Can you imagine a world where bank accounts don't exist? JP Morgan's Onyx Global Head of Coin System can. What is the future of money? Not bitcoin apparently....
Walter Jennings: Welcome to Waves in the Finoverse. I'm Walter Jennings, the host of a podcast brought to you by Finoverse. We're talking with the wave makers creating ripples, waves and tsunamis across finance, crypto, FinTech, Web3 and beyond. Listen weekly to hear the changemakers talk firsthand about their experiences in this dynamic industry. I'm joined in the booth by Naveen Mallela, who is Global Head of Coin Systems and Onyx by JP Morgan. Welcome to Waves in the Finoverse.
Naveen Mallela: Thanks for having me, Walter.
Walter Jennings: Now, Naveen, you had introduced yourself as a digital asset expert within JP Morgan. Tell me more about your role.
Naveen Mallela: Sure, Walter. I run digital currencies for JP Morgan globally. So products like JPM Coin ,work that we're doing on Central Bank Digital Currencies, work that we're doing with Partior, which is an Interbank Clearing and Settlement network based on distributed ledgers, tokenized deposits, stable coins. All of that is my area, in short, basically the future of money.
Walter Jennings: So we're not necessarily talking about crypto, Bitcoin and Ethereum. Instead, we're looking at perhaps a Central Bank Digital Currency, and other monies.
Naveen Mallela: That's right,Walter. What we think are going to be the payment instruments and payment methods which power the financial markets and commerce of the future. And to our mind, that's not crypto, that's going to be instruments like Central Bank Digital Currencies, tokenized deposits, stable coins. So all of those areas are things that I work on actively.
Walter Jennings: Okay. Now, Naveen, during the course of the talks with a number of tech professionals here. We've heard about the explosion of creativity in the last three years, I guess there is a silver lining to what was a very dark cloud of the pandemic. How has that impacted Central Bank Digital Currency and money?
Naveen Mallela: What has changed dramatically, Walter, over the last few years is the narrative, is no longer whether digital currencies are a thing. The narrative is about how can we go about getting there. So if you think about central banks, like China was first on the blocks in a major way, I mean, to be very honest, Bahamas was the first of the block with Sand Dollar. But in terms of scale, China with E-CNY has done some fantastic work. Now with India, talking about CBDCs, both retail and wholesale and embarking on a pilot. When you have India, when you have China, things will happen. So it looks a lot different now.
Walter Jennings: I think we're talking about scale, because the Bahamas would be what about 700,000 people and China is 1.2 billion plus
Naveen Mallela: Walter, you add India to that and you're getting close to the 3 billion number, right?
Walter Jennings: Well, I'm not sure whether I'm looking at official numbers.
Naveen Mallela: Well, there is that.
Walter Jennings: Naveen, the future of money has a lot of different permutations. So let's just break it down for a retail. For an individual, a consumer, you and I have got either money in our wallets or tap and go. How will that change when it becomes a Central Bank Digital Currency?
Naveen Mallela: Yeah. So if you think about the money today, right, the money that you and I carry in our wallet in terms of cash, that's the only form of Central Bank money that you and I as retail users are exposed to from a money standpoint. Most of the money that we use is commercial bank money, whether that is deposits that you use with banks to transact, whether that is store value cards, whether that is wallets all of that is just largely commercial bank money. So we don't think that the future of money is going to look very different from this two tier system where you have Central Bank money, which is going to power largely interbank settlement, those sort of use cases and probably have digital cash to a certain extent, but this proportion of money is going to still continue to be dominated by commercial banks. And that is the future that we at Onyx and JP Morgan are actually and actively building towards.
Walter Jennings: You know, there are benefits to the governments with a Central Bank Digital Currency, including, perhaps eliminating black markets and tracking cash where it goes, what are the benefits to the consumers and users of digital currency?
Naveen Mallela: So the benefits are manifold, right, like, so I give a few of the benefits. One is the ability to do peer to peer transactions, the only peer to peer transactions that you and I can do, Walter, is cash. Right? Like, other than that there is no peer to peer transaction, it has to go through a settlement mechanism, it has to go through a web of accounts. And that is where the friction in payments come from. Especially if you're thinking about cross border payments.
Walter Jennings: My son just started attending University in the Netherlands and it remains a bit of a challenge to get money to him.
Naveen Mallela: Exactly. So we think that the future of money is going to be token based. And once you have token based infrastructure as opposed to account based and message based infrastructure, transactions become truly peer to peer, so that we think is going to be transformative. This notion of bank account, we think is going to be disappearing fast, bank accounts will give way to wallets, which will have all sorts of tokens by all sorts of banks. You don't have to have bank accounts with different banks to transact cash securities accounts to transact on securities. You will have one wallet with security tokens, cash tokens, or where you have the custody of your keys. We believe in that future.
Walter Jennings: Well, if there's no bank account, then that makes it a challenge for the bank to lend. But clearly, it just means there's going to be increased competition for deposits.
Naveen Mallela: Did, I want to unbundle two things right back, bank account doesn't necessarily mean that commercial bank money will not exist. We think that commercial banks will continue to be relevant because they will be the dominant form of providing tokens which sits on those wallets. And those tokens are the ones which are going to drive the credit creation, the whole fractional banking and all of that will continue to be relevant. It's just that the medium of transacting will be so much more peer to peer.
Walter Jennings: Yeah, quicker, faster, easier, cheaper. Now, you've got within JP Morgan a group called Onyx. Can you introduce us to that and what its role is?
Naveen Mallela: Onyx is where all of the work that JP Morgan does from a blockchain standpoint is housed, via JP Morgan have been quite sort of contrarian to the rest of the industry in terms of making a big bet on blockchain. So right since 2015, when we started the blockchain Centre of Excellence, right since 2015, when we actually took Ethereum for credit and created Quorum, which is one of the top three enterprise blockchain platforms out there. Our view has always been a bit contrarian to an industry, which was largely "Wait and watch". So Onyx was about housing all of that work, whether that is Quorum or whether that is things like JPM Coin, whether that is things like Interbank Information Network calling, putting it all under a single brand, under a single entity could double down essentially, and to commercialise and to scale.
Walter Jennings: You mentioned JPM Coin, and that certainly seen massive growth, it's now responsible for billions of dollars of transactions each day. Could you tell us a little bit more about the coin and its hero journey?
Naveen Mallela: Yeah, I would love to think that JPM Coin is something, which is now a leading product line within JP Morgan. The reality is, it is not, right. Like if you think about what we do within JP Morgan, we clear 10 trillion a day. If you think about what we're doing with JPM Coin, cumulatively, we've done close to 20 billion. So in the overall context of JP Morgan and what we do with JPM Coin is not necessarily at the same scale, but it's not trivial either. What we've shown with JPM Coin is that blockchain native money can work, will work and we started transacting on that and we hope to have further growth and scale going forward.
Walter Jennings: Okay. What are the advantages of blockchain over legacy systems like SWIFT which is still used by 11,000 banks worldwide?
Naveen Mallela: This goes back to this notion of message based infrastructure right? Like if you think about the construct of how a payment is made today, a payment is essentially a set of accounting entries on different Ledgers and SWIFT is the messaging system which coordinates those updates. What we're looking to do is bring the banks onto a single worldwide financial ledger, which means that you no longer have sequential updates of Ledgers, everything happens instantly, everything happens automatically. And then you start laying the foundations for truly peer to peer. So essentially it is about the movement away from message based infrastructure to token based infrastructure, that is the big shift that we are trying to drive the future of payments is going to be driven by token based infrastructure.
Walter Jennings: Know, the future of payments and your role is based here in Singapore. Why did you choose to focus on Asia versus other regions in the world?
Naveen Mallela: This is quite unusual for JPMorgan, in the sense that given that we are New York headquartered for digital currencies globally to be based here in Asia. One of the key reasons is because of everything, which is happening in our part of the world, whether that is MAS, who've actually been so proactive, right from 2015. With project Ubin now, with Project Guardian, they are actually pushing the envelope on innovation and responsible innovation, really, which is basically what makes it such an attractive proposition for us. It's not just me as some of the work that HKMA is doing with mBridge, if you think about some of our largest clients, like we've gone public with the fact that Ant Financial is one of the active and the largest users of JPM Coin, so much of it is centred around Asia, it just made sense to build the team out of here. So in a way it's a departure, but there are some very compelling reasons as to why the departure is there.
Walter Jennings: Now, Naveen, how have you seen technology either accelerate? How have you seen the changes to acceptance of digital currency during the pandemic? This has been a great period of creativity and growth in technology. How has it impacted the digital money industry?
Naveen Mallela: I mean, for one, it's just like everything else, right? It just accelerated this whole trend of digitalization, that's when the penny dropped for the Central Banks, right? Like, hey, people don't want to use cash anymore. They would like a digital version of it. And that's when CBDCs and retail CBDCs start gaining credibility. It's definitely accelerated some of the thinking and give impetus to some of the initiatives and digital currencies. And now, it's at a point where it's a point of no return, right? Like the genies out of the bottle, right? Like different countries are going to happen this, there's no question of, is it a thing? It's just a question of how fast can you get?
Walter Jennings: Yeah, no, I've noticed also another trend, which is the rise of contactless payment. I went to Europe for the first time in three years and brought a lot of euros with me and brought them all home again.
Naveen Mallela: Clearly, that's a trend and that is only going to accelerate. I do think CBDCs will put a swift end to cash of any sort physical cash.
Walter Jennings: Well, speaking of a swift end of cash, we're here at Singapore FinTech Festival. And there appears to be some branded money going about, I've got $20 of that. Tell us about the concept of potentially offering money within your own ecosystem if you're a brand.
Naveen Mallela: Now, there's some very interesting monikers to this world or whether you call it branded money, whether you call it purpose bound money, or programmable money. The notion of making money only do certain things is very appealing. I'll give you an example. Like CBDCs are central bank digital currencies, the ability to do direct benefit transfers or dvds where you know, money disbursed for subsidies can only be used at certain outlets for certain purposes, for example,
Walter Jennings: So as an example we received in Hong Kong consumption vouchers which you were allowed to use in certain stores but you couldn't use it to pay the mechanic,
Naveen Mallela: That's exactly right. And these have existed in some form and closed loop networks like you had points, you have loyalty points which you could use for certain purposes.
Walter Jennings: My Starbucks card
Naveen Mallela: Your Starbucks card, your air miles, for example. But with purpose bound money and programmable money, you truly created directed programmable open loop payment infrastructure. And direct benefit transfers is just one example of it like subsidies and how those are spent. All of there are so many use cases and again, Singapore is pushing the boundaries on that with Project Orchid.
Walter Jennings: Naveen, I think about money and I immediately, I don't know why, think about theft and security. Now, what are the benefits and downsides of securing your cash in a digital world?
Naveen Mallela: Yeah, I mean, there remains obviously the risk like "Hey, Walter, it's all great. I have a wallet, I lost my key now what? Right? Yeah." And this is where there are solutions, more solutions than what meets the eye. There are solutions with MPC, there are solutions with sharding of keys where your bank potentially has one shard, which provides recoverability options. Those are things which we are actively working on when we say that we see a world which is tokenized. It's not just about tokenizing assets and tokenizing money, but creating all of the infrastructure around that, how do we create an identity solution so that I know you, Walter, are good for any transactions. You're not on any of the sanctions lists, or you're not any of any of the lists where we as a bank would not be comfortable facilitating a transaction. So identity, being able to provide NPC sharding solutions, being able to provide monitoring solutions. All of all of this control infrastructure is a large part of what we are working on.
Walter Jennings: Now, Naveen, we have a feature here we called tracks in the Finoverse, which is the music that would power you in the Finoverse. What's the song that comes to mind when you think about the future of money and the metaverse and all of that..
Naveen Mallela: Video Killed the Radio Star
Walter Jennings: Video Killed the Radio Star, why that one?
Naveen Mallela: For obvious reasons, right? Like I mean, you know where I'm going with this one Walter? Yeah, I do think that yeah, Metaverse might be some years away but the shift towards tokenization, peer to peer, DeFi materials I mean these are irreversible.
Walter Jennings: Naveen Mallela, Managing Director and Global Head of Coin System Onyx at JP Morgan. Thank you so much for joining us here at Waves in the Finoverse.
Naveen Mallela: Pleasure chatting with you.