The encryption world welcomes an important milestone: large Financial Institutions begin to offer services

Although JPMorgan still advises investors not to include Bitcoin or other cryptocurrencies in their portfolios in this year’s report, the company has taken a significant step into the crypto world.

According to reports, one of the largest Financial Institutions in the United States, JPMorgan Chase, will begin providing banking services for certain cryptocurrency exchanges whose bank accounts were approved for opening in April. In the initial phase of the collaboration, JPMorgan Chase will offer cash management services to these exchanges’ U.S. customers, including wire transfers and deposit and withdrawal services, but will not directly involve in the encryption clearing and settlement.

This news has caught the attention of Wall Street. A banking insider believes that besides direct revenue considerations, JPMorgan’s move may also bring future opportunities for underwriting related exchange IPOs, as well as considering listing JPM Coin on these platforms.

A former chief legal officer of a cryptocurrency exchange and current senior deputy director of the Office of the Currency Comptroller commented: “As the cryptocurrency market matures, more and more blockchain companies will have sound risk control systems and compliance standards, and such companies should not be hindered in banking matters.”

This collaboration is undoubtedly another important milestone for the integration of the encryption world into the mainstream. Understanding the logic behind it is crucial, but it is also important not to overlook that it will still take time to achieve a long-term stable partnership between the entire encryption world and Financial Institutions.

A “Perfect Match” Collaboration

The handshake between JPMorgan and these cryptocurrency exchanges is clearly the result of mutual attraction. The former needs to secure a stake in the emerging field under compliance requirements, while the latter needs the support of traditional Financial Institutions to become a more specialized financial service platform and to assist in penetrating deeper into a broader, institutionalized market.

High compliance and primarily fiat settlement are common strong attributes of these exchanges, which perfectly aligns with the banking industry’s need to comply with regulations. Financially, these exchanges have passed audits by major accounting firms. Industry insiders generally believe that the investment in compliance is the reason for their high valuations.

From the flow of funds in these exchanges, fiat currency holds an absolute dominant position, which clearly provides a considerable profit margin for banks such as JPMorgan Chase. According to data platform statistics, in the past 24 hours, a certain exchange had a trading volume of about $5.7 billion, of which 91.8% of the trading volume was completed relying on the three fiat currencies: USD, EUR, and GBP. Another exchange had a trading volume of about $47 million during the same period, with 99.2% of the trading volume completed relying on USD.

It should be noted that these exchanges have a wide range of businesses, and beyond the exchange operations, there is a strong demand for fiat services in custody, stablecoins, wallets, and other businesses. Taking stablecoins as an example, some stablecoins launched by certain exchanges are issued using a fiat collateral model. According to statistics, their total market capitalization is approximately $800 million, and the corresponding custody of funds and fiat deposit and withdrawal fees also generate considerable income.

From the perspective of JPMorgan, although its CEO has held negative views on Bitcoin for a long time, the institution’s exploration of the blockchain field can be considered deep and early. Its actual actions also demonstrate curiosity and enthusiasm for cryptocurrencies:

In 2016, JPMorgan Chase launched the open-source blockchain protocol Quorum to serve the funding interaction needs of enterprises and Financial Institutions. Reportedly, this business may merge with a certain blockchain company in the near future. In addition, JPMorgan Chase is also collaborating with other tech giants and institutions on blockchain identity verification, financial information exchange, and other aspects.

In 2017, JPMorgan Chase launched the Interbank Information Network (IIN) based on Quorum, aimed at addressing the long-standing challenges of information sharing between Financial Institutions. Currently, the network has attracted 397 banking institutions, including JPMorgan Chase, the National Bank of Canada, and China CITIC Bank.

In 2019, JPMorgan Chase announced the launch of its own digital currency, becoming the world’s first large bank to “issue a coin.” In 2018, the bank tokenized a $150 million one-year floating rate bond based on blockchain.

However, before this heavyweight cooperation comes to fruition, the cryptocurrency world has long been “nervously” navigating between banks, maintaining a highly uncertain cooperative relationship with them.

The Complex Relationship Between the Encryption World and Banks

Even cautious cryptocurrency exchanges have experienced several ups and downs: in August last year, they interrupted their cooperation with a certain British bank, possibly due to compliance issues, making it impossible to access the UK’s fast payment framework network; in the same month, they also delisted a certain anonymous coin, reportedly due to compliance requirements from the exchange’s British partner bank.

Among all the fluctuating stories, the situation of a certain stablecoin issuer and its affiliated exchange is the most poignant. It is well known that this stablecoin issuer and its affiliated exchange have an intertwined relationship, and the inflation of stablecoins in the absence of sufficient reserves is an open secret: after being involved in a lawsuit with a local prosecutor’s office last year, the issuer admitted that on average only about $0.74 supports each stablecoin, and the complaint also pointed out that $860 million in reserves had been misappropriated by the affiliated exchange.

Before this lawsuit, the stablecoin issuer had long tried to collaborate with traditional banks in partnership with its associated exchange, but the outcome has always been “difficult to sustain”. It is not hard to see from the timeline that they have had contact with several mainstream traditional banks, but without exception, all collaborations have been interrupted. Currently, whether they have received support from mainstream traditional banks and the status of cooperation remain unknown.

This bumpy experience is actually a microcosm of the cooperation situation between the encryption world and traditional banks: although banks are eager for the small gold mine that is the encryption world, many compliance uncertainties faced by native enterprises in the encryption world make it difficult for both parties to reach cooperation, often resulting in a tug-of-war state with high uncertainty. In China, with the introduction of relevant regulatory policies, the domestic encryption industry is also “isolated” from banks.

However, at the same time, the tumultuous fate has not prevented certain stablecoins from gaining a prominent position in the world of encryption. As of May 15, according to data platforms, a certain stablecoin has a market value of approximately $9 billion and a daily trading volume of $59 billion, firmly holding the third position in global cryptocurrency market value and the first in trading volume. Its issuance still significantly impacts the prices of encryption assets, but this logic of crude price changes often leaves people full of doubt.

If we examine further, perhaps some exchanges have successfully established themselves within mainstream Financial Institutions, while others are still “fleeing into the wilderness” yet “feasting”. This is a division in the world of encryption: industry-native institutions that strive to align with mainstream narratives will eventually succeed in “landing”, competing alongside giants of the financial industry, while the latter may continue to roam freely in the “bizarre” world of encryption. However, the question remains: can their story continue indefinitely?