Decentralized finance (DeFi) developers looking to leverage the yield-generating potential of assets that live outside the crypto native kingdom might just find their prayers are being answered by Wall Street’s biggest bank: JPMorgan (JPM).

Speaking to CoinDesk at Consensus 2022 in Austin, Texas, the head of JPMorgan’s Onyx Digital Assets, Tyrone Lobban, described in detail the bank’s institutional-grade DeFi plans, as well as highlighting how much value, in terms of tokenized assets, is waiting in the wings.

“Over time, we think tokenizing U.S. Treasuries or money market fund shares, for example, means these could all potentially be used as collateral in DeFi pools,” Lobban said. “The overall goal is to bring these trillions of dollars of assets into DeFi, so that we can use these new mechanisms for trading, borrowing [and] lending, but with the scale of institutional assets.”

Institutional DeFi generally means imposing know-your-customer (KYC) strictures on crypto’s permissionless lending pools, which has started to happen in pockets of innovation such as Aave Arc, as well as the recently announced project involving Siam Commercial Bank (SCB) and Compound Treasury.

However, JPMorgan’s plans incorporating the tokenization of traditional assets point towards an altogether different level of scale. From an Onyx Digital Assets perspective, there are two complementary parts to bringing bank-grade DeFi to fruition, explained Lobban.

One component is JPMorgan’s blockchain-based collateral settlement system that was extended last month to include tokenized versions of BlackRock’s money market fund shares, a kind of mutual fund invested in cash and highly liquid short-term debt instruments. This type of application on the Onyx Digital Assets blockchain (settled in the bank’s in-house digital token JPM Coin) now enjoys some $350 billion of flow, Lobban pointed out.

The second piece of the puzzle is the recent pilot led by the Monetary Authority of Singapore (MAS), and including JPMorgan, DBS Bank and Marketnode, dubbed “Project Guardian.” The initiative is all about testing institutional-friendly DeFi via permissioned liquidity pools comprising tokenized bonds and deposits.

These ventures into DeFi will involve public blockchains and have a permissioned structure similar in many ways to what is being done by the likes of Aave Arc and Fireblocks. One difference, Lobban noted, is that the KYCing in Project Guardian is being done by large financial institutions that are participating, as opposed to DeFi platforms and crypto native custody firms. In other words, a JPMorgan Trader has to prove they have the rights and entitlements to trade on behalf of the Wall Street bank.

Verifiable credentials

But a much more striking difference is the novel approach to permissioned DeFi done using digital identity building blocks such as W3C verifiable credentials.

“We want to use verifiable credentials as a way of identifying and proving identity, which is different from the current Aave model, for instance,” Lobban said. “Verifiable credentials are interesting because they can introduce the scale that you need to provide access to these pools without necessarily having to maintain a whitelist of addresses. Since verifiable credentials are not held on-chain, you don’t have the same overhead involved with writing this kind of information to blockchain, paying for gas fees, etc.”

As far as which DeFi protocols JPMorgan and its counterparties might be looking at, this decision has not yet been made, Lobban said, but it will be among the recognized offerings. “It’ll be from the bench of protocols that you’d expect, battle-tested with high TVLs [total locked value]. But we haven’t yet worked out which ones yet.”

Lobban explained that for the past two-and-a-half years, JPMorgan has quietly been exploring digital identity in the context of blockchain and digital assets.

“If we can put this identity layer in front of DeFi that enables KYC-based access, then each of those protocols should just naturally be able to support institutions without necessarily having to make too many changes to what they’re doing,” Lobban said. “Do we have to set up separate permissioned pools and make changes to the existing protocols? Or can these things work out of the box?”

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