Banks turn to blockchain in search for 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 biggest investment banks step up efforts to modernise the $12tn market with blockchain technology.

The French bank has joined a blockchain-powered network run by its US rival, which has already attracted more than $300bn of deals since its launch in December.

The arrangement represents the first steps in efforts to use digital tokens in one of the crucial links of the global financial system.

The repurchase, or repo, market is used by investors to borrow high-quality assets for a couple of days, and by central banks to conduct their monetary policies.

Three-quarters of deals are backed by government bonds, according to the Bank for International Settlements, making the market a key source of high-quality collateral for banks to fund their balance sheets or find the funds to support their derivatives positions.

JPMorgan’s blockchain allow banks to lend out US government bonds for a few hours as collateral, without the bonds leaving their balance sheets.

Post-crisis regulatory requirements demand that banks hold large amounts of liquid assets — which can be bought and sold easily even during times of market stress — such as Treasuries as a safety buffer. By tokenising these assets banks can temporarily turn them into collateral for a few hours, but without lowering their safety 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 length of the loan and settlement time are governed by a smart contract, which ensures that the cash is in the borrower’s account and that collateral locked up against loans is released at the end of the deal. More than $300bn worth of such short-term loans have taken place on JPMorgan’s blockchain technology platform Onyx Digital Assets since December 2020.

Joe Bonnaud, global markets chief operating officer 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 proof of concept work, we see this as part of our efforts to utilise the technology for the whole trading and operations lifecycle as the market evolves,” he added.

Scott Lucas, head of markets DLT at JPMorgan, said that the bank was exploring other fixed-income assets against which traders could borrow.

“We are looking at broadening the set of eligibility criteria in addition to US treasuries,” Lucas said.

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

JPMorgan has made a big push into digital assets in recent years despite its chief executive Jamie Dimon often hitting a critical note about digital assets such as bitcoin.

The bank’s Onyx unit has been experimenting with deploying blockchain technology across traditional markets, with former head of the 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 set up a presence in the metaverse. Aside from broadening its collateral criteria, the bank is also looking at ways it could provide its professional clients with access to new markets.

Tyrone Lobban, head of Onyx Digital Assets at JPMorgan said that the bank was also exploring the possibility of using Onyx as a gateway to decentralised finance markets for institutional investors.