A recent study from JPMorgan Chase and consultants dives into the potential benefits of deposit tokens in the banking sphere. The blockchain-powered system is seen to offer more stability and reliability than stablecoins and central bank digital currencies (CBDCs).
Deposit Tokens
According to JPMorgan Chase and OliverWyman, deposit tokens are a type of digital asset that represents a deposit claim or deposit of fiat currency held by a commercial bank. They are intended to be used on blockchain networks as a form of digital currency that can be transferred and traded, and they are projected to provide more benefits over standard stablecoins.
Advantages
The advantages of deposit tokens over stablecoins for commercial bank blockchains, as outlined based on the research, are as follows:
1. Reduced Regulatory Risk
Deposit tokens are considered commercial bank money in digital format. This puts them in the realm of the banking ecosystem and subjects them to the same rules that govern commercial banks. Likewise, the fact that these are backed by actual bank deposits makes them less susceptible to regulatory issues than stablecoins, which are not always backed by actual reserves and are often issued by non-bank private parties.
2. Greater Stability
These kinds of digital assets are tied to the underlying value of the fiat currency or deposit claim they represent. These can provide greater stability than stablecoins which do not always maintain a stable value.
3. Improved Liquidity
The tokens can be redeemed for the underlying fiat currency at any time. This can provide greater liquidity than stablecoins that may have restrictions on redemption or require the use of intermediaries.
4. Increased Scalability
Deposit tokens can be issued and redeemed by commercial banks directly. Such features can increase scalability and reduce the need for intermediaries.
5. Plenty of Latent Use Cases
OliverWyman points out that 90% of the money that people utilize nowadays is from bank deposits. So, its advisors see plenty of use cases for this kind of digital currency in terms of domestic and overseas payments. The firm also recognizes the budding advantage of these tokens in trading, settlement, and utilization as cash collateral.
Key Challenges
One of the obvious challenges posed by deposit tokens is interoperability. This refers to the ability of different blockchain networks and financial institutions to interact and exchange value with each other.
Deposit tokens issued by one bank may not be directly compatible with the systems used by other banks or blockchain networks, which can create barriers when it comes to wider adoption and use. To address this challenge, industry standards and protocols may need to be developed to ensure that deposit tokens can be used seamlessly across different systems.
Furthermore, regulatory compliance may need to be addressed to ensure that deposit tokens can be used in a way that meets the requirements of different jurisdictions.
Final Thoughts
Overall, deposit tokens offer a promising new approach to stable digital money that leverages the strengths of the traditional banking system while incorporating the benefits of blockchain technology. While there are still challenges to be addressed, such as regulatory compliance and interoperability, deposit tokens have the potential to become a key building block for the future of digital finance.
Giancarlo is an economist and researcher by profession. Prior to his addition to Blockzeit’s dynamic team, he was handling several crypto projects for both the government and private sectors as a Project Manager for a consultancy firm.
