Fireside | Integrating Tokenized Cash Instruments and Stablecoins into Institutional Systems

All right. Thank you everybody for joining us. This is going to be an electric fireside chat with Emma and Raphael over here. Um to start off, I'm going to define all these different dollar assets in my own words. You have stable coins, they're basically dollar assets that are backed by treasuries and other highly liquid assets.

You have tokenized money market funds. Money market funds, they've been around for a long time. They're been They're regulated asset. Then you have tokenized deposits, which are dollars off a bank's balance sheet. Um Emma, we'll start with you.

Can you define those three assets in your own words and say the similarities and differences between the three? Yeah, definitely. And I think you nailed it, right? Um so, we see them all as kind of cash, cash equivalents, right? That are available on chain.

I would say from a money market fund perspective, the difference that we can bucket these in are really twofold. And actually all three assets. Um basically asset backing and legal structures around it, and then the transferability itself. So, MMFs are structured as funds, right? They are investment vehicles, uh backing by, you know, papering accordingly, and short-term debt, high-quality liquid assets.

They're designed to stay around a $1 NAV. Uh and should, you know, in theory be redeemable for that, but they are funds, right? So, principal is not guaranteed. Um and with that comes usually like a higher yield. Uh stables are kind of the crypto-native bearer instruments.

I feel a little funny talk telling people about what stables are in this audience. Uh but of course, as you likely all know, made up of HQLA, the NAV of that HQLA has to always exceed the number of tokens in circulation, otherwise the stables will lose their peg. And then deposit tokens are, you know, as exactly as they sound, commercial bank money, right? Same type of money as you all hold in your accounts today. they're claims against a bank that are demand deposit liabilities, and they are treated and capitalized as such from a balance sheet perspective.

The second way I think about differences, transferability, right? And I think this is where it really um defines the three, right? So, a lot of these, as we see them on chain, are usually built as like ERC-20s with a few additional functions. They tend to be transferable, but of course, money market funds are funds, meaning that parties actually have to subscribe to be part of the flow of these funds. So, it does have permissioning at that layer.

Um and unlike traditional MMFs, TMMFs allow for transferability on chain, which actually like is the creation of a secondary market that doesn't exist right now, right? Which I think is very cool. Um secondly, stables bear instruments, right? Fully transferable utility is unlocked. Of course, that comes with its own trade-offs in terms of managing compliance, managing risk, but they are fully transferable.

And then, deposit tokens would be transferable as well, um with permissioning, but aligned to traditional kind of banking permissioning. So, things like uh third-party money models, client money models, correspondent banking, they can go just beyond the client boundary, but they do remain permissioned. So, it's going to be like a smaller ecosystem than stables, but the ability to build out kind of a trust ecosystem of parties that are permissioned that aren't just bank clients. And I think last but not least, the three of those then find like accordingly use cases, right? MMFs you look at as like hold assets, savings accounts on chains, stables as payments, and deposit tokens, given the credit risk profile, probably sit in between and can be used for hold use cases and payment use cases.

Yeah, Raphael, to you. Um That That was perfect.

yeah, go ahead. Yeah, that No, that was indeed the perfect. Um and ultimately, like they all have features different features, but they all also carry different risks. And the question is, what do you face when you you you you are buy those assets? Obviously, stablecoin at the end you face the issuer, even if he has proof of reserve, the the the guy you face is is the is really the issuer.

Money market fund, if done well, you only face the underlying assets because the issuer should be bankruptcy remote. So, that's what the the risk is only the underlying. And obviously, bank deposits here you you're facing the bank, and they have all they have obviously some level of insurance on on that. So, ultimately, they all have some features. They will all live together on the on wallets, and uh um yeah, that's important to to say.

Emma, so what have been the catalysts for institutions holding stablecoins, tokenized deposits, or these tokenized money markets? And what have you seen as blockers for them for holding them? Yeah, I mean, a number of different things. So, catalyst, I think let's, you know, be real. We see the ability to do two things.

One, faster cross-border 24/7 payments. Two, an opportunity to invest in new assets like RWAs that are being natively issued on chain, and stables being part of the settlement arm of that, right? So, I think those are two of the big catalysts. But in terms of the drawbacks, and and this is partially why we built JPM Coin, is that we have seen, you know, certain issues for institutions holding them around things like balance sheet certainty, around questions on the credit risk that they're actually taking, and we can dive into this a bit more as we contrast the two assets. Um as well as, you know, potential liquidity.

Not every stablecoin is created equal, so if you don't have quick on or off-ramps, that becomes an issue for institutions. But then, also looking at the tech side, I would say a few things, particularly as there's lots of builders in the audience, to think about, right? One is that when an institution is holding a stable or issuing a stable, they're fundamentally entering a new market, which is outside of their four walls. It opens up new questions on how do you do cyber monitoring, how do you connect to these networks, and how do you ensure that your security posture is strong, right? We already have a ton of staffs in all of these institutions just working on protecting our internal assets.

So, it's a new a net new kind of boundary of risk to build controls around. Second is infra, right? It is not easy to set up custody rigs, to have wallets, to build wallets that interface these external assets, and I think that's something as well that institutions continue to explore. And from a risk appetite perspective, particularly as their holdings grow in the space, it also means that the type of custody that they need to set up needs to grow and be appropriate for that risk management, and bringing in this type of tooling and this type of infrastructure into institutions is still a difficult thing. And then last but not least is that this still requires, fundamentally right now, being able to hold crypto, right?

And there's a lot of institutions who aren't yet comfortable with holding even the majors on their balance sheets for many different reasons in terms of risk management, but also just the operational complexity of doing it, which remains, you know, not prohibitive because of course there's things like account abstraction that can be used, but generally speaking, there's still again technology to navigate there to even be able to execute any functions on chain. Yeah. And uh Raphael, a question to you. Um how do you think institutions evaluate which assets to use when, and why would they use one asset, whether it's a tokenized money market fund or stablecoin, over another? Well, the first thing for them to to go on on chain is that the asset should be better than the asset they have on the traditional on the traditional market because a lot of time what's happening is that for example tokenized money market funds most of them on the market digital twin while you will never see a treasurer buy a digital twin or private fund and held it into its held it into its balance sheet.

So the first question for them is more why should they take those assets and that's why for example at Franklin when we when we built our money market fund we we issue it with the shoulder registry officially on chain so that when an institution buys it it's like for for for them legally it's like buying a traditional money market fund but on chain and because it's on chain there there is the true legal instance peer-to-peer transfer and also the intraday yields. And so the first thing is really why is it better on chain and the second thing is they all have different balance sheets, different segments on the balance sheet, different regulator, and different operation. And so depending on what they have to do if it's more payments, global payments, obviously they will first use stable coin because it moves faster, it's more global, there is not a lot of jurisdiction. Now tokenized money market fund for example if if you've got one like us regulated in Luxembourg well you can also do cross-border transfer between Hong Kong, Switzerland, France but you can't send it to the US because that fund is regulated in Luxembourg and that's where stable coin comes in. At the same time those institution they need a bank account and the bank account will be represented by a deposit token which at the end is the same thing it's just much more efficient.

Yeah and Emma tokenized deposits have historically been used for international transfers. We were talking about it before the chat. How do you see them growing and expanded? Will they be used any for anything externally or anything else? Yeah it's such a good question because I think that's one of the things I hear a lot when like speaking with the industry and of course you know JP Morgan has a long rich history of building the space.

We started building in 2016 with a blockchain center of excellence. Our engineering team, you know, built the Quorum network, which ultimately was sold to ConsenSys, and and we started building on-chain payments internally. So, we have a product called blockchain deposit accounts. Um it's essentially uh internal private permission ledger that's both core banking system and the payment rail collapsed into one. It's integrated to the rest of our downstream systems.

And I talk about this because we use this for a very specific set of use cases. Right? Moving money across our footprint. We offer, you know, deposit accounts that are just that, but on this blockchain-based rail, clients can move money across Singapore, London, New York in a day uh among our footprint. They can do FX on this chain.

Um and it helps deal with things like treasury cutoff times, different operating hours, right? Cuz if you're moving money in New York, Singapore, London, Australia in a day, most of these markets have what? 4 hours of operating overlap? So, when you're actually a corporate treasurer moving money that way, it means you need to fund the positions in all of those markets, right? Never mind the FX risk.

So, we've used that kind of we've used the tech, right? Really to build a solution that solves this problem for our clients. To date, we've processed over $3 trillion on that rail. Um so, it does remain adopted. But, I think what we continue to see, and really the reason that we built JPMD or JPM Coin as many of you know it, is that we had our institutional clients coming to us being very interested for either the faster payments aspect or to engage in the on-chain public chain markets.

Um but, they could not hold significant liquidity in stables. And it comes down to a few of the reasons that I mentioned. First is balance sheet certainty, right? If you're a large regulated institution, what do you put as a line item on your balance sheet for a holding of stables? How do you do capital management, risk management around that?

Many Web3 institutions know how to do that, right? But, if you're talking about corporate treasurers, there's not really a precedence necessarily. So, we felt like it was important to bring uh commercial bank money in the form of a deposit token to help bring adoption of these more traditional players in something that is just a demand deposit, right? Treat it accordingly in the same way that they manage all their account-based deposits. Um secondly is that, again, we looked to say like how could we bring the strength of our balance sheet to the ecosystem so that we can bring more liquidity with these traditional players and they could get comfortable doing that.

Um you know, yield, because this is commercial bank money, it can be natively yield-bearing, it can be eligible for relevant deposit insurance schemes in their specific jurisdictions. And we also looked to build something that had really quick on and off-ramps and it into JPMorgan accounts. Um and the reason being, right, which again, I think is key to this audience is that, you know, even on the last panels, we heard a lot about like liquidity still being an issue. But, if you're going to bring significant liquidity into the ecosystem, you have treasurers who are managing that. And what they do every day is they look at their own interlegal entity positions.

And if they're holding too much at a specific institution, they'll lend that on repo markets. Or maybe they have no show pooling structures to move cash into a certain area. And so, our hypothesis was that we needed to bring that integration to actually be able to continue to bring significant liquidity into the space. And all of those things drove bringing deposit tokens into a public chain ecosystem and looking for those external use cases. And I would say today, we're seeing both holds, so store value because of the yield-bearing capability, the credit risk, the balance sheet certainty use cases, and also payments use cases.

Um but, payments more so among like permission groups of counterparties, even on public chain, the permissioning just goes to the token instead of the actual protocol itself. Um and then with some of the more web three native institutions, what we're seeing is like an interest in diversifying their holdings. So, they may be holding significant amounts of majors and stables and they're interested in using JPMD to um also have their deposit position natively held on chain. And through that, we'll see payment use cases grow, settlement of RWAs, and I think interestingly, going back to bringing liquidity to the market, even potentially bringing in new broker dealers who will market make these more traditional money market funds, traditional private credit funds in just US dollar. And they may have been the parties who wouldn't have had the risk appetite to market make in what is stables.

Yeah. And uh Raphael, uh Benji has been around since 2021. Uh tokenized money markets have grown so much, 78% over the past year, 1600% over the past 3 years. Uh what do you think has accounted for such growth and how do you how do you see it growing in the future? Indeed, we we we've seen tremendous growth.

So, we started in 2021 with the US regulated Benji. Now, we've got four different Benji as we've got one private fund, one regulated in Luxembourg, and one in Singapore. Um I think this growth we we got basically three waves. Uh the first one were fintechs, uh especially as after the banks crisis, a lot of those fintechs started to understand that maybe it was not um it was better for them to diversify their holding and to add some money market fund into into their balance sheets. Uh after that, we also got some VCs, um escrow use cases.

And basically then, those VCs started to understand that uh they could hold Benji in their balance sheets and then also subscribe directly in deal by sending peer-to-peer uh Benji to their portfolios. Uh so, that was the first wave. The second wave, more let's say uh capital markets, trading, hedge funds. So, we saw a lot of market makers, hedge funds, using Benji as collateral across different exchanges, but also between them, and doing some repo trade and and bilateral agreements. And today, I think, and that's why this year we are at the the inflection point, is that we're seeing the first wave where treasurers, banks, state-owned institution, they're ready to invest, they understand more of the product, they understand blockchain, they understand the different type of tokenization, they know what they want.

And the only thing they miss is the integration. How they can have a wallet, where is this wallet, how they can bring what's on chain and just be connected and connect their own operation. So, I think it's really a we're really at the inflection point. Product has has always been better and better every year, and and now it's time to deliver. Emma, you've described these three different types of dollar-denominated assets as layers to a cake.

And to me, it sounds like tokenized deposits and tokenized money markets are the savings area, and stablecoins really the payments and transfers area. And so, how how do you think the winners in each category are going to come about and emerge, considering that? Yeah, I I love that you said layers to a cake, because I've used that analogy so much that you're making me realize maybe I should stop using that analogy. But no, I mean cakes, so true. True.

So, I think that, like, you know, the layers to the cake analogy, for those of you who haven't heard me say it, is this idea that, like, digital money will, you know, continue to coexist, right? And there's this idea, if you look at banking, of like, M1 and M0 money, right? And so, the idea of M0 money is that it's central bank money, it's the safest asset, it's the euro issued out of ECB, it's the dollar issued out of Fed accounts, which traditionally financial institutions have access to those accounts. Then you have this M1 money, that's the money we all hold in in accounts today, we all face institutions. Technically, you hold a demand deposit at, you know, Chase or SocGen or name your institution, right?

Um and those demand deposits find their finality into central bank money. And that's how you maintain singleness of money and financial stability, right? It's the reason that a dollar issued from one institution in a specific jurisdiction doesn't trade differently than a dollar or isn't worth a different amount, right? Than a dollar issued by another institution in that same jurisdiction. And I think our view of the world is like stables will be part of this M2 money, right?

Because what now those look like are money issued by private companies. And they will be very useful on chain and for certain use cases and certain client sets. And they will find their finality into commercial bank money, which will find its finality into central bank money. So that relationship continues because stablecoins ultimately will still need to off-ramp at some point for fiat. So we see it as an extension, right?

Of that relationship. So that's the layers of the cake in the way that we see these things converging. Um and then to your question, like what what's the winner? I actually think I thought about this, so I think all three, although with different in different ways, right? Different implementations, have the same three characteristics that will help drive winning.

One, and I think I've already heard it on two different panels this morning, risk management, right? How robust are the risk management practices? For MMFs, this might look like, you know, what type of short-term debt is in it, how much high-quality liquid asset versus short-term debt ratios are there, um how transparent is the NAV, how often is it actually being published, right? I think with stables, it's going to be like who are your underlying reserve holders, um again, how much transparency is those on those reserves, how often are they being published, how have you planned for what your stable will do in times of stress, right? And then with bank deposits, again, I mean, risk management is the whole name of the game with bank deposits, right?

People hold their money at institutions because of the capital ratios, because of the robust stress testing, because of the existing risk management practices. So, I think in all three states, it's going to be like and and in deposits, it's like the strength of the balance sheet, right? So, in all three of those, I think that's strength and that goes side and side with utility, right? Particularly for deposit tokens and MMFs, which as we know, are permission products. How do you grow distribution?

Who can use them? How do you grow the utility on chain? Because the reason that stables are so widely adopted is because of their utility, right? You can use it as a hold asset, put it in, you know, uh hot wallet so that you can get rewards or put it in, you know, do staking with the stables to earn rewards and then easily go lend that, right? Through these DeFi protocols and then the lender might meet a margin at, you know, name your prime broker.

And that usability is unmatched right now with permission products. So, I think growing the usability, particularly for deposit tokens and MMFs, will be key. And then stables, it's going to be growing, you know, continuing to have usability, but also doing so, particularly for institutions, uh in a way that we can get comfortable with the compliance posture. So, how are you managing sanctions risk? How are you managing money laundering risk?

How are you making sure that this isn't in the hands that an institution would not want to face? So, I think that's the other part of it. And that usability goes hand in hand for the last thing with all three, which is liquidity. Right? Like the most adopted stablecoins are the highly liquid stablecoins.

Distribution is key for the other two types of assets. So, I think risk management, liquidity, usability are the three things to build towards for the winners. And Raoul, to you, uh how do you think the winners will emerge and which winners will emerge? Well, I think that's what DeFi gave us. As finance is now easy to access.

You can buy the S&P 500 directly on chain. You can do lending. You can borrow. Like you can access Defy. You can access payments directly without intermediary.

Um This really changed finance because now institution that wants to to stay stay in place, stay relevant in this market, they have to provide value added. They have to provide this value added that maybe some of them before weren't at all bringing to the market. They were just protected by their regulatory umbrella and they were sure that people had to use them to access finance. As of now, people don't need to use them. So I think the winners will be the institutions and the companies protocols and the everyone that just show up and provide added value to the customer that's in any way can access the let's say the same raw functionalities without intermediary.

But at some points will always decide to choose an intermediary because there is so much value added in having maybe advisory, insurance, and any other advantage that that it has to to just go through a intermediary. Yeah, I can help but notice on stage right now we have Benji, the tokenized money market. We have JP Morgan, JPM Coin, and we have myself at Cap, the stable coin, each represented here. Emma, do you have any final words? Like where can people learn more about JPM Coin or tokenized deposits?

Definitely. I mean, of course, you know, you can always stay connected with me on LinkedIn. For what we're doing at with JPM Coin, we also have, you know, a number of research and white papers that we've put out. So normally you can get them from the Connexus website. We recently, or I guess last year, did also some work on building institutional grade payment token standards with the MIT DCI.

And for those of you who are builders in the audience, we've, you know, looked at evolving existing ERCs and building, you know, composable standards and acknowledging where there's gaps. So interesting reading as well and happy to connect on any of these topics. I'll be around for the next week. And Raphael to you, where can people learn more? Yeah, well let's let's just connect at at Franklin Templeton.

I think we've got more than 100 person working only in digital assets. Most of them are building infrastructure on chain wallets, asset management platform, tokenization infrastructure. So let's connect and let's see how we how we can help. And capmoney_ on Twitter and cap.f online.

Thank you so much guys. I will see you out there.