Increasing regulatory oversight in the shifting landscape of cryptocurrencies has introduced a new set of security token markets enabling institutions to join the sector. On July 19, 2018, JPMorgan filed a patent to issue asset-backed tokens on a distributed ledger.
JPMorgan Prepares for Wave of Regulated ICOs
Filed in January, JPMorgan’s patent application to issue virtual receipts comprised of tokens on a distributed ledger was published this Thursday, July 19 by the U.S. Patent and Trademark Office (USPTO).
A security token is created when an asset-owner entrusts the deposited asset to a qualified custodian, who will then process and authorize a virtual receipt comprised of a token and record the transaction on a distributed ledger.
Security tokens require approval and regulation by the U.S. Securities and Exchange Commission (SEC), limiting the exchanges where they may be available for trading.
In the patent application, it states:
” … a method for managing asset or obligation-backed virtual receipts on a distributed system may include (1) receiving confirmation of a deposit of an underlying asset, wherein the deposit encumbers the underlying asset; (2) receiving authorization to issue a virtual receipt for the deposited underlying asset; and (3) executing issuance of the virtual receipt by writing the transaction to a distributed ledger.
In the patent, JPMorgan mentions that a use-case for the distributed ledger would be “a securities offering (e.g., an IPO),” which in a blockchain environment would essentially function as an initial coin offering for newly issued security tokens.
The patent also includes a use-case to issue a “pool/basket of assets,” which are seemingly resemblant of a cryptocurrency exchange traded fund (ETF).
The patent defines the virtual receipt issued on the blockchain as:
“Virtual Depositary Receipts, or “Virtual Receipts,” are asset or obligation-backed electronic tokens that may provide investors, brokers, custodians, and clearing firms with a means to link an underlying asset or obligation with its digital representation on a distributed system for the purposes of ownership tracking and transfer; transaction clearing and settlement; asset origination, distribution and securitization”
Institutional Firms Pivot Towards Cryptocurrency Sector
Despite a persisting cryptocurrency bear market, institutional investor interest has risen to an all-time high.
Revealed in their H1 2018 report, Grayscale Investments showed that 56% of incoming capital came from institutional investors. Based in New York, Grayscale is one of the largest digital currency investment firms with $248.39 million in financial products holding cryptocurrencies.
Stated in the report, Grayscale mentions:
“As the investment community knows, over the last six months, the digital asset market experienced one of the largest price drawdowns since the inception of Bitcoin in 2009. However, what is more interesting, and somewhat counterintuitive, is that the pace of investment into Grayscale products has accelerated to a level that we have not seen before.”
In early May 2018, Goldman Sachs confirmed plans to launch a Bitcoin futures trading desks to meet client demand.
Later, the investment banking powerhouse announced the exploration of cryptocurrency markets beyond Bitcoin futures.
On June 20, Goldman Sachs COO David Solomon told Bloomberg that the firm must “evolve its business and adapt to the environment.”