Institutions Are Entering Crypto, But How?

Institutions have been getting into crypto, but most people misunderstand what they’re doing and why. There is a common misconception that institutional adoption of blockchain is boosting the crypto industry as we know it - the grassroot startups, the hyped communities, and the mooning bags, but this is more wrong than it is right.

Institutions, by which we mean banks, tradfi asset managers, wealth managers, governments, and other players in capital markets, have been using the blockchain technology to leverage its advantage over traditional financial rails and systems.

Key Activity

BlackRock’s BUIDL

BlackRock tokenised the BlackRock USD Institutional Digital Liquidity Fund, one of their money market funds (MMF). Given they have been around since the late 20th century, it begs the question of why bother venturing into blockchain technology to tokenise something? There are two main answers, that also come with some questions.

Firstly, it allows for automated processes via programmable money. Smart contracts pay interest, handle withdrawals, and manage compliance checks, cutting down on manual work. BUIDL also pays daily interest directly to crypto wallets, offers near-instant transaction settlement, full transparency, and 24/7 accessibility. Over its first months, BUIDL cumulatively distributed about $7 million in dividends to token holders.

This begs the question: with the rise of AI, particularly AI Agents, why is there a need for smart contracts when AI agents can automate these processes? Smart contracts natively guarantee on-chain transparency, immutable audit trails, and, arguably most importantly, atomic settlement; these features are unable to be replicated by Web2 AI agents, no matter how sophisticated, because of the reintroduction of centralised trust and reconciliation risk. In TradFi, securities trades operate on a T+1/2 cycle (settlement happens 1-2 days after the trade (in America it’s now T+1, in Europe it’ll upgrade from T+2 to T+1 by October 2027)), and this opens the door for significant counterparty risk during this window. Thus, even though AI agents can automate workflows off-chain and process redemptions, deposits, withdrawals, and certain compliance checks, they still require custodians and reconciliation processes. In contrast, BUIDL’s smart contracts enforce real-time net asset value updates (and thus atomic swaps), automated interest accrual, and fractional ownership with zero human intervention on a public ledger bringing true trustlessness and fast execution.

Whilst this cycle was created by the institutions themselves (BlackRock, JPMorgan, etc.), these rails are the subsequent of the need for intermediaries that must verify everything from the data itself to any compliance checks. Blockchain, and smart contracts, allow for the removal of intermediaries (a la decentralisation) because of the ability to create programmable rulesets that predicate the transactions automatically. This allows for automated and near instant processes, and opens the door to smaller investors.

Secondly, it allows for additional yield by utilising BUIDL tokens as collateral within existing DeFi systems. Primarily, users can deposit sBUIDL (a token they can mint by locking BUIDL tokens on Securitize) to borrow USDC or other tokens on Euler, Avalanche.

One thing is clear about crypto and it’s the beauty of DeFi arguably accidentally creating the foundation for valuing assets fast in debt markets. In TradFi, you can borrow money from a bank by putting up real estate, stocks, and very high value assets up as collateral; additionally, this takes a long time. DeFi has allowed to deposit any assets (used to be simple tokens, but now it is tokenised MMFs for example) and instantly get a stablecoin loan out. BlackRock’s BUIDL leverages this deeply.

Thirdly, it allows for better borderless recordkeeping, which facilitates faster settlement (as mentioned above in the first point), immediate KYC/AML checks, and regulatory efficiency. As mentioned above, currently securities settlement runs on a T+1/2 cycle, and is done by DTCC, Morgan Stanley, CME, and other huge players, settling trades and investments between depositories (CSDs) and investors. All of their records must be reconciled individually. Now, add to the mix the same players but from other countries. Having all transaction data be stored on a blockchain that’s used and validated by everyone makes everything much easier. This also makes it much easier for regulators to assess transactions, because they have 1 database to analyse.

This begs the question: why do we need a blockchain to act as the ledger to store information when everyone can simply use an Airtable (or whatever realistic software exists/can be created)? The answer is blockchain’s trustlessness and immutability. Any software like that must have an owner, a single point of control - database storage, server infrastructure, permissions. Even with a deeply trusted party, the potential risk of altering data is non-zero, and creates additional risks as hackers have a single point to attack. The beauty of blockchain is in its decentralised and immutable nature: it is the best ledger humanity has come up with that can allow everyone to store information in one place without the legacy risks associated with doing so. In other (technically incorrect but valid philosophically) words, blockchain is that magical SaaS that allows everyone to store information in one place without the fear of data manipulation or hacking.

JPMorgan Deposit Token JPMG

Similar to what BlackRock done with BUIDL, except BUIDL tokenised an MMF, whereas JPMG tokenised bank deposits at JPMorgan and is allowing JPM institutional clients to trade with. It is a Deposit Token - an electronic payment instrument issued by a bank, representing funds that have been deposited by a customer. Users deposit USD via Securitize, and get this JPMG token they can use on-chain. In essence, JPMorgan’s stabelcoin for settlement and payments.

It can be deployed on public and private blockchain networks and is intended to be transferable among the issuing bank’s direct customers as well as between their eligible customers.

It is built by Kinexys, which built Kinexys Digital Payments Blockchain Deposit Accounts, for JP Morgan’s institutional clients on a permissioned blockchain. JPMG on the other hand is on permissionless public chains.

Canton Network

Canton is the most successful institutional project within crypto. It is a privacy chain where all transactions are on a need to know basis. We have an article on Canton if you’d like to read further into it, but in this article the important topic to cover is that Canton settles $4Tn in repo payments a month.

It does this via Broadridge’s Distributed Ledger Repo (DLR) which tokenises securities and processes the repo market:

Banks deposit US Treasuries with DTCC, which creates a digital twin on Canton - a cryptographic link saying “Treasury Bond Serial #XYZ is held in custody here and cannot be withdrawn” represented by a smart contract; real assets stay within the DTCC vaults, but rights transfer on-chain.

When banks lend money against Treasury collateral, cash (USDC) flows one direction, collateral the other, with final settlement in a single transaction. The list of banks using this is:

• Bank of America

• Citadel

• Goldman Sachs

• HSBC

• JP Morgan

• Deutsche Bank

• BNP Paribas

  And many many more.

The process is very simple in that banks already have a relationship with Broadridge, so they sign up to the DLR as a new module on the platform and trade via Broadridge’s UI. Alternatively, they can run a validator node and manage the transactions yourself.

Conclusion

Institutions are involved with blockchain in a variety of ways, notably tokenization and DeFi as explained above. Don’t miss the boat and follow the money.