Consumer protection should be key in digital asset projects

SINGAPORE – Banks must prioritize consumer protection when embarking on experiments with digital assets, said Umar Farooq, managing director of JPMorgan’s blockchain unit Onyx.

Many blockchain projects and other crypto-protocols have the potential to make financial services more efficient, accessible and affordable. But without the right precautions, they can also expose customers to cyber security risks.

In recent months, many crypto investors have been hit by hacks and scams. For example, crypto exchange Binance was hit by a $570 million hack in October and Deribit lost $28 million in a hot wallet hack this month.

“What a bank needs to do from a regulatory point of view and the customer’s point of view is we need to protect our customers. We can’t lose their money,” Farooq said during a panel at the Singapore Fintech Festival 2022 on Wednesday.

“I think you need some kind of identity solution or know-your-customer solution that validates who the human interacting is and what they’re allowed to do. Because without that, in the long term, it just doesn’t work,” he added to in an interview with CNBC.

Farooq explained that JPMorgan uses a solution called verifiable credentials that resides in the customer’s blockchain wallet. When the customer goes to a protocol to shop, the protocol validates the credentials.

“I can’t foresee people sending money across borders if no one is checking and no one knows who is sending money to whom, because sooner or later they will be in a money laundering incident,” Farooq said.

“So those are the very basic things that need to be addressed before you even get to systematic questions. Education, protection and identity need to be in place,” he added.

Farooq and Onyx tackled some of these security and verification issues as part of Project Guardian, an industry pilot the Monetary Authority of Singapore announced in May.

“It was very, very difficult,” Farooq said during the panel.

In the pilot, DBS Bank, JPMorgan and SBI Digital Asset Holdings conducted transactions in tokenized currencies and government bonds. Tokenization of a financial asset involves converting the ownership rights into digital tokens. This means that financial transactions such as loans and lending can be carried out autonomously on a blockchain without the need for intermediaries.

“It was the first time we had tokenized deposits. I actually think it’s the first time any bank in the world has tokenized wallets on a public blockchain,” Farooq told CNBC in an interview.

“Using public blockchain, we had to spend a lot of time thinking through identity. We did a lot of revisions to smart contracts because again – they were publicly visible. And finally, it used a protocol to make it all happen. It’s a lot to manage the risk. All of these were firsts for us,” he said.