How JPMorgan is building the Internet of Money

If the name of JPMorgan’s digital assets and digital assets team, Onyx, sounds ambiguous, it’s by design.

“If someone says Onyx, you kind of know what it is, but you don’t really know what it is,” said Omar Farooq, CEO of Onyx by JPMorgan. “That’s how we landed on Onyx. It’s a color and a substance, which some people might say is black, but most people would say it’s sort of black.”

The group of 200 people, mostly developers, created a file Lounge in the virtual world Decentraland This one also has an air of mystery, with its tough lobby and a tiger walking back and forth representing the Chinese New Year.

says Omar Farooq, CEO of Onyx by JP Morgan.

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The team is building distributed ledger technology that reimagines many things a bank does for its customers, including deposits, cross-border payments, check processing and stock trading. The group has built a payment information network called Liink which is currently used by 75 banks. JPM Coin, taken by the bank as digital currency, has been developed to be a digital representation of the deposit account. Onyx technology is also used for tokenizing and trading assets.

Looking at how the largest US bank, with its $2.6 trillion in assets, deals with blockchain technology and digital assets, is to learn where other banks are likely to put their efforts in the coming years.

“To date, JPMorgan’s Onyx has pioneered the use of distributed ledger technology to move money and information around the world without the constraints of traditional payment rails,” said Sankar Krishnan, Executive Vice President of Capital Markets and Banking at Capgemini Americas.

Krishnan expects the other four of the five largest US banks to set up similar networks so they can compete with JPMorgan in B2B payments, securitization, guarantees and decentralized finance.

“Citi is moving quickly to respond to market opportunities and two European banks are watching closely,” he noted.

Vikas Shah, managing director of Rosenblatt Securities, sees JPMorgan as the industry leader.

“Their initiative is the oldest among all the banks and the most mature,” he said. “Other large banks such as Citi and Bank of America are also considering such initiatives, but they are not as advanced as JPMorgan.”

This could lead to significant cost savings for the bank, Shah said, assuming the technology can meet all regulatory and compliance requirements as well as handle throughput at speeds of hundreds of thousands of transactions per second.

He also noted the remarkable work being done by Shape, the fintech company he founded Mike Cagneythe former CEO of SoFi, who developed a Payment and settlement system used by more than ten community banks.

Everything on the blockchain

The Onyx Group is guided by the overarching belief that the movement of funds, assets and information will converge.

“We believe that having a platform where you can move value and assets seamlessly around the world is basically a new way of thinking about things and can have a very beneficial impact on how infrastructure works in the future,” said Farooq.

Farooq noted that today money and securities move in closed-loop ecosystems controlled by central parties: Money moves on Fedwire, ACH and Clearinghouse RTP rails. Securities move through clearing nets and dark ponds.

“By combining these two things, you can create new value propositions that didn’t exist before,” Farooq said. “Creating the Internet where you can transmit all of these things by standardizing technology and representing it as an icon is very exciting for us.”

He said this could allow a broker-dealer to borrow against securities for five minutes, while in current infrastructure it could take hours just to confirm the wire. This can help solve a short-term cash flow problem.

Because of its belief in the ultimate Internet concept of money and its accumulated experience with blockchain over the past seven years, the bank is no longer interested in conducting limited proof of concept with third parties.

“Senior management believes that if we want to have a real impact – and that has an opportunity to fundamentally restructure our financial services business, even if it’s been 20 years – then we need deep expertise in this area,” Farooq said. “That’s why our team went from two people seven years ago to now a few hundred people” who came from all over the bank.

“We want to make sure that if the world goes in that direction, we’re basically playing at the base level versus playing on the edges,” he said.

Farooq said JPMorgan is uniquely positioned to do this because of the amount of money it moves: about $10 trillion a day.

Onyx Digital Assets . platform

JPMorgan has been working on blockchain technology and digital assets for seven years. In March 2016, he showed Prototype From what he called a “distributed cipher” based on the open source Hyperledger project led by the Linux Foundation.

Later that year, it unveiled Quorum, a protocol layer for Ethereum developed under the leadership of Amber Baldet. The Quorum protocol is a private, licensed layer with baked in security, privacy, and performance elements. He left Baldet 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, launched in December 2020, builds on this earlier work.

“Think of our Onyx Digital Assets platform as a layer on top of ConsenSysQuorum,” Farooq said. The added layer supports encoding, swaps, and versioning. Moreover, there are specific applications such as daily repo and money market money token. To date, it has executed intraday repurchases worth over $320 billion.

The ability to tokenize money market funds, Farouk said, “may be more groundbreaking if it achieves scale.” This will allow major trading companies to spread margin more easily on derivatives trades.

One use case for Onyx digital assets that Farouk raises 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 required conditions required before the payment can be executed.

“Let’s say you’re an energy company and you want to move money based on the events that happen: the price of oil, shipping costs, temperature – for example, if you want to get more oil in Texas because it’s going to get very hot and power generation is going to be in demand – right now, There is no good way to automate all of this process,” Farouk said. “What happens is you have an army of people sitting in the energy company trying to improve the movement of money.” These rules can be written into a smart contract on a distributed ledger, triggered, and automatically executed.

The result could be faster transactions and an answer to a common liquidity problem for companies – the need to allocate excess liquidity reserves during periods of treasury team downtime, such as weekends, holidays and overnight stays.

Another use case of interest to Farooq is Project Guardian, a digital asset pilot program that uses tokenization in public blockchains announced by the Monetary Authority of Singapore in May. Tokenized bonds and deposits in an authorized liquidity pool will be used for transactions in which institutional investors will borrow and lend on the public blockchain. Regulated financial institutions will act as a “pillar of confidence,” starting with JP Morgan and DBS Bank.

“The reason why something like Project Guardian can be so transformative is that existing financial products like Treasuries and deposits will start to break out of authorized networks and take advantage of lessons learned from the public blockchain space,” Farooq said. “We could start seeing JPM or Treasury tokens on a public ecosystem like Ethereum or Polygon.”

Farooq said that JPM Coin is a deposit account, not a stablecoin. It is compatible with the current regulations for deposit products. Customers have used it to transfer funds worth $10.5 billion in transactions to date.

“Stablecoins are still a fairly unknown quantity in terms of what they really mean, especially in the US,” Farouk said. “There is no real equivalent out there. I think it may be capital inefficient given the need to hold 100% or even more of high quality liquid assets.”

In a year-old Onyx project called Liink, the team created a cross-border information exchange that has carried out more than 45 million messages so far. One running app for Liink, called Confirm, will provide cross-border verification of recipients of payments. This will not replace Swift messages, but 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 funds that serve corporate clients,” said Sushil Raja, global head of JPMorgan’s Link. “The key element of this ecosystem is that it is focused, so integrating with a small group of key players means significantly increasing efficiency across the system.”

Raja said the introduction of check processing on the Link network would allow banks to send check images to each other and help save costs and ESG fees for mailing physical checks.

The service is expected to start later this year.

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