If the name of JPMorgan’s blockchain and digital assets team, Onyx, sounds mysterious, it’s by design.
“If someone says Onyx, you know what it is, but you don’t really know what it is,” said Umar Farooq, CEO of Onyx by JPMorgan. “This is how we landed on Onyx. It’s a color and a material, some people would say it’s black, but most people would say it’s a little bit black.”
The group of 200 people, mostly developers, created a lounge in the virtual world Decentraland which also has an air of mystery, with its austere lobby and a pacing tiger representing Chinese New Year.
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The team is developing distributed ledger technology that reinvents many of the things the bank does for its customers, including deposits, cross-border payments, check processing and securities trading. The group has built a payment information network called Liink that is currently used by 75 banks. JPM Coin, the bank’s version of digital currency, has evolved to be a digital representation of a deposit account. Onyx technology is also used to tokenize and trade assets.
Watching how the largest bank in the US, with $2.6 trillion in assets, is approaching blockchain technology and digital assets is a glimpse of where other banks are likely to put their efforts in the coming years. .
“JP Morgan’s Onyx is today a clear leader in using distributed ledger technology to move money and information around the world without the limitations of traditional payment rails,” said Sankar Krishnan, executive vice president of capital markets and banking. from Capgemini Americas.
Krishnan expects the other four of the top five US banks to create similar networks so they can compete with JPMorgan in B2B payments, securitization, collateralization and decentralized finance.
“Citi is moving quickly to respond to the market opportunity and a couple of European banks are watching the space very closely,” he noted.
Vikas Shah, managing director of Rosenblatt Securities, also sees JPMorgan as a leader in this area.
“Your initiative is the oldest of all banks and the most mature,” he said. “Other big banks like Citi and Bank of America are also looking at these types of initiatives, but they are not as advanced as JPMorgan’s.”
It could lead to significant cost savings for the bank, assuming the technology can meet all regulatory and compliance mandates, as well as handle throughput as fast as hundreds of thousands of transactions per second, Shah said.
He also pointed to the remarkable work being done by Figure, the financial technology company founded by mike cagneythe former CEO of SoFi, who has developed a payment and settlement system used by more than a dozen community banks.
Everything on a blockchain
The Onyx group is guided by the general belief that the movement of money, assets and information will converge.
“We believe that having a platform where you can seamlessly move value and assets around the world is fundamentally a new way of thinking about things and can have a very significant impact on how future infrastructure works,” Farooq said.
Today, money and securities move in closed-loop ecosystems that are controlled by central parties, Farooq noted: Money moves on Fedwire, ACH and Clearinghouse RTP rails. Securities move through clearing networks and dark pools.
“By combining those two, you create new value propositions that never existed,” Farooq said. “Creating an Internet where all these things can be moved by unifying the technology and representing it as a token is very interesting for us.”
This could allow a broker to borrow against securities for five minutes, he said, whereas in the current infrastructure it could take hours to confirm the transfer. This could help solve a short-term cash flow problem.
Due to its belief in the concept of an eventual Internet of money and its accumulated experience in blockchain over the last seven years, the bank is no longer interested in doing limited proofs of concept with third parties.
“Senior management believes that if we want to have real impact, and this has the potential to fundamentally redesign our financial services work, even if it’s 20 years away, then we need to have a lot of experience in the space,” Farooq said. “And that’s why our team has gone from a couple of people seven years ago to a couple of hundred people now” who came from all over the bank.
“We want to make sure that if the world is going in this direction, we are fundamentally playing at the core level rather than playing at the edges,” he said.
JPMorgan is in a unique position for this job because of the amount of money it moves: some $10 trillion a day, Farooq said.
The Onyx Digital Asset Platform
JPMorgan has been working on blockchain and digital asset technology for seven years. In March 2016, he demonstrated a prototype of what he called a “distributed cryptobook” based on the open source Hyperledger Project run by the Linux Foundation.
Later that year, he introduced Quorum, a protocol layer for Ethereum developed under the leadership of amber baldet. The Quorum protocol is a private, permissioned layer with built-in security, privacy, and performance elements. Baldet left in 2018 and co-founded a software company called Clovyr. The bank sold its Quorum technology to ConsenSys in August 2020.
The Onyx Digital Assets platform, which launched in December 2020, builds on that earlier work.
“Think of our Onyx Digital Assets platform as a layer on top of ConsenSysQuorum,” said Farooq. The added layer supports tokenization, exchanges, and issuance. In addition to that, there are specific applications such as intraday repo and tokenization of money market funds. So far, it has executed intraday repo transactions for more than $320 billion in notional value.
The ability to tokenize money market funds “is likely to be more innovative if it reaches scale,” Farooq said. This would allow large trading companies to post margins more easily on derivatives trades.
One use case for Onyx Digital Assets that Farooq is excited about is smart money.
The bank worked with German manufacturer Siemens to test an automated treasury solution with programmable payments. This means that payments can be triggered by events, eliminating the need for human intervention to discover, calculate and confirm the necessary conditions before a payment can be executed.
“Say you’re an energy company and you want to move money based on events that happen: the price of oil, shipping costs, temperature; For example, if you want to bring more oil to Texas because it’s going to be very hot and power generation demand will increase; right now, there’s no good way to automate that whole process,” Farooq said. “What happens is you have an army of people sitting at the energy company trying to optimize the movement of money.” Such rules could be written into a smart contract on the distributed ledger and automatically activated and executed.
The result could be faster transactions and the answer to a common liquidity problem for businesses: the need to allocate excess liquidity reserves during periods of treasury team downtime, such as weekends, holidays and overnights. .
Another use case Farooq is interested in is Project Guardian, a digital asset pilot using tokenization on public blockchains that the Monetary Authority of Singapore announced in May. The tokenized bonds and deposits will be used in a licensed liquidity pool for transactions where institutional investors will borrow and lend on a public blockchain. Regulated financial institutions will act as “trust anchors”, starting with JP Morgan and DBS Bank.
“The reason something like Project Guardian could be very transformative is that existing financial products like Treasuries and deposits will start to move out of permissioned networks and use learnings from the public space of the blockchain.” Farooq said. “We could start to see JPM Coin or Treasuries tokenized in a public ecosystem like Ethereum or Polygon.”
JPM Coin is a deposit account, not a stablecoin, Farooq said. It complies with current regulations on deposit products. Customers have used it to move money in $10.5 billion worth of transactions to date.
“Stablecoins are still an unknown quantity in terms of what they really mean, especially in the US,” Farooq said. “There is no real equivalent out there. And I think they could be quite capital inefficient given the need to reserve 100% or even more with high-quality liquid assets.”
In a year-long Onyx project called Liink, the team has created a cross-border information exchange that has executed more than 45 million messages to date. An application in the works for Liink, called Confirm, would provide validation for cross-border payment recipients. This would not replace Swift’s messages, but rather complement them.
The team is also working on putting check processing on the Onyx blockchain.
“Hundreds of millions of checks are sent from banks to safe deposit boxes serving corporate clients,” said Sushil Raja, global head of Liink by JP Morgan. “A key element of this ecosystem is that it is concentrated, so integrating with a small group of key players means dramatically increasing efficiency across the entire system.”
Bringing check processing to the Liink network will allow banks to send check images to each other and help save the cost and ESG toll of sending physical checks through the mail, Raja said.
He expects the service to go live later this year.