JPMorgan is actively exploring digital asset custody, and is looking for help from crypto native firms

Investment banking giant JPMorgan has been exploring how it can offer cryptocurrency custody, according to several people familiar with the situation. 

In recent weeks, the bank has sent out requests for information and held discussions with a number of crypto-native custody providers to see how it could offer digital asset custody to its clients via a "sub-custodian," or a third-party specialist firm. Fidelity Digital Assets and Paxos are among the companies that JPMorgan has engaged with, according to sources familiar with the situation. 

JPMorgan wouldn't be the first bank to explore the crypto custody market. Sources at Citigroup say the bank has also conducted internal testing related to digital asset custody. Citigroup previously held its own conversations with Gemini and BitGo about crypto custody in recent years. Recently, however, the firm has been more in the "blockchain not bitcoin camp," according to a source. 

As for JPMorgan, this recent push into custody wouldn't be the firm's first. Sources who have worked with the bank said that the firm blockchain division was serious about exploring custody earlier this year prior to the Covid-19 health and economic crisis. At the time, the firm was working with providers to price a product. 

"The priorities shifted," a person familiar said. "The concept of sub-custody pursuit has been in the works for 18 months."

Another source said that JPMorgan has been "looking into [custody] for years." 

At one point the effort was led by former Paxos and Fidelity employee Steve Wager, who recently left JPMorgan to join BNY Mellon, according to sources. 

In the background, JPMorgan now appears to be sharpening its focus on digital assets — or at least restructuring it. According to a new report from CNBC, JPMorgan's digital currency, JPM Coin, will be used for the first time this week by "a large technology client to send payments around the world."

Takis Georgakopoulos, the firm's global head of wholesale payments, told CNBC that this and "other behind-the-scene moves" inspired JPMorgan to create a business devoted specifically to its blockchain and digital currency work. Freshly dubbed Onyx, the division has more than 100 team members. 

“We are launching Onyx because we believe we are shifting to a period of commercialization of those technologies, moving from research and development to something that can become a real business,” Georgakopoulos told CNBC. 

The report did not mention custody, but did note that JPMorgan is looking to create "new, separate payment rails for central banks that have expressed interest in starting their own currencies." 

A source familiar with the new unit said that the bank now has more authority to roll out new products, and that a recent guidance from the Office of the Comptroller of the Currency makes custody a more viable business than it has been historically. The OCC guidance said that custody of digital assets falls within the scope of federal-regulated banking activity. 

Custody would also provide a foundation for JPMorgan to enter a number of peripheral digital asset businesses. "Custody is the loss leader that you use to get into prime brokerage, lending, and everything under the sun," one industry insider noted. 

Matt Walsh of Castle Island Ventures said he sees most banks and brokers dealers opting to partner or buy up their own custody providers rather than building their own solutions in-house. He said there are three options: build your own custody platform, buy a custody provider, or enter sub-custody deals. "The forward-thinking firms who see the build option as time-consuming are going to be the first to scoop up the upstart custody providers," Walsh said.

Last week Bloomberg reported that the PayPal—which is set to roll-out its own cryptocurrency offering—has held acquisition conversations with crypto custody providers, including BitGo. Elsewhere, DBS, Singapore's biggest bank, is launching a custody platform along with a fiat-to-cryptocurrency exchange, as The Block first reported Wednesday.

JPMorgan declined to comment.