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 efforts to modernize the $12 billion market with the blockchain technology.
The French bank has joined a blockchain-powered network run by its American rival, which has already attracted more than $300 billion in transactions since its launch in December.
This agreement represents the first steps in efforts to use digital tokens in one of the crucial links in the global financial system.
The repurchase market, or repo, is used by investors to borrow high-quality assets for a few days, and by central banks to conduct their monetary policies.
According to the Bank for International Settlements, three-quarters of transactions are backed by government bonds, making the market a key source of high-quality collateral for banks to finance their balance sheets or raise the funds needed to support their derivative positions.
JPMorgan’s blockchain allows banks to lend US government bonds for a few hours as collateral, without the bonds leaving their balance sheets.
Post-crisis regulatory requirements require banks to hold large amounts of liquid assets – which can be bought and sold easily even in times of market stress – such as treasury bills as a safety buffer. By tokenizing 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 loan duration and settlement time are governed by a smart contract, which ensures that the money is in the borrower’s account and the collateral locked against the loans is released at the end of the transaction. . More than $300 billion of these short-term loans have taken place on JPMorgan Onyx Digital Assets’ blockchain technology platform since December 2020.
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 efforts to use technology for the entire trading and operations lifecycle as the market evolves,” he said. he adds.
Scott Lucas, head of DLT markets at JPMorgan, said the bank was exploring other fixed-income assets that traders could borrow against.
“We are considering expanding the eligibility criteria set in addition to US Treasuries,” Lucas said.
More and more participants are joining the platform, including banks and their customers from Europe, the UK and Asia.
JPMorgan has taken a big leap into digital assets in recent years, although its chief executive Jamie Dimon has often criticized digital assets such as bitcoin.
The bank’s Onyx unit has been experimenting with deploying blockchain technology in traditional markets, with former head of the digital unit Christine Moy noting recently 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 enter the metaverse. In addition to broadening its guarantee criteria, the bank is also studying ways of offering its professional clients 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.