What if a multinational corporation could transfer funds across its international subsidiaries seamlessly and instantly? What if foreign exchange trading desks could settle 24/7/365?
Outside of the implosion of the crypto speculative markets, regulated payments players are forging ahead testing and implementing pragmatic, commercial applications of blockchain and smart contracts. One such application is tokenized deposits. Oliver Wyman in collaboration with the Onyx team at JP Morgan recently published Deposit Token, A Foundation for Stable Digital Money, which discusses the merits of deposit tokens and proposes that “commercial bank money holds the key to a safer tokenized economy.”
What is a deposit token?
“Deposit tokens refer to transferable tokens issued on a blockchain by a licensed depository institution which evidence a deposit claim against the issuer. Given that deposit tokens are commercial bank money embodied in a new technical form, they sit comfortably as part of the banking ecosystem, subject to regulation and supervision applicable to commercial banks today. This includes existing bank minimum capital and liquidity requirements, and other technology risk management regulations and supervisory expectations, that control prudential and operational risks associated with deposit-taking and related bank activities.” (Oliver Wyman report referenced above)
Deposit tokens are an alternative to stablecoins, which can be issued by non-banks (a type of digital asset that is designed to maintain a relatively stable value, typically by being pegged to a fiat currency; e.g., USD Coin).
Use cases and advantages
Just like commercial bank money today, tokenized deposits can support a variety of use cases: payments (in particular cross-border), trading (e.g., FX) and settlement, and provision of cash collateral.
Superior to current commercial bank money, tokenized deposits offer programmability, instant, atomic settlement (i.e., the transaction settles if and only if every leg of the transaction is successful), and improved transaction status transparency. Programmability allows conditions to be placed on a funds transfer and execution to occur without human involvement once conditions are met.
The report outlines three different models of deposit tokens.
While pragmatic use cases for blockchain and smart contracts exist, there are very few players—including central banks—that have moved from working paper to proof-of-concept to pilot. Deposit tokens, in contrast, are a reality. “JPM Coin System is live with material transaction volume.”
For further discussion regarding tokenized deposits, see my blog, Blockchain Beacons: Practical Use Cases Forge Ahead in Wholesale Payments.