-powered tokens backed by traditional financial instruments. Singapore’s central bank, which doubles as the nation’s regulatory authority on finance, will leverage the pilot’s results to inform its crypto policymaking.



<h3 class="wp-block-heading">Crypto bigwigs already left Singapore for Dubai</h3>



While initial indications are that MAS is open to using public (permissionless) blockchains throughout Project Guardian, the tokenized bonds and deposits will be deployed to a private (permissioned) liquidity pool for the purposes of the pilot. There’s potential for digital securities trade on local regulated online exchanges at some point down the line.



Project Guardian diverges from a similar – already live – DeFi initiative managed directly by JPMorgan.&nbsp;



MAS wants to explore permissionless systems; JPMorgan’s Onyx Digital Assets platform is powered by a private blockchain that facilitates the tokenization and trading of US Treasurys within intraday repurchase, or repo, markets — which are employed by hedge funds and other asset managers looking to borrow money at reasonable rates to fund big-ticket orders.&nbsp;



Blockworks <a href="https://cms.blockworks.co/french-banking-giant-bnp-paribas-joins-jpmorgans-onyx-blockchain/" target="_blank" rel="noreferrer noopener">reported</a> last week that French bank BNP Paribas had joined Onyx, which has so far processed more than $300 billion of digital tokens representing US Treasurys since its December 2020 launch.



In any case, it’s not clear whether the potential for regulatory clarity via Project Guardian will be enough to entice a selection of crypto’s biggest names back to Singapore.&nbsp;



Increased regulatory scrutiny and long wait times for crypto exchanges applying for licenses had clouded hopes for Singapore to become a global hub for digital assets, with the localized arm of the global exchange Binance <a href="https://www.forbes.com/sites/robertolsen/2021/12/13/crypto-giant-binance-shuts-down-singapore-trading-platform/?sh=7351e75f682f" target="_blank" rel="noreferrer noopener">shutting down</a> last December.&nbsp;



Binance’s Singapore affiliate supported the trading of just eight cryptocurrencies at the time, a fraction of the 100 digital assets on Binance’s US platform, plus 600-odd tokens on its flagship exchange.



By March, Binance <a href="https://cms.blockworks.co/binance-granted-license-to-operate-in-dubai/" target="_blank" rel="noreferrer noopener">secured</a> regulatory approval to begin operating in Dubai and quickly began looking to hire 100 new staffers in the region. Founder and CEO Changpeng Zhao <a href="https://www.bloomberg.com/news/articles/2021-11-19/binance-chief-zhao-buys-his-first-home-in-pro-crypto-dubai" target="_blank" rel="noreferrer noopener">bought</a> property in Dubai in the months prior.



Crypto derivatives platform Bybit relocated its headquarters from Singapore to Dubai in April. Singapore-based exchange Crypto.com likewise recently <a href="https://www.reuters.com/business/finance/uae-crypto-push-sees-bybit-cryptocom-announce-dubai-offices-2022-03-28/" target="_blank" rel="noreferrer noopener">signaled</a> the company plans to open its first Dubai outpost.



Longtime crypto hedge fund firm Three Arrows Capital in April also pledged to move its headquarters from Singapore to Dubai. Co-founder Su Zhu <a href="https://www.coindesk.com/business/2022/04/28/three-arrows-capital-to-move-headquarters-to-dubai-raise-external-capital/" target="_blank" rel="noreferrer noopener">cited</a> “electric energy” in Dubai’s digital asset industry at the time.



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