DeFi Is Real, Whatever Happens To Cryptocurrency

In Jamie Dimon’s annual letter to JP Morgan Chase shareholders, he said explicitly that “DeFi and blockchain are real”, which caused some comment in crypto circles given his previous statement that “I don’t care about bitcoin. I have no interest in it.” But I think it is possible to believe that tokenization will be huge and that Defi protocols will have a serious role to play in the next generation of financial services, while simultaneously being skeptical that cryptocurrencies will have a major role.

DeFi without Bitcoin? Opinion is certainly divided, but when it comes to the entertaining ongoing spat between Marc Andreessen and Jack Dorsey, I’m on the Andreessen side of the fence. It is not at all clear to me that Bitcoin
BTC
is the universal and utopian money of the future, whereas I think that the experimentation going on the DeFi world will in time open up new ways of doing business in the finance sector.

I do not see this as a controversial positions. In fact, I think this has long been the view of serious players in the financial services mainstream. Irfan Ahmad (VP at State Street, the world’s largest custodian bank), recently said that cryptocurrencies have not just entered another winter, but a “polar vortex”, which seems a reasonable view given the collapse of the Celsius decentralized finance (DeFi) protocol and the news that Three Arrows Capital has filed for bankruptcy and so on. However, beneath the ice, his and other investment banks are working on using shared ledge technologies to build new trillion-dollar markets that do not involve speculative cryptocurrencies. But instead use digital representations (i.e., tokens) linked to real-world, hard assets.

There is no paradox at all: whether cryptocurrencies survive the coming storm of regulation, central bank digital currencies, instant payments and digital identity, institutional markets will ultimately use the new infrastructure to trade bonds, gold and carbon in digital form. It won’t only be commodities that are tokenized and traded without clearing and settlement. Banks will tokenize all forms of collateral, such as; title to property, using the technology. As the Bank for International Settlements (BIS) set out in their current Bulletin (no. 57, 14th June 2022), “DeFi lending must engage in large-scale tokenization of real-world assets unless it wants to remain a self-referential system fueled by speculation.”

Speaking at Consensus 2022 last month, Tyrone Lobban (Head of Onyx Digital Assets at JPMorgan) described in detail the bank’s institutional-grade, DeFi plans and highlighted how much value in tokenized assets is waiting in the wings. He said that tokenized assets ranging from US Treasuries to money market fun shares could be all be used collateral in DeFi pools, bring trillions of dollars of assets into DeFi, “so that we can use these new mechanisms for trading, borrowing [and] lending,…