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To date, the narrative around digital assets has largely been shaped by cryptocurrencies. Since the inception of Bitcoin, a lot of attention has been given to the idea of decentralisation and transacting without intermediaries.

Bitcoin’s whitepaper stresses the shortcomings of TradFi institutions. Referencing the 2008 Financial Crisis, it speaks about the need for a trustless system, where users can exchange funds without having to store them with a bank.

Over a decade since its creation, Bitcoin has become the most widely used cryptocurrency, however, perhaps not for its intended purpose.

“Most of the money being used in Web3 today is for speculative investments,” says Umar Farooq, CEO of Onyx by J.P. Morgan, at the Green Shoots Digital Assets Development Panel held on Monday (August 29)

Moderated by the Monetary Authority of Singapore’s (MAS) Chief FinTech Officer Sopnendu Mohanty, the panel also features the CEOs of Nansen, Contour, and Paxos.

“The banks learnt their lesson in 2008,” Farooq continues. “If you go down that path, it’s probably going to end badly.”  

Cryptocurrencies and digital assets

Although they’ve become a poster boy of sorts, cryptocurrencies only represent a small subset of the digital asset ecosystem. Farooq emphasises the potential of Web3 and digital asset technology, however, he maintains that the present use cases for cryptocurrency are few and far between.

greenshoots crypto jpmorgan
Screenshot of Green Shoots Digital Assets Development Panel

We remain very committed to [digital asset technology] and invest in it heavily. When you look at Web3 and what the runway of this can be one day, it’d be quite shortsighted of financial institutions to not be very heavily involved in this technology.

– Umar Farooq, CEO, Onyx by J.P. Morgan

As such, J.P. Morgan is looking into ways to improve existing infrastructure — to trade assets such as stocks and bonds — through blockchain technology.

Carl Wegner, CEO of trade finance company Contour, echoes a similar sentiment. “We are looking at letters of credit — which have been around for 400 years — and digitising the process to put it on a blockchain or distributed ledger. We aren’t creating a new product.”

Contour is supported by some of the world’s biggest banks, such as HSBC and Standard Chartered, in this venture.

We’re not the FinTech who steals their lunch. We’re the FinTech who helps them along this digital journey.

– Carl Wegner, CEO of Contour

These comments make it apparent that blockchain technology can serve different purposes. In the case of Bitcoin, it was meant to facilitate an alternative to the traditional banking system.

On the other hand, companies such as J.P. Morgan and Contour are using it to make their existing operations more efficient.

Banks versus crypto companies

While it’s certain that the finance industry is being disrupted by digital asset technology, it remains unclear who’s leading the charge.

At present, crypto exchanges are facilitating cross-border transfers, often at far lower costs than banks can offer.

If I want to send US dollars from my bank to any other country, it can cost me quite a bit. It’s also slow, and there’s about a 30 per cent chance that the recipient bank doesn’t acknowledge it while still claiming a fee. If I send a stablecoin, that’ll cost me a dollar or less.

– Alex Svanevik, CEO of Nansen
greenshoots umar farooq
Screenshot of Green Shoots Digital Assets Development Panel

Farooq argues that this is a benefit which will cease to exist over time. “[Bank transfers] are expensive, but this is because of reasons such as AML, KYC, and last-mile transferability. Once the regulatory arbitrage between the crypto and TradFi industry becomes smaller, the delta is not going to be that big.”

In Singapore, crypto exchanges are already being made to comply with AML and CFT regulations. Farooq believes that this could lead to an increase in transaction fees in the future. He also rebukes Svanevik’s claim that bank transfers have a 30 per cent reject rate.

Beyond transaction fees, existing regulations also put TradFi companies at a further disadvantage compared to other crypto players.

“You have a whole bit of the industry that is frankly, not regulated at all and can do whatever they want,” says Farooq. This is in sharp contrast to the requirements which banks have to meet.

As a result, crypto companies are often able to innovate faster, although their products may not be as safe for consumers to use.

The question of trust

In the long run, Farooq implies that banks will come out ahead despite their slow start.

“When we do something, we know we check all the boxes from AML/KYC to sanction screening and fraud checks,” he explains. “This makes it a lot safer for our customers, whether wholesale or retail. I think customers will probably come to us because one of the institutions they trust most, for better or for worse, is their bank.”

This theory might be put to the test once banks start implementing tokenised deposits. These would serve a purpose similar to stablecoins, wherein a customer’s currency deposits would be represented as on-chain tokens.

However, unlike stablecoins which can have unstable pegs — Terra USD, for example — tokenised deposits would be regulated the same way traditional bank deposits are.

When asked whether these deposits could compete with stablecoins, Farooq says, “I don’t think it’ll be competitive, I think [tokenised deposits] will be a winner.”

“When you think about moving major money. JP moves US$10 trillion every 24 hours. While we’re doing that, we’re complying with all the rules. All our regulators are satisfied with the approach.”

onyx by jpmorgan decentraland
Onyx by J.P. Morgan is helping transform the way that money, information and assets move around the world using blockchain technology / Screenshot of Onyx by J.P. Morgan’s lounge in Decentraland metaverse

Farooq maintains that stablecoins would still exist, comparing them to existing payment systems such as PayPal and Venmo.

Private options will always exist, but when it comes to serious transactions – hundreds of millions of dollars – you’ll always look to a regulated financial institution. The government, the regulators, and the financial infrastructure stands behind them.

– Umar Farooq, CEO, Onyx by J.P. Morgan

That being said, tokenised deposits are unlikely to become a reality until the digital asset ecosystem matures. Financial institutions need regulatory clarity before they can make a move into the space. This will only happen once there are more use-cases surrounding cryptocurrencies and stablecoins.

“Most of crypto is still junk. With the exception of a few dozen tokens, everything is still noise. The use cases haven’t risen and regulations haven’t caught up, which is why the financial industry is a bit slow to catch up. When they do catch up, the large institutions will absolutely be the winners,” he adds.

Featured Image Credit: Financial News London / Green Shoots

Also Read: MAS considers regulating retail access to cryptocurrencies, restricting leverage trading

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