JPMorgan Chase and consultancy Oliver Wyman discuss Blockchain technology in commercial banking in a report published Feb. 9. Stablecoins and Central Bank Digital Currencies (CBDCs) have dominated in this arena so far, but the authors pointed to the advantages that depository tokens offer in terms of stability and reliability.
Deposit tokens are issued on a blockchain by a depositary entity to represent a deposit right. 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 embodied in a new technical form, they sit comfortably as part of the banking ecosystem, subject to the regulation and supervision applicable to commercial banks today.”
Regulation, the authors of the report point out, contributes to trust and reduces the risk of mass withdrawal of deposit tokens, as well as ensuring reliability.
In this sense, stablecoins are not good by comparison due to the lack of rules for reserves and the lack of clarity on redemption rights. In addition, there is a risk of contagion in the event of a stablecoin mass withdrawal, while deposit tokens, as “extensions to traditional deposits”, would 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 simultaneous settlement, which can “speed up transactions and automate sophisticated payment operations,” the report argues.
Although deposit token technology is relatively underdeveloped, it can still inform the nascent CBDC technology, according to the report, and serve as a “natural bridge for the integration of CBDCs into the banking system.”
JPMorgan Chase introduced its Onyx blockchain platform along with its internal currency JPM Coin in 2020. He has tried numerous uses of the technology, such as collateral liquidation, repurchase operations, 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
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