Jamie Dimon is certainly an opportunist. For years he railed against cryptocurrency, especially Bitcoin. He was one of the leading proponents of the "we hate Bitcoin but love blockchain" brigade.
Now, it seems, JPMorgan is going all in on crypto under his direction.
This is not really a surprise. Dimon's job is to make the bank money and, even if he doesn't believe in the asset, the bank still can profit. It does know how to mitigate risk. At the same time, this is not the first time a major Wall Street bank incorporated an asset it didn't believe in. Hell, most of what these investment banks sell is ultimately garbage. They do not care.
JPMorgan, like the rest, specializes in mitigating risks even it it means unloading it onto the US taxpayers.
Either way, the bank insulates itself against the hit.
The bank accepting Bitcoin and Ethereum as collateral is a huge step forward. Here is what is happening:
Banking giant will accept Bitcoin and Ethereum collateral in loans as the asset class becomes more integrated with traditional finance.
By the end of 2025, JPMorgan Chase & Co. will allow its institutional clients to pledge their crypto holdings to secure loans, Bloomberg reported Friday. The programme will be rolled out globally and use a third party-custodian.
A few years ago I wrote about Hive bonds. The idea is to create high quality collateral. This is a piece of the financial puzzle that the average person misses. While the masses focus upon payments, with the maxis mistakenly believing that Bitcoin would be the new payment coin, the reality is the system depends upon collateral.
Establishing crypto as collateral was always going to be the main driver. This is what the banks (and Wall Street) know. Everything comes down to that. The entire repo market is based upon collateral. One of the issues since the Great Financial Crisis was the erosion of high quality collateral. This is why we see the idea of balance sheet constraint popping up.
The world is suffering from a lack of collateral. With European debt being viewed skeptically, this only enhanced the issue. Outside of US treasuries, there is a shortage.
The key with collateral is volatility. This is, ironically, the reason why crypto-assets are not a medium of exchange. Volatility is the opposite of price stability.
JPMorgan is now challenged with the task of trying to reduce the volatility of Bitcoin and Ethereum when using this as collateral. For long term lending, this is not a problem. When backing a 30 year mortgage with Bitcoin, a weekly or monthly move in the price means nothing.
However, if we are engaging in overnight lending, an asset that can move 10% could be catastrophic. Borrowers would simply default, turning the collateral, and bilking the bank for 10%.
We see how stablecoins are taking over the payment world. These products have stepped in while piggybacking off the US dollar.
Could the banks create something similar within the collateral world? It is possible. They might be able to figure out how to pool the risk, spreading it throughout the system, almost eliminating it from a single transaction. This would protect lenders against defaults due to price moves while expanding the overall collateral basis.
This might open up the floodgates. Like most new innovations, Bitcoin and Ethereum are the first cryptos incorporated. If JPMorgan goes ahead with this, how long until others start to use other crypto-assets?
Of course, we have to note this is only at the institution level. JPMorgan is not going to be offering a loan to buy a home using Bitcoin as the collateral, at least in the near term.
With DeFi already doing that, it is only a matter of time before TradFi gets involved. Institutions are the first focus.
