A blockchain platform built by global investment bank JP Morgan is being used to "tokenise" gold bars to allow sustainable miners to earn a premium on global markets, an indication of new trading opportunities the disruptive technology will create over the coming decade.
Blockchain technology, initially deployed to create bitcoin, is moving into production in major investment banks – but it's not being used to move money. Rather, banks are using it to manage global liquidity, improve information inefficiencies and create "crypto" assets (other than currencies).
JP Morgan has created an enterprise version of the Ethereum blockchain – known as Quorum – which allows for the operation of "smart contracts", or a computer program that automates processes based on a set of rules.
"We are the only financial player that owns the entire stack, from the application to the protocol," said JP Morgan's New York-based head of blockchain initiatives, Umar Farooq.
The "tokenisation" of assets will be made possible by blockchain, opening up a new world of fractionalised ownership and ...
The "tokenisation" of assets will be made possible by blockchain, opening up a new world of fractionalised ownership and new derivatives markets. Karl Hilzinger
"We are big believers in Ethereum."
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Ethereum is a more decentralised blockchain than other enterprise systems, although Quorum has been adapted for financial services customers to provide high-grade privacy and performance.
The use of blockchain to "tokenise" assets – effectively digitising them so they can move on distributed ledgers – emerged as a key topic at the Sibos conference held in Sydney last week.
The development could allow trading to be conducted directly between parties without needing an intermediary such as a broker or exchange. This promises to reduce costs and risks. It could also ultimately see isolated markets for particular securities merged together. More than nine in 10 of the world's initial coin offerings (ICOs) are conducted on Ethereum.
Tokenising gold
JP Morgan chief executive Jamie Dimon described bitcoin as "a fraud" in 2017; earlier this year, he said he'd regretted ...
JP Morgan chief executive Jamie Dimon described bitcoin as "a fraud" in 2017; earlier this year, he said he'd regretted making the comment but added "blockchain is real". Giulia Marchi
Mr Farooq said that in the medium term tokenisation of commodities could create new opportunities for global traders.
"There are people outside our firm using Quorum to tokenise gold, for instance," he told The Australian Financial Review on the sidelines of Sibos.
"They wrap a gold bar into a tamper-proof case electronically tagged, and they can track the gold bar from the mine to end point – with the use case being, if you know it's a socially responsible mine, someone will be willing to pay a higher spread on that gold versus if you don't know where it comes from. Diamonds is another example."
Tokenising real estate or art could also allow ownership to be fractionalised, so high-cost items could be held by a wider range of investors. Tokenisation can improve global liquidity management by allowing the netting out between corporate subsidiaries without having to move actual money. Investment banks are also exploring how "atomic swaps" will allow parties to trade assets under a smart contract without intermediaries.
Quorum, which could potentially be spun out of JP Morgan, is being considered for use in capital markets issuance, secondary markets and custody, and Mr Farooq said "the entire value chain is going to head in that direction".
JP Morgan is also a shareholder in Digital Asset, which is building the ASX's new equities clearing and settlement system. The other large enterprise blockchain developers are Hyperledger, of which JP Morgan is also a member, and R3's Corda platform. Blockchain software creates a synchronised copy of a database, or set of business rules, on a decentralised computing network; even though there's no central trusted party, the information can be relied upon.
'Blockchain is real'
JP Morgan chief executive Jamie Dimon described bitcoin as "a fraud" in 2017; earlier this year, he said he'd regretted making the comment but added "blockchain is real".
JP Morgan has created the Interbank Information Network, comprising more than 100 banks, which is using its blockchain to enhance payments information. Quorum was used recently by the National Bank of Canada to issue a certificate of deposit to US investors. The Monetary Authority of Singapore has also been testing Quorum to power a settlement and clearing system.
Commonwealth Bank recently issued a bond for the World Bank on a blockchain created using the Ethereum source code.
JP Morgan and Credit Suisse are members of the Enterprise Ethereum Alliance, which is developing standards for the technology. Mr Farooq said being part of Ethereum allows the bank to benefit from upgrades made to the public blockchain and to tap its growing developer community.
Another theme to emerge at Sibos is the potential convergence of private blockchains with public networks. Mr Farooq said this is something banks should be preparing for.
"We are all building private networks but there is a long-term thought process of what happens when you get to a point where you need to do private-public convergence – a connection –and at that point, if you are in some ways a derivative of a public platform, it could become easier," he said.
"We are not at a point where we believe public networks are right for financial institutions or businesses in general. But you never know what is going to happen in five years."