SINGAPORE — Banks have to prioritize consumer protection as they embark on digital asset experiments, said Umar Farooq, chief executive officer 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 proper precautions, they could also expose customers to cybersecurity risks.

In recent months, many crypto investors have been struck 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 customer's point of view is that we need to protect our customers. We cannot lose their money," Farooq said during a panel at the Singapore Fintech Festival 2022 on Wedneday.

"I do think you need some sort of identity solution or know-your-customer solution which verifies who the human being that is interacting is and what they are allowed to do. Because without that, in the longer term, it just doesn't work," he added in an interview with CNBC.

Farooq explained that JPMorgan is using a solution called verifiable credentials that live in the customer's blockchain wallet. When the customer goes to a protocol to trade, the protocol validates the credential.

"I can't foresee people being able to send money across borders if no one checks and no one knows who's sending money to who, because sooner or later they will be in a money laundering incident," said Farooq. 

"So those are the very fundamental things that need to be addressed before you even get to systematic issues. 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 hard," Farooq said during the panel.

In the pilot, DBS Bank, JPMorgan and SBI Digital Asset Holdings conducted transactions in tokenized foreign exchange and government bonds. Tokenizing a financial asset involves converting its ownership rights into digital tokens. It allows financial transactions such as borrowing and lending to be performed 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 lots of audits of smart contracts because again — they were publicly visible. And finally, it was using a protocol to actually make it all happen. It's a lot of managing the risks. All of these were firsts for us," he said.