The securities have not been and will not be registered under the U.S. Securities Act of 1933, as amended or with any other regulatory authority of any State or other jurisdiction of the United States or Canada and (i) may not be offered, sold or delivered within the United States or Canada, or to, or for the account or benefit of any U.S. Person or Canadian, and (ii) may be offered, sold or otherwise delivered at any time only to transferees that are Non-United States Persons and Non-Canadians.

February 14, 2023

JP Morgan; US staking; BNY Mellon

Welcome to Swarm Markets’ media memo. This weekly update provides comments from Swarm Markets’ co-founders, Philipp Pieper and Timo Lehes, on key industry news that has caught our eye, plus our own developments. 

Comments available on the following news items:

 

  • JPMorgan sees value in tokenized bank deposits
  • US staking crackdown could have big crypto market implications
  • BNY Mellon’s customers want access to digital assets

 

JPMorgan wants to tokenize bank deposits

 

JPMorgan has published a whitepaper on tokenizing bank deposits. The investment banking giant sees so-called deposit tokens as an alternative to stablecoins, as the market for digital assets expands. 

 

In essence what JPMorgan is touting here is the reinvention of fractional reserve banking with a layer of tokenization built into the process. Traditional banks create money out of thin air, despite what central banks might lead you to believe, so any system of tokenized deposits ultimately just perpetuates this.

 

JPMorgan is quick to disparage stablecoins, but these kinds of digital assets exist because they provide digital value while meeting collateral confidence needs for users. Each stablecoin, assuming it isn’t algorithmic, is backed 1:1 with a fiat currency, making redemption beyond concern. Tokenized bank deposits as an idea sound very similar in practical terms to CBDCs, which come with plenty of their own problems, not least of all a lack of decentralization. 

 

Instead of creating digital versions of the old way of banking, TradFi should look to embrace more digital assets with real world collateral. Real world assets (RWAs) such as stocks and bonds are the missing piece of the digital financial ecosystem because they have inherent value, unlike tokens that are created at will by platforms or exchanges – something that isn’t solved by tokenized deposits. 

 

Digital RWAs will provide key collateral confidence for investors while opening up new realms of digital financial innovations that will provide better value, more transparent and more secure ownership of assets. The marriage of these two ecosystems will be a revolution for the entire financial system. Tokenization of the old way of doing things won’t. 

 

US staking crackdown has wide implications for crypto

 

The SEC is cracking down on a variety of crypto projects in the US. There are various high profile cases now underway, including most recently Kraken. These enforcement actions have obviously specific and painful consequences for those in the firing line, but they come with wider repercussions too.

 

For starters, Kraken has agreed to halt crypto staking in the US to make the suit go away. But it isn’t the only one pulling back as a result. PayPal is reportedly pausing its stablecoin work after regulatory pressure shifts, while the future of Lido’s US staking is in question. It isn’t the only area of action either. Paxos has just announced it intends to stop minting stablecoins thanks to a pending suit, while other stablecoins are seeing their market cap plunge, as investors get cold feet on the developments.

 

The crackdown on Kraken and staking generally could have a major effect on the value of staking rewards for those that still have access to it, outside the US as well. A fully permissioned liquid staking protocol that excludes US users could conceivably present much greater rewards to those non-US users who retain access too. 

 

The whole episode stems from a lack of structured regulatory framework. The SEC is (aggressively) pursuing its agenda with the information and powers it has at its disposal and the crypto market is reeling, as a result. 

 

But while this affects prices at a global level, it is opening the way for innovators outside of the US to take advantage of opportunities in regions that are more open to the sector and its potential. The reality is the US is going to miss out on significant innovations at a critical moment for the sector and financial industry more broadly. 

 

BNY Mellon’s customers want access to digital assets

 

BNY Mellon’s head of digital assets Michael Demissie has said its customers are hotly anticipating the introduction of investable tokenized assets. BNY Mellon has been one of the most forward thinking of traditional financial institutions making forays into digital assets but its offering is still exploratory. 

 

Demissie in his comments raised a familiar need which Swarm has always pointed towards – the need for a fully permissioned, regulated offering for those interested in moving into tokenized assets. This rings true with comments from Goldman Sachs’s digital assets chief Mathew McDermott, who says markets are looking for a ‘flight to quality.’

 

The opportunity here then is for real world assets (RWAs) offered in a tokenized, on chain format that provides secure and regulated means for investors to hold and trade assets. This is where the flight to quality will take place and is a critical step for crypto at this juncture, after much trouble in the past year.

 

A combination of transparency, collateral confidence and regulatory assuredness will be the drivers of the sector in the coming years. The demand is there and institutions such as BNY Mellon and Goldman Sachs can see it. Those that innovate to offer these solutions, particularly to highly influential institutional players, stand to lead the sector into the future and further accelerate the integration of TradFi and DeFi.

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