JPMorgan's tokenized dollar on public blockchains reshapes Wall Street fund flows

Large financial institutions on Wall Street are actively adopting digital asset infrastructure based on public blockchains. JPMorgan’s deployment of tokenized dollar JPMD on Coinbase’s Base Layer 2 blockchain is a representative example, and this move goes beyond mere technological experimentation to a strategic choice responding to concrete business needs of institutional investors.

Institutional Investor Demand Drives Transition from Private Chains to Public Blockchains

JPMorgan has been preparing a blockchain-based payment system from the outset. In 2019, it launched Onyx (now Kinexys), a permissioned Ethereum-based private chain for institutional clients, which was an innovative attempt at the time. However, the situation has changed in recent years. Clients have increasingly requested payments and settlements within a public blockchain environment.

Basak Toprak, Head of Tokenized Deposits in JPMorgan’s Digital Payments division, explains this shift: “As clients expand their activities on-chain, we’ve received requests to follow suit. Especially institutional investors operating within the cryptocurrency ecosystem are seeking reliable payment methods based on bank deposits.”

Currently, the main means of payment available on public blockchains are mostly stablecoins. However, institutions wanted products with characteristics similar to traditional bank deposits, which became a core motivation for deploying JPMD.

JPM Coin Becomes the Bank Version of Stablecoins

JPMD differs from existing stablecoins in several key ways. First, it is a claim on JPMorgan’s actual bank assets and can generate interest. While traditional stablecoins are simply stores of value, JPMD maintains its nature as a banking product.

Additionally, JPMD operates in a fully controlled environment. It functions on Coinbase’s Base public blockchain but can only be transferred among approved parties listed on a whitelist. In other words, only institutional clients who have gone through JPMorgan’s onboarding process can transact.

Toprak emphasizes that this approach provides both security and transparency needed by institutional investors: “We control the smart contracts, and key management and role separation are clearly structured. We also have the ability to move tokens from one address to another.”

When Is Public Blockchain Payment Necessary?

There are emerging ways for institutional clients to specifically utilize JPMD. Notably, when using assets held at exchanges like Coinbase as collateral or for margin trading related to cryptocurrency purchases.

Currently, these transactions are conducted through traditional off-chain bank accounts or stablecoins. However, off-chain bank accounts have time constraints, and stablecoins present different risk profiles to institutional clients. Toprak explains, “Using JPMD allows us to maintain the stability of bank deposits while ensuring the immediacy of on-chain environments.”

Competition and Coexistence with Stablecoins

Does JPMorgan’s JPMD pose a direct threat to the stablecoin market? Brian Foster, Global Head of Coinbase’s Wholesale Division, describes “tokenized bank deposits as the cousin of stablecoins.” Both products can be used for on-chain payments, exchange settlement, and collateral.

However, Foster believes the market will decide which is superior rather than judging one over the other. “Banks now need to think beyond simply creating useful products within their own walls and consider how to distribute and expand these products outside their ecosystems.”

Foster views the future of on-chain finance as a spectrum. At one end are fully custodial banking products, and at the other are non-custodial on-chain tools like DeFi. “To enable customers to choose what they want, we aim to offer options across this entire spectrum for them to explore.”

JPMorgan’s Risk Management Strategy Alleviates Public Blockchain Concerns

It remains groundbreaking for large financial institutions like JPMorgan to officially venture into public blockchains, especially given repeated warnings from international financial organizations like the Bank for International Settlements (BIS) about the risks of blockchain-based systems.

JPMorgan’s reason for overcoming these concerns and deploying the system lies in thorough internal governance and risk management frameworks. Toprak states, “Everything we deploy goes through internal governance processes, and all associated risks are reviewed from multiple angles.”

Specifically, JPMorgan fully controls smart contracts, manages cryptographic keys strictly, and adheres to role separation principles. It also retains the authority to control token transfers as the sole administrator of the tokens it issues.

Toprak emphasizes that public blockchains have demonstrated stability over years of operation: “It’s not much different from deploying applications on other technological layers. Public blockchain infrastructure is a place of many innovations and where our clients are increasingly congregating.”

Ultimately, JPMorgan’s adoption of JPMD is not just a technological experiment. It reflects an acknowledgment of public blockchains as a fundamental infrastructure for traditional financial institutions and signifies that on-chain activity by institutional clients is now a necessity rather than an option. How this quiet transition prepared by Wall Street will reshape the financial ecosystem is still unfolding.