Banks Are Turning To Blockchain In Search Of High-Quality Trading Assets

BNP Paribas has joined JPMorgan in using digital tokens for short-term trading in fixed income markets as some of the world’s largest investment banks step up their efforts to modernize the $12 billion market with blockchain technology.

The French bank has joined a blockchain-powered network operated by its US rival, which has attracted more than $300 billion in transactions since its launch in December.

This agreement represents the first steps in the effort to use digital tokens in one of the crucial links in the global financial system.

The buyback market, or repo, is used by investors to borrow high-quality assets for a few days, and by central banks to conduct their monetary policy.

According to the Bank for International Settlements, three-quarters of transactions are backed by government bonds, making the market an important source of high-quality collateral for banks to fund their balance sheets or raise the funds needed to support their derivative positions.

With JPMorgan’s blockchain, banks can lend US Treasury bonds as collateral for a few hours, without the bonds leaving their balance sheets.

Post-crisis regulatory requirements require banks to hold large amounts of liquid assets – which can be easily bought and sold even in times of market stress – such as treasury bills as a security buffer. By tokenizing these assets, banks can temporarily turn them into collateral for a few hours, but without lowering their security buffers, which are calculated at the end of each day.

The token represents a digital version of a treasury and borrowers can exchange it for cash.

Details such as the loan term and settlement time are controlled by a smart contract, which ensures that the funds are in the borrower’s account and that the collateral locked against the loans is released at the end of the transaction. As of December 2020, more than $300 billion of these short-term loans have taken place on JPMorgan Onyx Digital Assets’ blockchain technology platform.

Joe Bonnaud, Chief Operating Officer of Global Markets and Head of Engineering at BNP Paribas, said the two main use cases for the bank were securities financing and intraday repo.

“This is not just a proof-of-concept, we see this as part of our effort to leverage technology across the entire trading and operational lifecycle as the market evolves,” he adds.

Scott Lucas, head of DLT markets at JPMorgan, said the bank is exploring other fixed income assets against which traders can borrow.

“We are considering expanding the eligibility criteria established alongside US Treasuries,” Lucas said.

More and more participants are joining the platform, including banks and their customers from Europe, UK and Asia.

JPMorgan has made great strides in digital assets in recent years, although CEO Jamie Dimon often criticizes digital assets like bitcoin.

The bank’s Onyx unit has been experimenting with deploying blockchain technology in traditional markets, with former head of digital unit Christine Moy recently noting that JPMorgan was the first bank to provide regulated crypto exchanges with bank accounts.

In mid-February, JPMorgan also became the first major bank to join the metaverse. In addition to broadening its guarantee criteria, the bank is also exploring ways to offer its professional customers access to new markets.

Tyrone Lobban, head of Onyx Digital Assets at JPMorgan, said the bank is also exploring the possibility of using Onyx as a gateway to decentralized financial markets for institutional investors.

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