Blockchain for Banking News

JP Morgan promotes bank deposit tokens versus stablecoins

jp morgan

Yesterday consultants Oliver Wyman published a report in conjunction with Onyx by JP Morgan on blockchain and tokenized bank deposits as a form of payment. The report delves into the differences between stablecoins and deposit tokens, arguing in favor of regulated deposit tokens and exploring their use cases.

“We believe deposit tokens will become a widely used form of money within the digital asset ecosystem alongside central bank digital currencies,” said Basak Toprak, Global Product Head of Deposit Tokens at Onyx by J.P. Morgan.

In contrast to some blockchain-based deposit accounts, the report focuses on deposit tokens that are native to the blockchain rather than accounts that represent an amount in a legacy account.

The JPM Coin is one of the highest profile blockchain deposits accounts, but smaller banks such as Signature also have blockchain-based payment networks that support 24/7 payments. Both JPM Coin and Signature’s Signet support payments only between existing bank clients. Signet recently said that cargo shipping firms are the largest users of its blockchain payments network because it supports instant payments outside of banking hours.

Other use cases for deposit tokens include:

  • Programmable money
  • Settlement for financial transactions
  • Participation in DeFi
  • Using bank tokens as collateral.

While JPM Coin and Signet operate single bank distributed ledgers, for interbank payments JP Morgan-backed Partior has a shared ledger, as does Tassat’s Digital Interbank Network. Oliver Wyman identified a third group, universal tokens that operate on permissionless blockchains as planned by the USDF Consortium of community banks. JP Morgan is also participating in experiments on public blockchain in Singapore, where it is exploring deposit tokens as opposed to the existing JPM Coin accounts.

The digital currency competition

The report focuses on three types of tokenized money: stablecoins, deposit tokens and central bank digital currency (CBDC), but in reality there is a spectrum. For example, somewhere between deposit tokens and CBDC there is synthetic CBDC, where institutions issue tokens backed by bank deposits at the central bank. An example is Fnality, backed by 17 major financial institutions.

Oliver Wyman argues that once stablecoins get more significant, a run on a stablecoin could impact money markets if there are sudden large sales of government bonds. That’s something the European Central Bank highlighted years ago when discussing Libra, the stablecoin proposed by Meta.

Banks already have rigid capital requirements and risk management, so the argument is they are more stable. The strongest thing in favor of deposit tokens is the tendency to be more decentralized compared to stablecoins. There are only three major stablecoin issuers compared to 30 globally systemic banks and around 10,000 banks overall.

However, Silvergate Bank, which focuses on the digital asset sector, was almost brought to its knees after the collapse of FTX when it experienced a run-like situation. Digital asset firms held large deposits at the bank that were withdrawn. It was only saved by having an ultra-conservative balance sheet approach but lost money because it had to sell bonds quickly.

Other benefits of deposit tokens include interoperability with the existing financial system.

Turning to securities transactions, the paper argues that deposit tokens enable atomic settlement, which means the money and securities are exchanged simultaneously, eliminating counterparty risk. That’s true, but during turbulent economic times, commercial bank money is not viewed as risk-free, hence the desire for a CBDC.

In fact, the Bank of England has stated that most stablecoins will likely be backed by central bank money.

Regulators and tokenization

Regulators are pleased that the crypto crash and FTX collapse had a limited impact on the mainstream financial system. Currently, there’s a challenging dynamic between embracing blockchain’s innovation and the regulators’ resistance to cryptocurrency volatility spilling outside of its ecosystem.

That’s hinted at in the conclusion of the Oliver Wyman paper. It argues that deposit tokens “merit separate consideration by banks looking to innovate, regulators looking to establish appropriate regulation that shape this evolving space, and the broader set of participants in the financial system looking to interact with digital money.”

Meanwhile, in late 2021 Oliver Wyman and Onyx published a report estimating that cross border CBDC could save $100 billion annually.

Update: The article clarified the distinction between JPM Coin deposit accounts versus deposit tokens