Why tokenization is gaining momentum

Hannah Elson (0:04)

Welcome to JPMorgan's Making Sense.

I'm Hannah Elson, I'm the Global Head of Custody, and the EMEA Head of Security Services. And I'm joined today by Oli Harris, who leads Kinexys, JPMorgan's comprehensive blockchain offering. Oli, it's great to have you with us.

Oli Harris (0:23)

Thanks, Hammond. It's great to be here.

Hannah Elson (0:25)

Oli, today we're going to talk about tokenization and digital assets, and what is seemingly feeling very different versus perhaps where we were a few years ago. Tokenization and digital assets have been a topic of discussion across the industry for a number of years now, but we are starting to see a real shift from pilot programs to much more scalable solutions with regulatory development happening much quicker and institutional adoption also increasing. I think what feels different now is that institutions are increasingly using tokenization to address real liquidity, settlement and operational challenges, giving the market stronger foundations for continued growth.

So Oli, I guess if you had to summarize what's fueling the increased adoption and focus on tokenization over the last 18 months or so, what would you point to?

Oli Harris (1:28)

Yeah, I think the single word I would use is convergence. This time around, it's not about crypto price speculation, nor is it about hype around any one asset. It's being driven by genuine market structure transformation, where participants, assets and cash are finally coming together on the same rails to drive real commercial outcomes.

The second driver we're seeing is regulatory clarity. Policy direction has sharpened in several major markets, and that is what gives institutions the confidence, as you rightly said, to stop piloting and start moving into production. The third, and the one people underestimate, is the cash leg. On-chain money is becoming credible through regulated forms like tokenized commercial bank deposits, such as our very own JPMorgan coin, and that matters enormously, because tokenized assets cannot scale without a trusted settlement asset and true delivery versus payment. No cash leg means no market, and all of this is landing at a moment when higher rates have put a hard price on idle liquidity.

Trapped cash, collateral efficiency, settlement timing, and balance sheet optimization are senior management and board level concerns, which is exactly why cross-border, always on, multi-currency settlement has gone from a niche idea to a commercial imperative. For us at Kinexys, none of this changes our long-term thesis. It just means that the market is validating our ideas faster because the whole ecosystem is now coming on-chain at the same time.

Hannah Elson (3:15)

Thanks, Oli. That all makes complete sense. A couple of other things I would add to that. I think the growth of stable coins has also been a really strong factor at play here. It's not only fueled some of the growth and development in digital cash and payments that you touched on, but is also a driver now we're seeing of demand for tokenized yield generating products like money market funds.

Then I think the other area of development that we've seen as a bit of a driving force here is the emergence of new players in the ecosystem. So, fintechs that are increasingly getting expanded regulatory approvals, so these could be crypto-fintechs or crypto-native fintechs, and becoming now, again, much more prominent players in the servicing space.

Those aren't organizations that we're hearing about or talking about 12 months ago, but most of our clients will now understand what a tokenization or securitization service is. So, I think that Imagine Stablecoins have also been really big contributors to that.

Oli Harris (4:21)

Building on those themes, what are you hearing from clients in the security services and custody space, and are there any global or segment trends that would be helpful for our audience?

Hannah Elson (4:34)

Yeah, Oli, I would say the main trend we're seeing is really from our asset manager clients who are very much focused on launching tokenized money market funds. And they're seeing that as a means to tap into those blockchain based investors, effectively a new distribution channel to provide an on-chain yield generating product to target some of those reserve stablecoin asset flows.

We're also seeing potential development of use cases through tokenization for funds and money market funds to be used as collateral as well. Of course, we're seeing interest in tokenized equities and bonds, especially given some of the announcements that we've seen over the past year or so. US and DTC seed plans to tokenize securities being one example. Also here in the UK, the UK government has announced plans to issue a digital guild. I think that's in quarter one next year. We're starting to see markets around the world, of course, announce plans. And so our institutional investor clients are keen to understand the timelines and what they should be doing or how they should be thinking about developing their capabilities and what they can expect from us as their service provider in terms of our own capabilities. Again, touching on liquidity, we're also now seeing some of our investor clients want to connect their custody accounts into blockchain deposit accounts or to have the ability to integrate into tokenized cash, digital cash solutions. And we're also starting to have some conversations as well on tokenized ETFs, again, thinking about that as a potentially new, more simplified, efficient distribution mechanism. I mean, I would say generally across the board, whether it's our asset owner or asset manager clients, and pretty much anywhere that I go in the world, this is within the top three things that clients want to talk about. And for the most part, our clients are really just looking to understand what's going on, what's real, what's noise, what they should be thinking about, wanting to understand what their service providers are delivering for them. And so it's really been more of an education journey, I would say, outside of some of those specific use cases that I mentioned.