One of the United States’ oldest financial institutions, JPMorgan Chase, is considering offering crypto-backed loans. Once sceptical of their use, it is doing so off the back of changes to US laws regarding cryptocurrency and stablecoin usage.
JPMorgan Chase is considering loans that can be backed by a client’s cryptocurrency holdings. According to the Financial Times, this will mainly focus on Bitcoin and Ethereum. It is believed this could take place as early as next year. All of this is happening as further institutional adoption begins, with Bank of America and Citibank looking into the use of stablecoins.
What Are Crypto Backed Loans?
Bitcoin has had a meteoric rise in price over the last year, with many now comparing it to a digital version of gold. According to the exchange Binance.com, it is currently trading at $114,076. However, in April alone it was down at the $75,004 mark. Its rise has been prompted by institutional adoption such as this, both in corporate treasuries and states. At one point, this even saw it pass the $124,000 mark and reach a record high.
Currently, the bank allows lending against crypto Exchange Traded Funds, such as Blackrock’s ETF products. This will enable customers to use their own stored BTC and ETH as collateral, expanding their range of products. It is worth noting that the article said this was only a consideration.
While reported, the bank has declined to comment on the subject despite requests from numerous media outlets, including Reuters and The Financial Times itself. CEO Jamie Dimon has long been against the use of cryptocurrency, often criticizing its use of leverage, misuse, and potential for money laundering. He has also been vocally against the storage of cryptocurrency for clients of the bank, though he has no problem with clients buying it. In May, he explained it as “I don’t think you should smoke, but I defend your right to smoke. I defend your right to buy bitcoin. Go at it.”
As a major provider of financial services, JPMorgan could be opening the door for further changes. This may see more banks do the same, increasing cryptocurrency adoption across the globe. Combined with clearer regulations in the United States, it could see a total transformation of the financial landscape.
JPMorgan’s Stablecoin Development
Earlier in the week, the company also announced it would be moving into the development of stablecoins. In the second quarter earnings call, Dillon acknowledged that they would be looking at deposit coins and stablecoin usage. He also added that he wants to see the benefits, and is confused as to why customers wouldn’t just make a payment.
It is believed the project will be a joint venture with Wells Fargo and offered exclusively to its institutional clients. Banks already cooperate by sharing financial information and transactions through Zelle. This is a peer-to-peer payment network, which is known for its high charges. Thus, it is not used by many smaller banks. It is believed tokenized deposits could improve this, possibly reducing fees, before moving onto stablecoins.
All of these announcements are coming off the back of ‘crypto week’. This followed the passing of the GENIUS Act, a regulatory regime for stablecoins usage. It aims to provide clear rules for the growing industry, so the US can stay abreast of the payment gateway sector. Stablecoins must now be backed by an equivalent amount in US dollars, and companies issuing them must have regular audits.
Other Forms of Crypto Lending
By no means is this the first time cryptocurrency has been used in finance. However, it is the first time it has been used as collateral in traditional financial institutions.
Crypto lending has so far worked in two ways. The first is the use of crypto as collateral to secure fiat loans, as JPMorgan is doing. The second is the actual lending of cryptocurrencies by users who receive crypto rewards.
These platforms can either be centralized or decentralized. Both have varied criteria, with APR swinging from 1-20%. Aside from his, they work very much like any other lending platform. Lenders place their crypto into a pool, from which others can borrow. They must then pay back the crypto with a little extra as interest, which is given to the lender.
Smart contracts on the blockchain can facilitate this in decentralized exchanges. In centralized ones, the process works more like a traditional bank using a middleman. While it costs more and requires collateral, it can often be a safer way to do business.
Volatility is the name of the game when it comes to crypto, and is the main problem with lending. People could lend bitcoin one week and see its value in fiat terms drop drastically the next. Large falls could mean that borrowers need to place more collateral.
Crypto lending has arrived. While it may be in its infancy in major banks, changes to US legislation and laws overseeing stablecoin usage suggest it is inevitable that it will be implemented in some form. This could seriously improve the efficiency of banking, and may even see a reduction in fees.