French banking giant BNP Paribas has joined U.S.-based J.P. Morgan’s blockchain platform Onyx Digital Assets to use tokenized versions of fixed income assets for short-term trades, according to a Financial Times report.
After the 2008 financial crisis, banks are required to hold large amounts of liquid assets, such as bonds, as a safety net. But banks also need cash to support their derivatives positions or fund their balance sheet. Therefore, they use the bonds as collateral for loans that range from a few hours to a couple of days.
These loans take place in the repurchase (repo) market. Three-quarters of repo deals are collateralized by government bonds, making them one of the most important fixed-income assets. Central banks also use the repo market to conduct monetary policies.
The deal will enable BNP Paribas to lend tokenized U.S. government bonds for a few hours without the assets leaving their balance sheet. In other words, BNP Paribas will borrow cash against its bonds for a few hours and then repurchase those bonds at a slightly higher rate. The digital tokens traded via Onyx Digital Assets represent U.S. treasury bonds.
A smart contract governs the loan terms, like length and settlement time. The smart contract also eliminates counter-party risk, ensuring the collateralized bonds are released during settlement, and the borrower has enough funds.
The deal currently serves two purposes for BNP Paribas – securities financing and intraday repo. However, it is part of the bank’s larger efforts to incorporate blockchain into its operations. “This is not just proof of concept work, we see this as part of our efforts to utilize the technology for the whole trading and operations lifecycle as the market evolves,” Joe Bonnaud, COO of global markets and head of engineering at BNP Paribas, told Financial Times.
While the deal currently allows only U.S. treasuries to be tokenized, J.P. Morgan is looking at expanding the eligibility criteria to include other fixed-income assets.
J.P. Morgan has led the way for banks entering the crypto sector, despite CEO Jamie Dimon’s criticism of Bitcoin (BTC). Onyx Digital Assets has already handled short-term loans worth over US$300 billion since December 2020. Earlier this year, J.P. Morgan became one of the first banks to enter the metaverse.
According to Onyx Digital Assets head Tyrone Lobban, the bank is currently looking at using Onyx to offer institutional investors access to the world of decentralized finance.