American investment banking giant JP Morgan is testing a blockchain-based dollar payment settlement system for financial institutions in India’s GIFT City.
According to an Economic Times report, the pilot program will be conducted by the bank in partnership with domestic banks in the Gujarat International Finance Tec-City or GIFT City, an international financial centre located in Gujarat, India.
U.S. Banking Giant JP Morgan Testing Blockchain-Powered Dollar Settlements With Indian Banks
Opened in 2008, GIFT City is an economic free trade zone considered a quasi-foreign territory with regulations that differ from the rest of the country. The city aims to compete with other major international financial hubs such as Singapore, Hong Kong, Abu Dhabi Global Market (ADGM), and Dubai International Financial Center (DIFC).
Apart from leading Indian banks – Axis Bank, Kotak Mahindra Bank, ICICI Bank, and Bank of Baroda – which set up their International Financial Services Center Banking Units (IBUs) in the free trade zone to allow non-residents and foreign entities open dollar accounts in India, several international systemic banks, including HSBC, JP Morgan, Deutsche Bank, and MUFG, also opened shop in GIFT City.
Usually, financial institutions in India hold Nostro accounts at U.S.-based banks to make dollar payments. Nostro is a foreign-currency-denominated account a particular bank from one country has with a bank in the country that issues the currency, for example, a Chinese yuan account opened by an American bank with a bank in China. The banks rely on the cross-border interbank SWIFT payment system to simplify the process of exchanging and trading in U.S. dollars.
However, in most cases, the banks are bogged by the restriction of only being able to conduct transactions during U.S. open hours, making it impossible for them to exchange or trade during the weekends. JP Morgan is aiming to find a solution to this problem using distributed ledger technology (DLT).
The banking giant says its blockchain-based payment system will settle transactions on the instant, allowing banks to send or receive payments 24/7 on all days of the week. According to JP Morgan, it will enable Indian banks in GIFT City to open on-chain Nostro accounts in a sandbox environment. The platform, developed by the bank’s blockchain unit, Onyx, will use the standard and familiar SWIFT messaging interface to process payments on a distributed ledger within JP Morgan’s blockchain ecosystem.
The Economic Times also noted that the platform supports 24/7 payments between two banks with JP Morgan accounts, while payments outside of the ecosystem will be compliant with normal SWIFT restrictions.
JP Morgan began developing blockchain-based banking systems with the creation of the Onyx unit in 2022. The team is responsible for launching the JPM crypto token and bank accounts powered by its Distributed Ledger Technology (DLT) systems.
Last November, JP Morgan announced Project Guardian, a program that explores the potential of decentralized finance (DeFi) for traditional financial (TradFi) institutions. The bank partnered with the Monetary Authority of Singapore (MAS), DBS Bank, and SBI Digital Asset to trial foreign currency exchange transactions and government bond trades on DeFi lending protocol Aave (AAVE) and decentralized exchange (DEX) Uniswap. The transactions were executed on the Polygon (MATIC) blockchain.
In 2021, the bank co-founded Partior, a blockchain-powered interbank network that supports multi-currency transactions. Partior, developed in collaboration with DBS Bank and Temasek, processes payments in USD and Singapore dollars. The network expects to add support for six more fiat currencies.
India’s Efforts to Become a Blockchain Economy
Meanwhile, India is also ramping up to become a blockchain economy, with the latest development from JP Morgan being a testament to the country’s efforts.
Recently, India’s Minister of Finance, Nirmala Sitharaman, confirmed that the Narendra Modi government would be making blockchain the focal point of its technological aspirations. The county is aiming for a 46% blockchain adoption rate by 2026.
In January, the National Institution for Transforming India (NITI), or NITI Aayog, partnered with digital asset giants 5ire and Network Capital to launch a blockchain learning module to train Indian students looking to start their careers in the emerging field. NITI Aayog’s Atal Innovation Mission (AIM), which manages the module, has set up Atal Tinkering Labs in 10,000 schools across the country to teach 7.5 million students computational skills and adaptive learning techniques.
India’s healthcare, security, manufacturing, banking, and real estate sectors are implementing blockchain applications to make their fields more efficient. However, the country’s tax regime against cryptocurrencies and virtual asset service providers is a thorn in the shoe of the blockchain sector, which may hinder the technology’s growth and adoption in the world’s fastest-growing economy.