JP Morgan's JPMD - A Tokenised Deposit Cum Stablecoin

JP Morgan has announced that it will be issuing a stablecoin-like token, called JPMD, on a public blockchain. 

Importantly, the token is permissioned. So, yes, it is on the pubic blockchain, but holders are “by invitation only”. Upfront, the guest or whitelist is limited to JPM Institutional Clients only. 

To date my take on tokenised deposits has been: “Not useful outside the four walls of the place that issued them”. Specifically, my view has been that using JPM Coin or Kinexys is like have an extra discrete account in a specific currency which works on new technology or rails. 

JPMD adds mew dimensions. To quote Keynes: “When the facts change, I change my mind …”  In this case, the facts have changed. In this post I’ll explain my thinking.

As with all things bleeding edge in financial services, there is every risk that I haven’t understood properly, or just missed a few salient points, or just come to an implausible conclusion. If any of things are true, please call me out on them. 

Why is this an important topic?

Let’s start at the beginning. With a good old TradFi account at JPM, or any Nostro, when you want to make a payment you send the instruction to JPM. Funds are then moved as book transfers if the recipient / payee also has a JPM account or IRL via a payment system, such as the FedWire, CHIPS, CHAPS or T2. But there are limitations on timing; business days end in late afternoon, early evening and the batch nature of the systems mean nothing happens at the weekend. 

JPM broke out of this “legacy systems albatross” with JPM Coin and Onyx, which is now Kinexys. The “train” is the same; an account and a payment, but the “rails” are different. New technology enabling 24 * 7 * 365 processing.

The change meant that JPM clients could send and receive funds from any other client using Kinexys at any time. This is useful if a meaningfully large or all-encompassing group of clients all bank with JPM. An example where this is the case is India, with local banks using JPM to settle dollar trades.

At this point, you will understand my saying: “Not useful outside the four walls of the place that issued them”.

Kinexys is also a path for JPM to payments system renewal. Instead of trying to adapt, upgrade and fix the old rails, JPM have taken a really sensible path here. Trying to have a big bang, with the one stopping and the other starting, could be done, but requires huge planning. Allowing things to exist in parallel, whilst minimising investment in the old, legacy systems, reduces the operational risks involved. One of co-existence. There is a parallel from TradFi; bank branches with counter service vs. ATMs. Only some 50 years after the first ATMs were introduced did banks begin to push through widespread closure of their counter services.

What’s new or changing?

Quite often, people I interact with talk about public blockchains and private permissioned chains. Two discrete things. For reasons which are easy to imagine; KYC, transaction monitoring, sanctions screening, in other words all the regulatory must do stuff, which regulated financial institutions have to do. There is though a hybrid or in-between flavour: public permissioned.

This is an important concept. The token circulates on the public blockchain but only amongst approved users. A private members’ club. In the case of JPMD, the membership is limited to JPM’s institutional clients. 

Using the public blockchain opens up interoperability, programmability and composability. The holy trinity of digital asset capabilities. Here’s my thinking of what this means in practical terms.

Today, an institutional client wanting to trade digital assets will often be required to pre-fund cash with whichever marketplace or broker it is using. In the TradFi world, if the client uses JPM and the marketplace uses Citi, then money has to move IRL and that can be slow. In technical terms, this type of set-up has credit risk and liquidity risk, as well as making liquidity management harder than it might be.

That works a bit better if both client and marketplace have a TradFi fiat Nostro with the same bank. Not really a scalable solution for the marketplace. And limited by all those TradFi opening hours and cut-off times.

Things work a bit better if you use Kinexys; the opening hour restrictions largely go away. But, there is the same limitation for the marketplace. And, as the client you still need to pre-fund the marketplace aka venue aka exchange. 

Once the client accounts are on a public-permissioned blockchain, all parties can take advantage of that holy trinity of digital assets. Back to that institutional client wanting to trade. Once it has some JPMD on a public chain, it could send a buy order to a marketplace, which in turn would use interoperability to earmark enough JPMD to cover the order and then try to execute. If the order is not filled, a quick kill instruction would lift the earmark, and the client can try its luck at another venue. Now exactly the same thing could be done with USDC or USDT; JPM is offering optionality. Programmability might be used for an escrow arrangement; when an order is placed, it enables funds to be earmarked, and then later transferred when pre-agreed conditions are met. 

In technical terms, there is still credit risk, but vis a vis JPM rather than one or more marketplaces. There is no liquidity risk; one pool of liquidity serving the marketplaces and settlement needs which have accounts at JPM. There is still some liquidity management to be done, balancing fiat needs and tokenised deposit needs, but life is easier. In the long run, the fiat part will become smaller and smaller. 

In terms of accounting and reporting, I don’t think there is any change here; today in fiat, or even Kinexys, JPM keeps track of client balances. With the advent of JPMD, JPM will still be accountable for things AML / CFT. That will force them to monitor the follows of their JPMD token between wallets. This is the same range of work as if they process a TradFi book-transfer between two JPM clients.

So clients have the ability to use the full range of new services on the public blockchain as long those they want to interact with also use JPM.

Now, somethings do not change. The issued JPMD is still a liability in JPM’s books and still has to be reflected in the liquidity calculations: LCR, NSFR. 

In conclusion

JPM has done our industry a service with this step. Public permissioned is an important step. 

I need to update my take on tokenised deposits:

Old: “Not useful outside the four walls of the place that issued them”.

New: “Useful inside the four walls of the issue or the private members’ only gardens controlled by the issuer”. 

There is hope for even more useful developments. In times past, I have spent many hours in the world of securities settlement, dividends and withholding tax reclaims. These are elongated, paper-based processes. In my days at Goldman Sachs in Zurich, we had to collect all the confirmations of net dividends received and withholding tax deducted, then fill out forms, then submit these to HMRC in the UK for a stamp that entitled Goldman Sachs Intl to reclaim 20 of the withheld 35% under the double tax treaty, and then submit the stamped forms to the Swiss Federal tax folk. Potentially that could be much simpler: HMRC issues Goldman Sachs International a token on a public chain validating their right to that refund. The Swiss tax folk can see the position, the gross dividend paid, and the HMRC token all in the same wallet. A smart contract can execute the repayment of 35% of the withholding to token-holding wallets without any manual review or effort. Outside the upfront smart contract work, there is no on-going admin. Governments could reduce headcount. Could - but whether they will or not is an entirely different matter.

Things JPMD all work really well as long as all those who want to play are JPM clients. Rather like Google with search, and to some extent Apple with the App Store, JPM is building an ecosystem which could give it monopoly power in the long-run. I am an Operations guy who has spent his career settling trades and making payments. The main ingredient has been the use of financial market infrastructure (FMIs) to do that. The idea that we would all have to use JPM does not sit well. 

My thanks to Mike Manning and Dani Heller for reviewing the draft and making some useful edits and observations.

Thanks for reading. Please do let me know what you think of these notes. Feedback via the comments would be great.

Author

Olaf Ransome is a liquidity and financial services expert. He is the founder of 3C Advisory  You can message Olaf directly here.