You'd be hard-pressed to find a year in crypto as brutal as 2022. In the last year, nearly every cryptocurrency has posted a negative return, and the entire asset class is down more than 70% since hitting an all-time high of a $2.9 trillion market cap.

Although contractions after a rapid rise in prices are normal for any asset class, last year's crypto decline was likely exacerbated by a handful of events that can trace their roots to the implosion of the Terra stablecoin in May, and reached its pinnacle more recently when the cryptocurrency exchange FTX announced bankruptcy. 

Despite this widespread fallout, there were still good things that happened in crypto in 2022. Yet, one particular event didn't seem to grab the attention it likely deserves and probably would have had if we were in a bull market. 

Back in October of this year, one of the world's largest banks accomplished a feat never done before. In a groundbreaking, successful experiment, JPMorgan (JPM 0.15%) partnered with banks and agencies in Singapore and Japan to conduct international money transfers on a blockchain. The experiment created blockchain equivalents of traditional assets like Japanese yen, Singaporean dollars, and bonds from both countries. This process is referred to as tokenization, and since the experiment was successful, it could lay the foundation for a new way for traditional financial entities to migrate their processes to the blockchain. 

What actually happened

First, the banks simulated a deposit of the Singaporean dollar token in exchange for the Japanese yen token. This type of transaction is extremely common among banks because the value of national currencies changes every hour of the day.

In order to maintain a well-structured balance sheet, banks trade currencies depending on price fluctuations and assessed future value. With currencies now in a tokenized form on the blockchain, banks can make these trades instantaneously and automatically if certain conditions are met (like a price drop or increase in the currency). The trades are also cheaper, since there is no need to settle the trade with an intermediary.

The second part of this experiment took it a step further and tokenized bonds. Like the currency market, bonds are heavily traded and have a wide range of players like corporations, banks, and even governments. Therefore, successfully trading tokenized bonds could have wide-ranging benefits. If this model is used in the future, it will mitigate costs, streamline processes, and allow transactions to be conducted in real time.

How they did it

To achieve all of this, not just one but a few blockchains were actually used. The trades were technically settled on Polygon (MATIC 1.31%) but also involved Ethereum (ETH 0.94%) and the decentralized finance specialist Aave (AAVE 0.91%).

Ethereum has become the standard blockchain for DeFi due to its programmable smart contracts, decentralization, and security. However, costly fees and slow speeds can plague the blockchain when traffic is high. JPMorgan chose to utilize Polygon because it processes transactions on its own blockchain and then adds them to Ethereum in a bundle instead of individual transactions. This makes Polygon faster and cheaper to use than Ethereum but still maintains that desired compatibility.

To set certain parameters like foreign exchange rates and interest rates, Aave was used. You could think of Aave as the actual bank where conditions and rules can be put in place. In addition, Aave's functionality allowed JPMorgan to set up credential-based access so that only certain participants could make trades.

The future of banking is on the blockchain

The success of this experiment proves that blockchains have the potential to revolutionize financial processes. While crypto was once viewed as direct competition and an alternative to traditional finance, the lines between the two are slowly starting to blur. Chief FinTech Officer of the Monetary Authority of Singapore and a participant in the experiment, Sopnendu Mohanty, asserted that "digital assets and decentralized finance have the potential to transform capital markets."

With blockchains, banks can transform their everyday processes from being slow and lagging into instantaneous, transparent, and cheap transactions. And if more banks decide to follow JPMorgan's path, it could lead to explosive long-term potential for the blockchains used in this experiment. 

While crypto investors might be looking forward to an end to this year, looking to the future, there is still plenty of potential in the space that could revolutionize finance. It's more than likely that more casualties will occur while this bear market persists, but that can serve to the benefit of investors. While prices are low, prioritizing investments in cryptocurrencies at the forefront of this innovation, like Polygon, Ethereum, and Aave could provide lucrative returns as blockchains continue to attract the attention of capital-rich industries like banking.