Banks Start Seeing Blockchain as Source of High-Quality Assets

May 31, 2022 12:35:00

BNP Paribas, a French bank, has joined a platform owned by J.P. Morgan in a bid to start leveraging digital tokens while undertaking short-term trading activities in the markets of fixed-term financial assets. This comes at a time when major banks are ramping up efforts to modernize the sector by adopting blockchain technology.

The blockchain platform, dubbed Onyx Digital Assets, has so far seen deals worth $300 billion completed since December 2020 when the platform was launched. This platform facilitates repo (or repurchase) deals in which investors are allowed to borrow high-quality financial assets for a day or so. Repo markets also make it possible for central banks around the world to conduct their mandate of implementing monetary policies.

According to official records, almost eight in 10 of all repo deals involves government bonds. This makes the repo market a highly sought-after source of top-tier collateral for banking institutions that want to secure funds for the purpose of backing derivative deals. Banks interested in financing their balance sheets also turn to repo markets.

The Onyx platform allows banks to tokenize the bonds in their possession and lend those tokens out for only a few hours. This time limitation is important because banks are mandated to compute their safety buffers at the end of every workday. Given how high the post-coronavirus requirement to maintain a bigger fraction of assets in highly liquid forms is, it is imperative that borrowed government-issued bond tokens are returned before the business day ends. This keeps those treasury bonds on the balance sheets of the banks that have lent them out through intraday repurchase deals.

The necessary details of each repo deal are contained in a smart contract on the blockchain platform. For example, the lender and borrower agree on the time at which the debt will be settled, as well as for how long the borrower can remain with the borrowed asset, among other details.

J.P. Morgan revealed that it was looking into beefing up the scope of which assets can be tokenized beyond U.S. Treasury bonds. This measure will ramp up the options of assets for those interested in short-term borrowing and lending.

As more multinational financial institutions as well as their clients join platforms such as Onyx, blockchain technology will be well on its way to becoming mainstream, and sector actors such as BIT Mining Ltd. (NYSE: BTCM) will have plenty of clients to serve.

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