Just a couple of years ago, it was virtually unthinkable that a Wall Street titan like JPMorgan would embrace crypto, but the recent arrival of the bank’s tokenized deposits on Coinbase’s layer-2 blockchain Base is evidence that the world’s biggest banks are ultimately heading towards exotic realms like decentralized finance (DeFi).

Last month’s move by the banking giant involves blockchain-based dollars — so-called JPM Coin (JPMD) —that, unlike traditional stablecoins, are digital claims on existing bank funds and can be interest-bearing (under the GENIUS Act, stablecoin issuers are not allowed to directly offer interest), offering a new option for institutional and retail investors alike.

A Wall Street giant suddenly jumping into the more obscure corners of crypto, such as DeFi via tokenized deposits, may seem audacious, but it's a move that has been in the works for a while and has a simpler logic: growing customer demand.

JPMorgan began offering blockchain deposit accounts to institutional customers in 2019 on a permissioned version of Ethereum (then called Onyx, now called Kinexys), before its recent embrace of Base, a public blockchain. This move from JPMorgan’s homespun private chain to Coinbase’s Base is simply driven by demand, according to Basak Toprak, Product Head, Deposit Tokens at JPMorgan’s Kinexys Digital Payments.

“Right now, the only cash or cash equivalent option available on public chains are stablecoins,” Toprak said in an interview. “There is a demand for making payments on public chains using a bank deposit product. We thought this was particularly important for institutional customers.”

JPMD hitting Base, a fast and inexpensive public Ethereum overlay blockchain, was received with breathless anticipation by some, pointing out that JPMorgan just linked its $10 trillion-per-day payments engine to the exchange.

But Toprak takes a sober view as far as use cases go.

“A payment is a payment,” she said. “Cash is used as collateral today in traditional finance, so it can be used as a collateral in the onchain world as well. There's nothing new about it.”

Beyond just meeting rising customer demand, there’s another, perhaps more cynical way of looking at banks’ embrace of crypto and crypto-adjacent products: banks are mounting a defense, staking out some onchain territory for their deposit-taking businesses in the face of a rapidly expanding stablecoin universe and growing investor adoption.

The parameters of the bank’s beachhead are clear: JPMD is a permissioned token that is only transferable between whitelisted parties, i.e. the clients that have been onboarded to the JPM Coin platform.

“Deposits are obviously the dominant form of money today in the traditional world, and we think very strongly that they should have their place in the onchain world as well,” Toprak said

As it turns out, it was the move many of JPMorgan's customers were looking for. As the accounts gradually move onchain, the bank has been fielding requests from many parties, Toprak said. For now, those interested parties are largely crypto companies and other digital asset ecosystem players.

“There are asset managers or broker-dealers who have a transaction relationship with Coinbase, for instance. They keep collateral at Coinbase, and they pay margins as well. These are the sorts of clients that are asking us about use cases,” she said.

Currently, some of this is being done either with stablecoins or via traditional, offchain bank accounts. These present different types of risk profiles or inefficiencies, Toprak said. Offchain bank accounts have cutoff time issues, while stablecoins present a different risk profile, especially for institutional customers who are perhaps just entering this space and are more comfortable with bank deposits.

“So that's the use case they are looking to adopt and use: JPM Coin as a means to either keep collateral or make margin payments for transactions related to their crypto purchases, for example,” Toprak said.

Cousin of stablecoins

Could JPMorgan’s offering of tokenized deposits to its large client base bring into direct, head-to-head competition with stablecoins? After all, both are likely to be used for a similar range of purposes, such as payments, which would include business-to-business institutional money flows, as well as settlement and collateral on trading venues.

The similarities are close enough that Coinbase’s Global Head of Wholesale, Brian Foster, called tokenized deposits the "cousin of stablecoins."

Foster remains neutral on tokenized deposits versus the proliferation of traditional stablecoins, save for flagging the obvious interoperability challenge facing an asset that is fixed within a bank.

“I'm not here to tell you that one is better than the other; the market's going to tell us that,” Foster said in an interview. “I think banks need to figure out: 'How do I export this? How do I get distribution for this new product outside of the four walls of my bank?’ No doubt, it is easy for a bank that has a huge distribution and client base to make a new thing that's useful within its own ecosystem. But I think that the journey that these banks are on now is going a step further to say, ‘How do I make this useful outside of my four walls’?”

Looking ahead, Foster sees a spectrum from offchain TradFi to areas like DeFi, and where banks are on this continuum depends on their comfort levels over time.

“We have infrastructure that's fully custodial, ring-fenced and very plain vanilla that is a great place to start,” Foster said. “From a trading perspective, we have things that are in the middle, that are a little bit intermediated, that can still give you access to DeFi. And then, of course, we have more non-custodial and fully onchain tools. So it's choose-your-own-adventure that kind of works for every client archetype on that spectrum.”

Controlling risk

However, the adoption of new technology for a bank as large as JPMorgan often raises a burning question: what about risk controls?

After all, just the fact that a systemically important bank is now openly interacting with a public blockchain is something to marvel at, especially since major institutions like the Bank for International Settlements (BIS) have repeatedly warned of the risks associated with the open crypto universe.

BIS declined to comment on this story.

JPMorgan's Toprak says she is regularly asked how the bank became comfortable deploying on a public blockchain.

“That is the work we've done over the past years. Of course, anything we deploy and launch, we make sure it goes through our internal governance, and it looks across all aspects of risks related to any new product,” she said.

“We showed to our internal teams that we can do this in a very controlled way, because we are controlling the smart contract. No one else is. We have keys stored in the right way. We have separation of roles. We are the sole controller of the token that we deployed and have the ability to move it from any address to another address,” Toprak said.

Furthermore, public blockchains have been in operation for multiple years and have demonstrated stability and safety, she said.

“This is not much different from using another technology layer to deploy your application. I think public chain infrastructure is where a lot of the innovation is, and where we're going to see a lot of the use cases being deployed," Toprak said. "That's where our customers will increasingly be, and that's where we want to go.”