Digital assets unveiled: Industry insights and regulatory shifts

[Music]

Tina Rathjen: Welcome to ‘Market Matters,’ our market series here on J.P. Morgan's Making Sense. I'm Tina Rathjen from the J.P. Morgan Security Services Regulatory Practice team. I'm based in Hong Kong. And with me today I have Kara Kennedy, our co-head of Kinexys at J.P. Morgan Edinburgh. Nice to have you with me today, Kara.

Kara: Thank you Tina, pleasure to be here.

Tina Rathjen: So today our plan is to explore the ever-evolving world around digital assets and blockchain technology, including some of the recent regulatory changes that are shaping the future of digital assets. And we will also cover what J.P. Morgan is doing in this space. But let me set the scene first by looking at some of the opportunities and challenges that we face when it comes to digital assets and distributed ledger technology. So it's quite interesting how financial technology and digital assets have developed over time. We've moved from dealing with physical assets like banknotes and certificates to using electronic formats that make the transfer of assets easier, and also the record-keeping faster. But even with these advancements, there may still be the requirement for separate ledgers and several intermediaries, and that could ultimately create manual work when it comes to reconciling everything. So traditionally our financial systems have been very centralized, in the sense that the control is in the hands of a few regulated entities. But now, through DLT, distributed ledger technology, this could move us more towards a decentralized finance or short DeFi. This permits the provision of these services without the need for such traditional intermediaries. So Kara, here's my question to you. What do you see as the primary benefits of DeFi, and how could that be applied in the context of our industry?

Kara Kennedy: I think that when we think about DeFi, it's important to focus on some of the core principles that we see in the on-chain ecosystem, which then could be relevant to how we think about a future vision for our financial market infrastructure. And really the piece that you picked up on around record-keeping and transaction systems, which are today centralized. And potentially could move to an ecosystem where they are operated and validated across multiple different entities, rather than within those single centralized organizations. And I think a key example of that would be thinking about how financial market infrastructure could be decentralized, whereby the participants that co-operate today within those infrastructures would not only have access to the system and the assets recorded on those systems, but are actively contributing to validation and processing of transactions. And thereby helping to reduce the risk of a single centralized operating system, which could go offline, helping to increase the resiliency of the system, and obviously creating opportunities for new commercial models as well. There are other factors things like transparency and the real-time availability of information such as transaction settlement status or history. And having that visibility into the validation mechanisms also provides a lot of the additional visibility which would then help to remove some of those additional workflows that you mentioned around reconciliation. And helps to make sure that all of the participants in the market are operating across the same information set that they can see at the same time. One of the other key areas that we see in the DeFi ecosystem is about the increased flexibility for participants to develop and construct their own systems and operating models using the programmability and flexibility of smart contracts. So having an infrastructure which enables participants to really develop their own solutions, and help create an environment where innovation can be accelerated and new products and innovations can come to market quickly.

Tina Rathjen: Thanks, Kara. Lots of opportunities but, of course, we cannot forget that there are also still some challenges, especially when we think around network participation and scalability. So for digital assets to be widely adopted, there needs to be a critical mass of clients in a single network, or across interoperable networks. So Kara, how can these challenges be tackled, and what else needs to be considered?

Kara Kennedy: Yeah. So I think the issue of interoperability between different ledger systems is critical. And it's important to recognize we're still at quite an early stage in the maturity of this technology, particularly as it applies to regulated financial services. We've seen already the movement of different organizations setting up their own private permissioned infrastructure. We at J.P. Morgan operate our own blockchain infrastructure within the Kinexys business. And others have done the same, within their entities to start to demonstrate some of the value of this within their own client and participant bases. In terms of thinking about interoperability going forward, we are seeing solutions developed from a technological perspective, so cross-chain interoperability. As well as interoperability, there's other challenges in relation to things like privacy, which goes hand in hand with the transparency of shared ledger technology. And naturally there will be some transactions where participants don't want the contents of those to be publicly visible. And there will need to be solutions put in place in order to protect some of the relevant content, and protect the sensitivity of that content whilst also enabling the benefits that come as part of the transparency in terms of validating those transactions.

Tina Rathjen: I know that digital identity was also part of Project EPIC, can you share a little bit more around that please?

Kara Kennedy: Digital identity and verification of who you're dealing with on-chain is obviously a key requirement, particularly for regulated financial institutions who are subject to high standards of anti-money laundering, and know your customer compliance obligations. So again, progress is being made here in terms of technical solutions, but adoption and standardization are going to be critical to address that, at scale. And I think that piece around being able to move in the on-chain ecosystem whilst maintaining compliance around existing regulatory frameworks is a really big area of focus, and it is one of the key areas where we're seeing the winds of change globally in this space at the moment. And I know that's an area that you focus on a lot, Tina, as well.

Tina Rathjen: Yes indeed, I do spend a lot of time on these type of regulations. In the last couple of years we've actually seen a lot of changes in the regulatory landscape for digital assets, and this shift is largely driven by the rapid growth and the adoption of cryptocurrencies, stable coins, tokenization, and other blockchain-based assets. So governments and regulatory bodies around the world are trying to set clear guidelines and also frameworks to govern the use of digital assets. And they're looking to address concerns around, like you say, money laundering, fraud, and consumer protection, but also around the capital treatment of digital assets, and the licensing and registration requirements for service providers of digital assets, and these are just to name a few. Efforts to develop global regulations across jurisdictions continue. And it's not just international organizations like IOSCO, the Basel Committee, and FSB that have issues guidelines to standardize regulatory approaches, but we have a good example when we look at Europe. And that's where we have MiCA, Europe's Markets in Crypto-Assets regulation, which is ultimately working towards unified regulatory framework within the EU. Another thing that we have observed over the last few years is that there has been the creation of regulatory sandboxes in various jurisdictions. So these sandboxes allow companies to test new digital asset products and services in a kind of controlled environment with regulatory oversight as well. We have also seen those kind of sandboxes that facilitate cross-border collaboration, so between policymakers and the industry. And some good examples here would be in Hong Kong Project Ensemble or in Singapore Project Guardian. And it would be fair to say that many of these sandboxes have focused on tokenization in the past, which is the digital representation of existing traditional assets on a blockchain. But now there's a growing interest or trend towards other digital assets as well. And I would say that probably stablecoins in particular have caught regulators’ attention recently because of their potential impact on financial stability and monetary policy. So we have seen a few new stablecoin regimes being implemented in different jurisdictions, for example in the United States. And in fact in the U.S. a lot has happened since the beginning of the year. The U.S. Congress has moved forward with the legislation to create a federal framework for regulating cryptocurrencies and stablecoins. And there we have seen the GENIUS Act, which has now recently been passed into law. But overall, the Trump administration has embraced digital assets and blockchain technology, so they've taken significant steps to provide more legal clarity, and also remove some of the previous regulatory barriers that existed. So Kara, how are all these regulatory changes impacting the digital asset industry?

Kara Kennedy: So I think it's fair to say that obviously regulation has a significant impact on industry's activity and also their focus. And I think we have seen a significant re-shift towards the United States following the actions of the Trump administration to reposition the United States as open to innovation in relation to digital assets and distributed ledger technologies. As a global bank, we're serving clients across multiple different jurisdictions, and we work with our regulators and with industry around the world to support the development of harmonized regulatory frameworks that support responsible innovation in this space, and also prevent jurisdictional fragmentation and allow us to operate cross-border as much as possible. We are also collaborating with clients and our peers to develop best practices and market standards, which are really of critical importance as we start to go beyond private blockchain networks and start to interface with public infrastructure, and make sure that we are again cooperating in a way that allows this to scale in a responsible manner.

Tina Rathjen: And how has J.P. Morgan prepared for these changes in the digital assets space?

Kara Kennedy: It is our view that distributed ledger technology can certainly improve efficiencies, lower costs, and reduce redundancies in the existing market infrastructure. But it goes without saying that it's important that the development and use of that technology ensures the continued protection of investors and the soundness of our capital markets. And there's a lot to be learned from the experience of traditional financial markets when we start to think about deploying our products and services using this type of new technology. And so I think it's important that we continue to be engaged in this space, and work with the regulators and the rest of the industry to really build out appropriate regulatory frameworks that can support the activity to bring value to our clients. J.P. Morgan has been invested in blockchain and digital assets since we first set up our Blockchain Center of Excellence in 2015. And that has continued to be invested on over the past decade, and is now Kinexys, our blockchain-based business unit. And we see a significant amount of transactions on that on a daily basis, normally between $1 to $2 billion on average. So we're demonstrating the potential of this technology through use cases which are able to be deployed across our clients, and allows them to experiment with the technology and see some of the benefits of operating in that shared ledger infrastructure.

Tina Rathjen: These are great initiatives, Kara. Last question for you today, what has the industry and J.P. Morgan focused on over the last, let's say 12 to 24 months? And how do you see this changing in the near future?

Kara Kennedy: So I think the repositioning of the U.S. administration, and opening up greater potential for participation of traditional financial institutions, particularly in respect of public blockchain and decentralized finance has been a critical shift. And I think we have seen increased appetite for traditional players to look at how they can engage with those types of infrastructure. From a J.P. Morgan perspective, we have also initiated a POC on our deposit token product, JPMD, which is distributed on public blockchain infrastructure. And I expect that you will continue to see advancement and further engagement towards public blockchain infrastructure in the coming months and years. In terms of our clients, we've seen increased appetite around the fund space, and how that can be impacted by blockchain technology, both in terms of the alternative funds market where there is an expectation that this could be leveraged to move forward infrastructure solutions to support greater efficiencies, and also potentially broader distribution of those fund structures. And also in terms of tokenized money market funds, which has become a key theme in terms of looking at alternative yield-bearing instruments as the stablecoin market grows, and there is greater demand for on-chain assets that can be efficiently used as collateral or settlement assets.

Tina Rathjen: Thank you Kara, for those insights. So I think it's clear to say that the digital asset landscape is rapidly evolving, driven by the advancement of technology and regulatory developments. I think as we wrap up our podcast for today, it's fair to say that continued collaboration between the industry and regulators would be crucial in shaping a secure and efficient digital asset ecosystem. And with that, I would like to thank you for joining us today, and we hope you found this discussion useful. Stay tuned for more episodes as we continue to explore the ever-changing world of finance and technology. Thank you and goodbye.

Voiceover: Thanks for listening to ‘Market Matters.’ If you've enjoyed this conversation, we hope you'll review, rate, and subscribe to J.P. Morgan's Making Sense to stay on top of the latest industry news and trends available on Apple Podcasts, Spotify, and YouTube.

This podcast is intended for institutional clients only. The views expressed in this podcast may not necessarily reflect the views of J.P. Morgan Chase & Co, and its affiliates, together J.P. Morgan, and do not constitute research or recommendation advice or an offer or a solicitation to buy or sell any security or financial instrument. Referenced products and services in this podcast may not be suitable for you, and may not be available in all jurisdictions. J.P. Morgan may make markets and trade as principal in securities and other asset classes and financial products that may have been discussed. For additional disclaimers and regulatory disclosures, please visit www.jpmorgan.com/disclosures.

© 2025 JPMorgan Chase & Company. All rights reserved.

[End of Episode]