As a competitor with, and even as a threat to, traditional financial institutions (FIs), cryptocurrency has a long way to go, the head of J.P. Morgan’s blockchain division said.
Even so, this nascent asset class has far too much disruptive potential to be ignored, Umar Farooq, CEO of Onyx by J.P. Morgan, said during a panel hosted Tuesday (Aug. 30) by the Monetary Authority of Singapore.
For one thing, the regulatory infrastructure isn’t in place yet, and that is slowing the financial industry down, he said.
“If you think about deposits, tokenized deposits do not exist in the world right now” as a result, Farooq added.
But for another, “there are not that many use cases” yet, Farooq said. “Yes, you can try to tokenize deposits to create crypto. But who cares? Most of crypto is still junk, actually … with the exception of, I would say, a few dozen tokens.”
Everything else, he said, “is either noise, or frankly, it’s just going to go away. So, in my mind, the use cases haven’t arisen fully.”
While there are things you can do right now, he added, “most of the money that’s being used in Web3 today in the current infrastructure is for speculative investments.”
See also: Web3: Is There Any ‘There’ There? And If So, Where Is It?
Having learned their lessons in the fiscal crisis of 2008-2009, banks understand “if you go down that path, it’s probably going to end badly,” Farooq said.
New Use Cases
Farooq said he does believe those use cases will arise, however.
J.P. Morgan remains “very committed to the technology” and is investing heavily in it, he said. “When you look at Web3, and you look at what the framework and what the runway of this thing can be one day, it would be quite short-sighted for financial institutions not to be very heavily involved in this technology.”
When you consider moving money or creating tokenized assets like stocks and bonds, or even tokenized real estate on blockchains, Farooq argued, you can see how dramatically different it can be with a reinvented infrastructure.
J.P. Morgan has been thinking very hard about “building the infrastructure that enables applying that technology to assets as they are understood and regulated today, but also enabling us to be ready for the next cycle, which will be the asset cycle,” Farooq said.
At the same time, he said he believes that large banks will win the race to create that blockchain-based, crypto-powered infrastructure.
“All of the banks are looking at this as a way to really rethink the future of their business,” Farooq said.
Playing to Win
Noting that the company Chase transfers about $10 trillion every 24 hours, Farooq said, “right now, our JPM Coin infrastructure does upwards of about $1 billion dollars a day.”
That’s far more than any competitor, he added.
“When we are doing that $1 billion, we are complying with all the rules that the $10 trillion complies with,” he said. “And so, all of our regulators across the world are satisfied with the approach.”
While that means FIs are slower, given the complex regulatory regime they labor under, that’s not a bad thing, given the implications for financial stability if things go wrong for big banks, Farooq added.
But potential customers “know that we check all the boxes [for] everything from sanctions screening to anti-money laundering (AML) and know your customer (KYC) checks.”
Everyone in the financial blockchain space, whether a big traditional firm or startup FinTech, is “trying to build trust, and one of the institutions [customers] trust the most, for better or for worse, is their bank.”
He added, “the large institutions who catch up to this are going to be absolute winners in the market.”
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