JPMorgan Chase and consultants Oliver Wyman discussed blockchain technology in commercial banking in a report published Feb. 9. Stablecoins and central bank digital currencies (CBDCs) have dominated in this sphere so far, but the authors pointed to the advantages that deposit offers. coins for stability and reliability.
Deposit tokens are issued on a blockchain by a depository institution to represent a deposit claim. This is in contrast to stablecoins, commonly issued by a private non-bank entity, and CBDCs. This difference in emitter is a key advantage:
“Since deposit tokens are commercial bank money incorporated in a new technical way, they sit comfortably as part of the banking ecosystem, subject to the regulation and supervision applicable to commercial banks today.”
Regulation, the report authors noted, contributes to trust and reduces the risk of a run on deposit tokens, as well as ensuring trustworthiness.
Stablecoins compare poorly in this regard due to a lack of standards for reserves and a lack of clarity about redemption rights. In addition, there is a risk of contagion in the event of a run on a stablecoin, while deposit currencies such as “traditional deposit spreads” can be expected to withstand that stress:
“Historical analysis of traditional deposits shows that deposits have been a consistent and reliable source of funding for commercial banks throughout business cycles.”
The electronic form of deposit tokens offers advantages over cash, such as programmability and atomic (simultaneous) settlement that can “speed up transactions and automate sophisticated payment operations,” the report argued.
Related: Bahrain’s central bank tests JPMorgan’s blockchain and token
While deposit token technology is relatively underdeveloped, it can still inform nascent CBDC technology, according to the report, and serve as a “natural bridge for CBDC integration into the banking system.”
JPMorgan Chase introduced its Onyx blockchain platform along with its own JPM Coin in 2020. It has tested numerous uses of the technology, including collateral liquidation, repurchase transactions, and cross-border transactions.
1/3 Embrace, extend, extinguish? @OliverWyman & @jpmorgan renamed them deposit “tokens” (https://t.co/XDrHXxLrbq)…
—Christian Catalini (@ccatalini) February 10, 2023
