A tokenised collateral network
28 March 2023
With little fanfare but significant long-term impact, J.P. Morgan’s Paul Pirie and Bhavna Haswani discuss the recently completed landmark transaction, moving a tokenised money market fund onto a blockchain. Leveraging this initial transaction, J.P. Morgan is exploring how to expand this offering in the coming months
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The Tokenized Collateral Network (TCN) is a major milestone in our digital strategy and will be a central utility in creating a digital collateral hub for J.P. Morgan clients and the market.
In January 2021, J.P. Morgan revealed its Collateral Token Agent (CTA) functionality — which enabled the tokenisation of baskets of assets in triparty — to facilitate the execution of trades on the J.P. Morgan distributed ledger technology (DLT) repo platform. With the arrival of the TCN, J.P. Morgan’s trading services business has the infrastructure to potentially tokenise any asset in any market. It will transfer that ‘token’ instantly from the collateral provider wallet to any collateral receiver wallet, as participants on the network.
This is incredibly powerful. It will not only vastly increase the potential mobility for traditional collateral securities, but it also opens the door for new asset types or markets to be used as collateral.
The TCN is perceived as a market utility which enables participants to create a virtual digital pool of assets and to mobilise them. The network operates independently of J.P. Morgan’s agency products and services.
The role of TCN
TCN is a utility for every actor in any collateral transaction, including collateral providers and receivers, collateral agents, vendors and triparty agents. TCN improves all collateral flows covering bilateral or triparty, inter or intra entity, variation or initial margin.
The network incorporates smart contracts to facilitate real-time collateral exchanges, either as a pledge or title transfer. This model is supported by independent legal opinions, which confirm that the right of ownership is not impacted by the DLT nature of the process. Furthermore, the TCN aims to significantly reduce settlement risk from the market by leaving assets with the client’s custodian and tokenising them in location, before mobilising them as collateral on the blockchain.
TCN creates mobility in less liquid assets, thereby allowing so called ‘trapped’ assets to be financed, reducing the cost of carry and improving investment viability. Collateral providers using the network will be able to create a single global pool of collateral that can be mobilised to any counterparty instantaneously and independent of market operating hours.
Further benefits of J.P. Morgan’s newly launched network includes the possibility to enable the tokenised collateral to be delivered into standard collateral models such as triparty by using standard asset reference data.
While the applications are potentially endless, the initial focus is on mobilising the harder to finance assets as collateral and bringing these into the existing collateral flows. J.P. Morgan is now working with a core group of market participants in design partner groups, to prioritise the most valuable use cases for the TCN, allowing it to evolve and scale up incrementally in the coming months.
The utilisation of securities
In close collaboration with key clients and stakeholders, we have successfully tokenised CNAV Money Market Fund (MMF) shares and executed a title transfer move of those shares between two TCN participants on blockchain. This is an industry first and demonstrates the power of our Onyx blockchain platform and our team’s ability to innovate on behalf of J.P. Morgan clients.
MMF shares are an example of a low risk, highly liquid asset that is very cumbersome to mobilise as collateral. By tokenising MMF shares, the TCN has tangibly increased the utility of MMFs for natural investors and provided an alternative to cash for collateral providers.
Financing natively issued digital bonds
There are increasing numbers of fixed income securities being issued directly onto blockchain and the J.P. Morgan tri-party platform is working with issuers, primary market makers, clients and holders to create a secondary market for the use of natively digital bonds as collateral.
In January 2021, J.P. Morgan revealed its Collateral Token Agent (CTA) functionality — which enabled the tokenisation of baskets of assets in triparty — to facilitate the execution of trades on the J.P. Morgan distributed ledger technology (DLT) repo platform. With the arrival of the TCN, J.P. Morgan’s trading services business has the infrastructure to potentially tokenise any asset in any market. It will transfer that ‘token’ instantly from the collateral provider wallet to any collateral receiver wallet, as participants on the network.
This is incredibly powerful. It will not only vastly increase the potential mobility for traditional collateral securities, but it also opens the door for new asset types or markets to be used as collateral.
The TCN is perceived as a market utility which enables participants to create a virtual digital pool of assets and to mobilise them. The network operates independently of J.P. Morgan’s agency products and services.
The role of TCN
TCN is a utility for every actor in any collateral transaction, including collateral providers and receivers, collateral agents, vendors and triparty agents. TCN improves all collateral flows covering bilateral or triparty, inter or intra entity, variation or initial margin.
The network incorporates smart contracts to facilitate real-time collateral exchanges, either as a pledge or title transfer. This model is supported by independent legal opinions, which confirm that the right of ownership is not impacted by the DLT nature of the process. Furthermore, the TCN aims to significantly reduce settlement risk from the market by leaving assets with the client’s custodian and tokenising them in location, before mobilising them as collateral on the blockchain.
TCN creates mobility in less liquid assets, thereby allowing so called ‘trapped’ assets to be financed, reducing the cost of carry and improving investment viability. Collateral providers using the network will be able to create a single global pool of collateral that can be mobilised to any counterparty instantaneously and independent of market operating hours.
Further benefits of J.P. Morgan’s newly launched network includes the possibility to enable the tokenised collateral to be delivered into standard collateral models such as triparty by using standard asset reference data.
While the applications are potentially endless, the initial focus is on mobilising the harder to finance assets as collateral and bringing these into the existing collateral flows. J.P. Morgan is now working with a core group of market participants in design partner groups, to prioritise the most valuable use cases for the TCN, allowing it to evolve and scale up incrementally in the coming months.
The utilisation of securities
In close collaboration with key clients and stakeholders, we have successfully tokenised CNAV Money Market Fund (MMF) shares and executed a title transfer move of those shares between two TCN participants on blockchain. This is an industry first and demonstrates the power of our Onyx blockchain platform and our team’s ability to innovate on behalf of J.P. Morgan clients.
MMF shares are an example of a low risk, highly liquid asset that is very cumbersome to mobilise as collateral. By tokenising MMF shares, the TCN has tangibly increased the utility of MMFs for natural investors and provided an alternative to cash for collateral providers.
Financing natively issued digital bonds
There are increasing numbers of fixed income securities being issued directly onto blockchain and the J.P. Morgan tri-party platform is working with issuers, primary market makers, clients and holders to create a secondary market for the use of natively digital bonds as collateral.
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