On Tuesday the Swiss Banking Association (SBA) published a white paper on deposit tokens. It’s particularly interested in Swiss Franc (CHF) deposit tokens to settle transactions for tokenized assets. Apart from digital assets, it focuses on ‘payments of the future’, including retail wallet-based payments, micropayments and corporate payments.
Interoperability is seen as an essential principle of deposit tokens. The SBA believes this is best achieved by using public blockchain.
As context, in Switzerland there are already two institutional CHF stablecoins from the SIX Digital Exchange and Sygnum, but both are only usable with their own ecosystems. The SBA’s vision is something bigger and more interoperable. While both the SDX and Sygnum tokens are fully backed by reserves, deposit tokens could potentially be based on fractional reserves because participants are regulated banks.
The SBA envisions three potential approaches. One route is so-called colored coins, where each bank issues tokens with its own rules. The SBA sees various problems with this path, including that different rules mean the tokens are only partially interchangeable or fungible. For example, one might be fully backed by reserves and another 50% backed. This also results in fragmentation.
An alternative is standardized tokens, where each institution issues its own, but there are standard rules and it must be fully backed.
The third path is a joint token, the route that SBA favors. One of the advantages it sees is that segregation of reserves is easier compared to standardized tokens. The paper refers to ‘freedom with regards to money creation’. It’s unclear if this implies it may not be fully backed.
Another potential advantage of a joint deposit token is this kind of token could earn interest if held in a wallet with a bank, similar to a conventional deposit. This path sounds similar to Fnality, except it does not rely on central bank reserves and is retail rather than interbank-focused.
There are still many questions to answer, particularly on the legal front. The SBA more or less rules out deposit tokens as a ‘system of payment instructions’ because it would be too restrictive. The alternative is to be classified as a security, but it needs some answers from the regulator FINMA.
It’s also concerned about the FINMAs statement that Swiss institutions that want to issue stablecoins must identify all persons in the transaction chain. This applies only to banks, which the SBA argues is an unlevel playing field.
The paper concludes that there’s still much to explore, including governance, the impact on bank balance sheets, and whether it could be used for cross border payments.
Meanwhile, last year JP Morgan and Oliver Wyman issued a paper on deposit tokens and JP Morgan is trialing them as part of Project Guardian. In the U.S., the USDF Consortium is planning a deposit token network.