Blockchain breakthroughs: “You can’t innovate from afar”

[Music]

Sandy Kaul: You can't innovate from afar, you have to be able to innovate from within a system. And that's why I think it's so important that we are at this pivot point where we are starting to see players who really understand the regulations, looking at these new spaces and really putting some of the best minds in the industry toward how do we make this work in a way that could really open up this opportunity in a safe way that focuses with consumer protections and still allows for innovation.

Kate Finlayson: Hello and welcome to JPMorgan's Making Sense. I'm Kate Finlayson from the FICC Market Structure and Liquidity Strategy team. With the evolution of trading technology and the look at how regulatory frameworks need to be adapted to accommodate and move with this technological change, the use of blockchain and the tokenization of assets has become far more tangible for institutional investors. In today's episode, we'll be discussing the advancements made in the use of blockchain technology, just how much has changed, what is being done by industry participants that is actually credible, and what investors should be thinking about and preparing for at this stage in the market structure shift. To discuss these dynamics, I'm thrilled to have with me Sandy Kaul, Executive Vice President and Head of innovation at Franklin Templeton, and Scott Lucas, Head of Markets Digital Assets at JPMorgan. In addition to their day jobs leading the strategy and advancement of execution on the blockchain at their firms, Sandy and Scott were appointed by the CFTC as co-chairs of the CFTC's Digital Assets Subcommittee of the Global Markets Advisory Committee. And both are at the very forefront of this evolving space. So welcome to you both.

Sandy Kaul: Thank you so much for having us today.

Scott Lucas: Thanks, Kate.

Kate Finlayson: Sandy, Scott and I have done a number of these podcasts together over the years. We've spoken about how blockchain technology could transform how market participants interact. And for some in the industry, the progress made has felt a little bit of a slow burn, but actually a lot has been achieved and we're arguably at an inflection point. Franklin Templeton has been a pioneer in the movement of regulated assets on chain. What milestones stand out for you in terms of your firm's journey in leveraging this technology?

Sandy Kaul: Yes, thank you, Kate. We have had a a long journey with lots of lessons learned along the way. We began back in 2018 by putting our digital asset team together and began working with the Securities Exchange Commission here in the US in 2019, really to explore the operational potential of the blockchain. We were running our own transfer agent function, which is where you administer the shareholder record of different funds. And we had thousands of mutual funds inside Franklin Templeton and really wanted to explore whether blockchain technologies could really help in our operational efficiency. And so we decided to tokenize a money market fund because unlike some of our more actively managed funds, there's daily activity in a money market fund that a transfer agent needs to administer, and that would give us a real chance to test the blockchain. So we've launched that fund in April of 2021. So that was definitely a key milestone for us. We did a side-by-side pilot for the Securities Exchange Commission where we ran the traditional transfer agent on the mainframe based systems with our new blockchain based transfer agent. We did about a four month 50,000 transaction test case, and we really saw a tremendous savings and an increase in the accuracy of our blockchain based transfer agent, and that was when we really got the permission, and I believe we remain the only asset manager with the permission to run our products natively as digital native products on chain. So that simply means that there is no off chain shares of our money market fund. It is a digitally native token. From there, our big milestones have become launching on more blockchains. We are now running our system across 10 public and one private blockchain, launching a second version of our transfer agent in Luxembourg, and then most recently passing a billion dollars in assets under management in our tokenized money market fund. So those have been some of our great milestones.

Kate Finlayson: Wow, congratulations on that most recent one. That's incredible. Shows the real momentum there. Scott, from JPMorgan's perspective, many achievements spring to mind, from tokenization of intraday repo and the sheer volumes we see there, tokenization of money market funds in the use of collateral, and recently the US commercial paper issuance for Galaxy Digital Holdings on Solana, and we had Franklin Templeton purchasing the securities alongside Coinbase. So this marked the first debt issuance on Solana and one of the earliest debt issuances ever executed on a public blockchain. Scott, what do some of these achievements represent when it comes to industry progress and readiness?

Scott Lucas: I think the underpinning reason we can start exploring that space when it comes to readiness is that the change in tone in regulation over the last sort of four and a half quarters, really led by the United States, that opened the door for a bit more activity to really move towards a wider set of opportunities on blockchain. So previously, banks were pretty much constrained to private. There were other bits of the market that could use public. And actually you really want a cohesive architecture of financial market participants operating in this space, you need to have the full spectrum available to all. So I think that's a really good tone change. As a result of that, we can get a bit more operationally ready to service that. So how do we interact with public blockchain? What does a securities wallet or a cash wallet or a crypto wallet look like in a custodian? We need to understand that and how do we operationalize that, and bring all that data and security and risk management process in into our own reporting. That's key to understand that in more detail and we're really working through that. There's also that tone changer enabled a bit more of a client voice in this conversation. And when we think about it, it's very retail driven to start with, but it is moving up through the stack. And I would say that Franklin Templeton is as ready as any large asset manager to operate in the space, and they've demonstrated that through purchasing the asset in December. But there's a lot of work to do around a bunch of other types of funds in the asset manager, asset owner space, in the hedge fund space, and even private wealth and and high net worths that aren't as ready or as agile as retail yet. So that change of tone provides the reason to get ready. So there's some stuff around actually executing in the market because the opportunity now exists and the operational readiness is starting to be delivered, but the client demand then starts to surface. And without that client demand, actually it's really hard to execute because you can provide as much supply as you want, but you don't see that demand side until those conditions are met. So that's, that's really what we've started to observe and that upward growth from retail through high net worth hedge funds and asset managers at a general trajectory. But there are lot of examples like Franklin Templeton and a few others that can start to execute at a more sophisticated high-level institutional scale. So that's really kind of what that enables the industry to do, and, from our perspective, it's about getting ready to service our clients that way. Doing all of those things.

Kate Finlayson: Makes good sense that where we have that client demand, that allows us to expand when it comes to blockchain. But there has been this investment required in the technology and resource dedication, and clearly we're beyond the stage now of experimenting and, and, and actually now physically introducing a lot of efficiencies that are materializing. From that investment spend perspective, what are the benefits you see from the advancement of this technology that makes the return on investment worthwhile?

Sandy Kaul: Yeah, so, you know, I think that to Scott's point, a lot of the more institutional use cases are just developing because we really, if you think about it, have had to build a institutional quality liquidity layer on top of this whole ecosystem, right? Crypto, for the most part, operates as a self-funded system, a pre-funded system, and that is often capital inefficient for large institutions. And so building out this interoperability between cash-like vehicles like stablecoins, gold-bearing instruments like money market funds, creating new services on chain that are going to allow for more capital efficiency like your intraday repo, and then being able to bring in more typical financing products like the commercial paper, all of this is really creating that, we call it the universal liquidity layer, on top of which we're gonna really build the institutional business. And I'd say that we're probably only about 50 to 60% through the full buildout of that layer. And I think you'll see tremendous progress there in the coming year. But then it unlocks a lot of new benefits, right? So I'll just use our tokenized money market fund as an example. Because it is a digitally native product, we compile our books and records second by second throughout the trading day. So every time a block settles on a blockchain, we're able to update the shareholder record in terms of ownership. That real-time view of share ownership allows us to now calculate and divide a trading day into a 24 hour period. And so if Scott owns one of our money market funds at the start of the trading day and sells it halfway through the day, he's still going to get half the interest for that day. That's just not possible in today's system because we're really doing our books and records on trade date plus one. So that's a tangible improvement in the way that a simple bog-standard money market fund can operate. We can also pay out yield daily because we're paying out the yield on our money market fund in an incremental new issuance of tokens. And so every day, you get your yield dropped into your wallet and you see that money become immediately available. Whereas in a traditional money market fund, you really need to see that daily yield accumulate and get paid out only monthly. So these are tangible improvements in the way that this new liquidity layer will be able to work, and it really opens up new use cases for institutions.

Kate Finlayson: Interesting. Scott, from our perspective?

Scott Lucas: No, I completely agree with that. I think we're at the point where, you know, whether it be the money fund, you can do a higher turnover, you see a yield faster. Whereas in [inaudible 00:11:00], I can do the same trade but I can do with more precision and a shorter tenor, or even in the debt markets at the short end that people are focused on. I think we're starting to see that this is additive to the existing market in some ways. And capital markets have always done this. The outcome is not about, oh, great we can use blockchain. The outcome is about now we have a wider deeper set of capital market opportunities that actually enable growth in the broader economy. What that really means though is you've gotta time your investment appropriately and I think there's been a lot of exploration, a lot of R&D over a number of years. We're getting to that point now where we can start to see return on investment, and then that return on investment builds the case for the next set of developments. So I think we're kind of in the flywheel now. There's a debate around how long that will take and the only people that know that will be the people at the end of the journey. You'll say it took however long, but there's a realization that any investment's no longer for a proof of concept here or a headline there. It's actually about building something that is generative for the broader market.

Kate Finlayson: Sure. Are there certain asset classes that lend themselves well for this form of technology or, or are there certain asset classes that perhaps show promise that we haven't yet tapped that you think are interesting?

Sandy Kaul: Yeah, we're seeing, I think, some very interesting use cases beginning to emerge. What's interesting is the tokenization focus has mostly been on the equity side, but a lot of the new product launches and a lot of the demand that we're seeing is really in the credit space, and a lot of it is coming from these new types of credit products that are really looking to blend public and private credit and bring it to market with a target yield, right? So I think that, you know, we're seeing interest for yield, yield plus, yield max type products that are really going to be able to be available within the crypto ecosystem. Because to Scott's earlier point, a lot of the demand right now is still coming from retail. And where you're seeing that retail interest, a lot of those individuals have racked up pretty significant profits to their crypto. We're seeing the crypto markets themselves in a period of pullback and so they're looking for other products that they can take risk on that's gonna provide them yield and income. So I think that's a big trend that we're seeing now. Interesting products, home equity lines of credit, private credit, a mix of private and public credit structured credits. These are all coming to market I think very quickly. Then you're getting the whole traditional investment layer. So ETFs, tokenized equities, all of this is coming. So I always kind of think of it as the more structured part of the market, the more liquid part of the market. And then you know, I think a lot of people are really thinking hard about how to bring some of the more illiquid, private aspects of the market on chain. I actually think that's gonna be a little bit of a harder lift than people anticipate, because you do create this liquidity mismatch and we've seen many times in the past we do not want liquidity mismatches in the marketplace. So I think you will actually see private assets where there's a lot of opportunity long term, but I think that will take a little bit longer of a marketplace to develop. It's gonna be in these yielding and these highly liquid products that I think you see a lot of interest early on.

Kate Finlayson: Interesting. Thank you, Sandy. Could we talk a little bit about the convergence of traditional finance and decentralized finance, and the gap between these ecosystems, how that is being bridged? How would you see that manifesting?

Sandy Kaul: Yeah, so we're at a very interesting bridge stage right now, and that's really how I look at it, is we are seeing a lot of real assets. So equities, bonds, private funds, et cetera being put into all these types of strategies we just spoke about, they are being put into these types of arrangements where the fund itself is owned by a single owner, typically an exchange or a issuer. And that that issuer then puts it into an SPV or another vehicle and they issue tokens on top of the SPV that give ownership to the SPV and pass through the return streams of the interior assets. Think of this as almost a synthetic exposure, and those tokens are able to circulate freely in the crypto ecosystem and be used as collateral, be used as inputs into the DeFi lending pools and into some of the DeFi financing models. And so that's a, a real new phenomena that we've been seeing probably just over the last six months or so. And it's interesting 'cause it's bringing traditional assets into DeFi but in a way that is still not, in our view, regulatorily compliant because there's still no owner. Once these assets go into these DeFi pools, the owner of the assets is really listed as null, which is not workable for us in the regulated space. But what's interesting is it's starting to create the bridge, right? And it's easier to design a solution from a system that you're participating in rather than trying to design a solution from arm's length. And so I think that these developments are very important because it allows us to get inside the smart contracts. It allows us to get inside the market dynamics of these DeFi pools. And I fully expect that that will enable us to really come up with an adequate regulated solution that really opens up these models for JPMorgan, for Franklin Templeton, for other institutional players who really would love to be able to take advantage of the liquidity that's building there, the speed, the transferability, the velocity of those pools. These are very attractive, but we need to find a way to get into them in a way that really meets the high standards of our organizations, and I think that experimentation is now starting.

Kate Finlayson: Yeah. Scott, from JPMorgan's perspective?

Scott Lucas: The physical evidence is when you look at the people, whether you go to a, you know, an event that's sort of focused on finance in the blockchain space today, there's a lot of banks, asset managers, what would Google think from a traditional finance background at that event? But I'd say a couple of things. I think there's starting to be an understanding from a lot of the sort of newer entrants in this space that actually rulemaking takes time and GENUIS Act came out last year but it's still not turned into actual regulation. It'll be a little while to get there. There is a, you know, a natural sort of friction in potential areas of how things operate between new rules and old rules. So the fact that we're starting to have those conversations suggests there is that sort of overlap occurring, which is good, but there's a lot that can be done now anyway.

Sandy Kaul: And if I could just add to what Scott said, I think that our experience at Franklin Templeton, having worked with multiple sets of regulators over all these years, is the more you can demonstrate how they can fix the system, the easier it is for them to then embrace these changes that we need. So this is why this experimentation is so important, right? You can't innovate from afar, you have to be able to innovate from within a system. And that's why I think it's so important that we are at this pivot point where we are starting to see players who really understand the regulations, looking at these new spaces, and really putting some of the best minds in the industry toward how do we make this work in a way that can really open up this opportunity in a safe way that focuses with consumer protections and still allows for innovation.

Kate Finlayson: Yeah, absolutely. We see the development of these regulatory frameworks and moving with that obviously drives a lot of momentum or certainly further momentum. Something that I would like us to revisit is this concept of interoperability, as at JPMorgan we have our own chain, Kinexys, and Deposit Token, and Sandy at Franklin Templeton has its own infrastructure as well as its token Benji. So with the existence of multiple deposit tokens and stablecoins, what do you think this ultimately means for the market long term, and how does one address issues of interoperability between different blockchains?

Scott Lucas: There's so much advancement in the sort of technical interoperability capability across the market that I think we'll start to see mobility in a different way over time. Now, whether that's through ways to mobilize assets from one layer to to another, whether it's a layer two that sits across multiple, like I don't really mind. Like there's ones and zeros that technology folks will put 'em in the right order and solve the the engineering problem. I have real confidence in that 'cause there are a lot of technology people spending (laughs) a lot of time working on this thing and we see that with the prevalence of, of new blockchains. I think when it comes to sort of the rules, simple things like I'm confident that I've got finality of settlement, that that number on the screen is my number and I own that number. And the legal certainty of that, like that bit will take a little bit longer. But the good news is, again, that trajectory is in flight. And so the market is good at figuring these things out. So I'm not worried about the technical stuff, I think they'll get resolved. I think some of the certainty and conviction around the legal status might take a bit longer 'cause that's a bit more subjective. But at some point, it's just gonna be another form of cash. So whether I settle my securities purchase with fiat cash, stablecoin, deposit token, maybe a money fund if it's recognized as settlement mechanism, wholesale CDBC in some jurisdictions, like it doesn't really matter as long as I can settle it. Then the question will be functionally, well, which choice do I make and how do I do that? Well, custodians do a lot of this stuff on the securities now anyway. You can give them a schedule, you can give them an sort of allocation preference. They run their own process to pick out the cheapest delivery or the right security in a specific scenario. Well, okay, they'll have to learn how to do that on the cash side. And there's some interesting dynamics that might surface there. But I think all of these things are solvable problems. We like to put up a lot of hurdles to progress 'cause we're human beings and, and I think if we treat those hurdles as ways to think through the problem to get to yes, then fine. I kind of think we're starting to get that space. Challenging, but not impossible, and I think we're on the path.

Kate Finlayson: Sandy, in terms of future state, will we see a real shift in books and records so that it's all on blockchain, or perhaps an ecosystem where we have both alongside?

Sandy Kaul: Yeah, for a while, we're going to have both, right? I think that's inevitable, because we have spent 50 years investing in the infrastructure that we all operate on today and, and we're not going to be able to just simply get off that infrastructure, right? Many of us are still running mainframes from the '90s (laughs)-

Kate Finlayson: (laughs).

Sandy Kaul: ... so we're not even off that infrastructure yet. But I do believe that an increasing proportion of the business that we do going forward is going to shift into these new rails. And that's for a couple reasons, right? Number one, because it is easier for counterparties to both be looking at the same record and being able to agree upon trade details when everyone is looking at the same information. So if one system lists my name as Sandy Kaul and one system lists my name as Sandra Kaul in a different organization, my trade record might not match, right? But if we're both looking at the same record, that becomes a lot easier. It removes a lot of operational friction. I also think that we have instruments now, these token wrappers that we are able to bring and put assets inside of are programmable. We've never had a programmable fund wrapper, right? And that is going to really change the game because a lot of the operational functions that we need to perform, once we program those wrappers and put those contracts inside the assets, they become self-executing. It's kind of automation on an industry-wide scale. And I think that too is gonna be a very powerful vision that draws people more and more towards the blockchains. And then I think the final one is going to be the immediacy, right? Scott was saying, "I need to know that that print is, the print that I'm actually getting," and the speed with which the blockchain system is going to be able to operate is going to give people a lot more certainty a lot more quickly, which means that a lot of the collateral that we tie up in the system today to cover operational risks is going to be freed up and that becomes more investment capital or more capital to really upgrade your technology and your capabilities. So I do believe that increasingly, we're going to see more and more of our future business move on to blockchain rails, and the majority of business will be on blockchain probably within the next 10 to 15 years. Just like we still have mainframes today, but most firms do the majority of their business on the cloud. That was a transition that we've already lived through. This move to blockchain will be the next

Kate Finlayson: Sandy, as institutional investors are thinking about how they can engage in this space and actually what existing infrastructure can be leveraged to access blockchain technology, where do they start?

Sandy Kaul: Yeah, everything starts with education, right? First, you really need to understand why this is such an advancement in technology. And you need to understand how it's going to operate so that you get comfortable that you're going to be safe and regulatorily compliant operating in the space. But we are seeing now people getting beyond that education stage and really looking to get advice, right? We have moved firmly, within my organization, from education to advice at this point, and we are helping people think through, who are the technology providers? How do they compare to one another? What are some of the concerns you might have? Where might we be able to externalize and utilize capabilities that we've developed? Where might JPMorgan be able to externalize and offer capabilities they've developed? The nice thing about these technologies is that they have been architected in such a way that it is possible to move quickly in this space. And I think you will see more and more organizations really beginning the infrastructure build that they need, because the most important evolution we need to enable this new system that we've been talking about today is the deployment of wallets into our financial architecture. We're moving away from this account-based world to a wallet-based world, and that is really going to be the most important first step.

Scott Lucas: If I could just add one more thing to where Sandy finished there. I think from an institutional investor standpoint, you know, the reason FT have gone from experimentation to advice is 'cause they've done something and the condition is set. Now, the only way you learn and the only way you understand what it means for your institution and the only way you can engaged in this is to actually take risk. Because unless you're taking risk, you don't really care about some of the unhappy paths and the legal documents that you need to make sure that are in the right conditions for you, et cetera. So do something, get involved. There's lots of activity out there to be done at a sort of a fund level or smaller level that you can really engage on, and that sort of opens the door. I think follow names like Franklin Templeton and the example they've set on the buy side to say like this is possible and this has got value. And that's the sort of thing that I think we're starting to also JPMorgan. But do something is the main story, I think, and that's is now eminently possible to do that.

Kate Finlayson: That's a great point, Scott. Thank you. Clearly, there's a lot for institutional investors, asset managers, firms looking at the space to think about and, and prioritize. We've covered quite a bit in this discussion, from the operational potential of blockchain, the savings and benefits to be gleaned from the investment there, where we might see more examples manifest, as well as the one point you made, Sandy, which is you can't innovate from afar. So get involved. Great to have you both with me to discuss these developments today. Thank you so much for your thoughts, Sandy and Scott.

Sandy Kaul: Great. Thank you guys so much for having me. What a fun conversation.

Scott Lucas: Thanks, Kate. Until next time.

Voiceover: Thanks for listening to JPMorgan's Making Sense. If you've enjoyed this conversation, share your feedback by leaving a comment or review wherever you listen to podcasts. And be sure to follow our channel so you don't miss an episode. The views expressed in this podcast may not necessarily reflect the views of JPMorganChase & Co and its affiliates, together JPMorgan and do not constitute research or recommendation advice or an offer or a solicitation to buy or sell any security or financial instrument. They are not issued by research but are a solicitation under CFTC Rule 1.71. Referenced products and services in this podcast may not be suitable for you and may not be available in all jurisdictions. JPMorgan may make markets and trade as principle in securities and other asset classes and financial products that may have been discussed. The FICC Market structure publications, or to one newsletters mentioned in this podcast are available for JPMorgan clients. Please contact your JPMorgan sales representative should you wish to receive them. For additional disclaimers and regulatory disclosures, please visit www.jpmorgan.com/disclosures. Copyright 2026 JPMorganChase & Co. All rights reserved.

[End of episode]