JPMorgan Chase is letting institutional clients use Bitcoin and Ethereum as collateral against loans denominated in US dollars. The move brings the most popular crypto tokens even further into the world of customary credit. The tokens will be held by third-party custodians while clients are able to access dollar liquidity.
It also marked another step in JPMorgan’s broader digital assets strategy despite CEO Jamie Dimon’s long-standing disdain of Bitcoin, with the firm having spent years building out its blockchain infrastructure.
The network’s Kinexys platform, formerly known as Onyx, supports institutional payments, settlements and tokenized assets, with an estimated $5 billion worth of transactions being processed by the network every day, according to JPMorgan.
The collateral model functions like customary securities-backed lending, where institutional borrowers deposit Bitcoin or Ethereum with an approved third-party custodian who verifies ownership of the asset.
This crypto is used as collateral for a customary dollar loan. JPMorgan does not own the tokens. However, values of any collateral are continually tracked, and margin requirements can be adjusted accordingly.
With custody separate from lending, the bank extends the credit while a third-party custodian holds the digital assets, with the question of whether more collateral is required determined by other lenders in the market. This is different from most DeFi protocols, where collateral and borrowing sit in the same smart contract.
Reported Bitcoin haircuts in the 30% to 50% range indicate how banks and lenders are approaching crypto: A $1 million Bitcoin position may only support $500,000-$700,000 of borrowing.
Those haircuts are in part due to the volatility associated with Bitcoin, which is less stable than collateral backed by U.S. Treasuries or investment-grade bonds.
The arrangement enables institutional owners to access liquidity without selling their crypto. Corporate treasuries and funds could borrow against their digital balance sheets while remaining exposed to the upside.
At the same time, however, collateralized lending carries the same risks: falling prices in the underlying market can result in a margin call and liquidation of collateral.
While Ethereum is included, the overall altcoin market is not, due to the considerably deeper liquidity and institutional infrastructure available for the two largest crypto assets, Bitcoin and Ethereum.
The JPMorgan measure is part of a larger trend, with banks developing tokenized deposits, blockchain-based settlement systems, and digital asset products geared to institutional investors. The bank claims to be investing in digital asset infrastructure in order to meet client demand for regulated and risk-controlled products and services.
It is important because accepting Bitcoin and Ethereum as collateral extends into the cryptocurrency domain the same collateral notion that securities, cash, and other highly liquid collateral have enjoyed.
It does not shield against crypto volatility or custody risks, but it further connects institutional crypto holdings to the balance-sheet mechanics of customary banking.