Convergence in motion: Inside the institutional blockchain shift

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Emma Landriault: Hello, and welcome to J.P. Morgan's Making Sense. I'm Emma Landriault, head of Labs at Kinexys, which is J.P. Morgan's blockchain business, where I look after our public blockchain efforts. Traditional finance and the public blockchain ecosystem are converging like never before. In today's episode, we'll be exploring what's driving this convergence, where the current infrastructure falls short for the biggest players, and where the industry is headed next. And to discuss these dynamics, I'm joined by Ollie Harris, head of Kinexys.

Oliver Harris: Thanks, Emma. It's great to be here.

Emma Landriault: We're happy to have you. So, Ollie, obviously there has been a ton of movement in the blockchain space recently. Traditional finance is making serious investments alongside the crypto-native firms, and the crypto-native firms are doing their best to build for institutional liquidity. What is actually happening in this space from your seat?

Oliver Harris: Yeah, I would say this time around, the convergence isn't driven by hype. You know, crypto prices have been roughly flat for a long time. The previous cycles were all about the asset, and now this time it's about the rails, not speculative. And you can see this across a range of different businesses and commercial opportunities as this convergence grows. Whether it's BlackRock, Franklin Templeton, [HC(U1] [LU2] or even our own J.P. Morgan Asset Management tokenizing funds, not for experimentation, but for operational alpha and distribution. And I think what's super interesting these days is the convergence of digital money, tokenized real world assets, and crypto assets all on the same rails.

Emma Landriault: It's very interesting because I think in the previous cycle, you know better than I do, we've always focused on solve a problem. Use blockchain where there's opacity or where you need consensus-driven transparency in a value chain. But this seems different. There's so much more focus on going where the distribution is, where the other assets are, and where you can get yield. How are you seeing that difference?

Oliver Harris: Yeah, this time around, there's an interplay of the technology is now enterprise-grade and fit for purpose. There's increasing regulatory clarity. Whether that's MiCa in the EU, GENIUS in the US, and in Singapore and other jurisdictions, continue to get increasing regulatory clarity. So this time around, there's real market structure change and the plumbing is being refactored across payments, settlements, collateral, fund servicing, you name it. And it's boring on purpose and boring is what scales.

Emma Landriault: Absolutely, and as we think about this, one of the things that I've noticed is that you're almost seeing this mirroring of traditional markets on the public blockchain ecosystem. So we're seeing more traditional assets getting issued. You have crypto prime brokers. I've even heard of a firm who's looking at creating structured products, others who are doing collateralized lending. All of these things are really starting to build an ecosystem on the public blockchains that our institutional clients seem to want into. So how are you thinking about the approaches that hold up at scale, that are actually fit for institutions?

Oliver Harris: Yeah, we're definitely seeing the convergence and the blurring between traditional financial services and the Web3 crypto native world. I would say when you think about the key design requirements and what's needed to scale this convergence is three things from my perspective. It's compliance, privacy, and finality. And solving those three points is going to be incredibly key as you think about accelerating the adoption of these new emerging rails.

Emma Landriault: So for institutional users, compliance, so ensuring they're meeting AML obligations, KYC obligations, sanction obligations, finality, both legal finality and a new thing to navigate in this world, technical finality, right? And privacy are three really key drivers for any infrastructure decisions. Let's dive a little bit deeper into those.

Oliver Harris: Yeah, exactly. So I would say historically, public blockchains were radically transparent by design. And until recently, there were some trade-offs between compliance, privacy, and finality. And this also led to a lot of fragmentation, both within the private permission world, but also on public blockchains. There are lots of blockchain islands with different use cases and different actors, which created a significant amount of fragmented liquidity, which we need to overcome. So I would say from my perspective now, as we think about these emerging networks that are being created, they are working to solve those three points around compliance, privacy, and finality, as you rightly mentioned, both legally, technically, and from an operational perspective. And ultimately, our view is solving those three dimensions will lead to interoperability between networks and actually foster the adoption and unlock the commercial value from this technology.

Emma Landriault: So do you think interoperability solves the public blockchain trilemma?

Oliver Harris: I do, but I also feel there's a middle ground. And that middle ground is where the institutional market is already converging. And the point here is that it's not a dichotomy between public blockchains or private permissioned blockchains. My view is we're going to end up with permissioned access on public-grade infrastructure. We're actually going to see privacy enabled on public networks, which is going to enable compliant businesses to be built on these emerging infrastructures. And that will enable the reach, the neutrality, and the shared liquidity to actually unlock the network effects that we've been discussing for nearly 10 years now.

Emma Landriault: And do you think that that privacy will always stay as a settlement layer above these chains? Or do you think that you're also potentially going to see more privacy or controls built in into the programmable layer at the asset? How do you think about that?

Oliver Harris: Yeah, I think there's going to be a variety of different privacy solutions. And it's an area that we're spending a lot of time on in investing resources, because I think you're going to see different solutions for different use cases, whether that's privacy at the protocol layer or at the asset layer itself. And again, it will depend on the specific use case so that institutions can participate without compromising their fiduciary or regulatory obligations. And obviously, most importantly, not revealing their competitive strategies either.

Emma Landriault: Absolutely. You don't want to be leaving a strategic footprint, right, by facing counterparties. I couldn't agree more. And speaking of where institutions are actually adopting this, I wanted to talk to you a little bit about digital money. Stablecoins are getting so much attention right now. I feel like every day, I'm opening up a newsfeed or a press release that has some news about stablecoins or infrastructure for stablecoins. Especially with the Genius Act and Clarity in the U.S., the regulatory landscape is supporting this momentum. Kinexys has chosen to operate with a deposit token. For our audience, what's the difference? Why does it matter? And why do we feel like that was the best suited for our institutional clients?

Oliver Harris: I would say one of the most exciting things when I rejoined J.P. Morgan is obviously J.P. Morgan being the only GSIB with a deposit token on a public chain with JPM coin. And again, having that ability to service both digital payments in an account-based format with blockchain deposits, as well as JPM coin in a token-based model is fantastic. And I would say from a stablecoin perspective, they look similar on a screen, but they are fundamentally different in what backs them legally. So with deposit tokens, of course they're a deposit claim on a regulated bank. They are both a payment and store of value. And they carry the full weight of banking supervision with the insurance eligibility where applicable, and obviously the credit quality of the issuer. Whereas stablecoins are distinctly regulated. And if under Genius, they are liabilities of a qualified non-bank or bank subsidiary backed by reserve assets. So I think my view is they both serve different purposes and different use cases, and they have different credit and redemption risk profiles. And to date, we've obviously seen stablecoins in the global cross-border and retail use cases, and deposit tokens from an institutional, wholesale and capital markets perspective. So yes, I would say they're complementary and not substitutes.

Emma Landriault: And do you think they appeal to the institutional and capital markets players because of that fact that they are a deposit from a balance sheet certainty perspective? Or do you think that some of that will be lost to tokenized money market funds and stablecoins as it continues to evolve?

Oliver Harris: I'd say my view, if you look at the market structure on like a five, 10 year forward is all three products are going to coexist for different use cases and for different actors. And that's a part of the convergence that we're looking at is as we move towards shared rails and the interplay of these three products, we obviously need to be serving client needs across those different dimensions. So I definitely see them as complementary and not substitutes. But I do feel there are benefits, especially from a wholesale and capital markets perspective from having the ability to on off ramp between deposits. Part of the work we're doing here at Kinexys is thinking about that seamless operating model as you move between your traditional account based world that finances today and into the instrument based token future that we're moving into with digital assets.

Emma Landriault: I actually think that part is key because I've spent time thinking about this and talking a lot to our client base about this. And one of the things that I hear a lot is like, if you bring high value, significant liquidity into the space, you have treasurers behind that who are managing that liquidity and they still have end of day treasury operations, right? Whether it's notional pooling sweeps or they have certain ratios of capital that they can even hold in deposit base with J.P. Morgan, they then need to lend to repo markets. And all of that stuff is out of account. That's not going to change. So in order to actually get convergence, that point that you hit on is key. Okay, digital money has its digital money use cases, but the probably number one thing that I've been hearing from our clients is interest in the RWA space. So for those who, the uninitiated, right? The RWA space is real world assets. So what this refers to are assets that are current assets that exist in the real world and tend to sit in institutional custody, but then get issued in the form of a token on a public chain. We've seen a huge growth and enormous momentum around this space, but there's a lot that are, you know, first either in pilots or there are single issuance and not continuing to grow in use. So what are your views on the real world asset spaces? What asset classes do you think are moving the fastest and where do you think the industry needs to go to mature to actually reach the benchmarks it's aspiring to?

Oliver Harris: Yeah, if we think of the continuum of all the different asset classes plotted on liquidity, we've obviously been in this game, many of us for now, nearly 10 years. And I would say, given historically the technology was maturing in parallel with the legal evolution and our experimentation at the app layer, it was unclear where we would be seeing adoption. Today, quite clearly it's all on the HQLA side, the high quality liquid assets and where there's already two-sided marketplaces and liquidity. So again, to your point, Emma, around these one-off proof of concepts or areas that have not scaled to date like private credit or real estate, there's been a lot of issues in those areas because it's not just about the technology, it's more about the market structure and is it ready? And obviously that's led to MMFs or money market funds and short duration treasuries, relatively simple products where you can actually get genuine use through the collateral mobility use cases. And so that's where we see adoption, I would say both within the private permissioned businesses that we operate at Kinexys, but also in the public blockchain world too.

Emma Landriault: And do you think there'll be more growth in this space when from an operational and a market structure perspective, we can start tokenizing longer term or e-liquid assets?

Oliver Harris: Definitely, I think over time, if the nexus today is on the high quality liquid assets where there's already liquidity, I do think over time, you're going to come up the curve towards more liquid products. And I do believe ultimately that the majority of asset classes will be digitized onto a blockchain in some formal fashion, whether it's to service institutional use cases or retail use cases.

Emma Landriault: Absolutely, hopefully the incentives will align soon enough to bring some of those assets into the ecosystem because I think it actually also replicates what our traditional treasurers are doing today, right? Their MMFs are a subset, but there's significant value when you can bring those e-liquid assets. And I think part of the assumption is that that will help bring liquidity into the space. So as you think about the J.P. Morgan ecosystem, everything from payments and markets to security services, do you have a view that blockchain is actually going to help connect those pieces, change what's possible to bring to our clients? And how do you think our audience should be thinking about preparing for the next few years of innovation?

Oliver Harris: Ultimately, what we're doing is we're putting cash and assets on compatible rails and we're collapsing siloed value chains into networks so that cash and assets can move together real-time atomically. And there's a ton of benefits that we're seeing live in production with the businesses we operate today around delivery versus payment with no settlement gaps, 24-7 payments and movement of assets, programmability overlaid on top of the 24 nature of this new world we're entering, where we're reducing settlement times, but we're also importantly reducing settlement, counterparty and operational risk. Where you can actually think through, again, depending on where you're sitting, you can have collateral mobilized in minutes and not days and liquidity at an instant. So we're moving to this world where there's going to be a single motion end-to-end between cash and assets, which will unlock new value for clients across different businesses within financial services and beyond.

Emma Landriault: It's such an exciting time. And I think the key word for those listening is atomicity, right? This idea that assets and cash will move simultaneously and instantly because that will reduce, if not completely remove counterparty risk. And when you can apply that across the value chain, the opportunities are endless. So Ollie, final question for you today before wrapping up our episode. For somebody who's a decision maker at one of the large institutions who's still thinking about how blockchain fits into their strategy, how would you respond to them?

Oliver Harris: I would respond saying, look, it's no longer a technology bet. It's an infrastructure transition. So I would prepare by picking what's an actual real world pain that you're facing today in your life at work. And I'd get into that real pain point and think about it end-to-end. For example, on the Kinexys side, when we were working with our clients on the corporate payment side, we saw that corporate treasurers typically only have, let's say four hours between cutoff periods and are looking to unlock working capital. And that's where we created our account-based blockchain deposit accounts, which unlock 24 seven programmable rails to solve their actual real world pain points. So that would be my, put back onto the audience. And in addition to that, I would say, the risk of inaction is asymmetric. The downside of careful exploration is quite modest in my opinion, but arriving five years too late is existential to your relevance.

Emma Landriault: Couldn't agree more. Oli, thank you for joining us.

Oliver Harris: Thanks for having me, Emma.

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 [HC(U1]Need to confirm with L+C that these references are okay to leave in

 [LU2]Ok with these references (their tokenized funds are all public)