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Bank-Issued Deposit Tokens Emerge and JP Morgan Sees Them Going DeFi

Finextra | Feb 10, 2023

deposit tokens - Bank-Issued Deposit Tokens Emerge and JP Morgan Sees Them Going DeFi

Blockchain-based deposit tokens, rather than stablecoins, could emerge as the foundation for stable digital money, according to a report from JP Morgan and Oliver Wyman.

  • Alternative bank-issued deposit token could prove more successful than stablecoins often touted as the future of digital money
    • Deposit tokens are transferable tokens issued on a blockchain by a licensed depository institution which evidence a deposit claim against the issuer.
    • Because the 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.
    • Number of technical advantages to payments and transaction settlement including programmability, 24/7 transferability, as well as faster and more direct fund flows between counterparties.

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Basak Toprak, global product head, digital tokens, Onyx by JP Morgan:

The digital money landscape is still emerging and various types of digital money will compete to serve different use-cases. We believe deposit tokens will become a widely used form of money within the digital asset ecosystem alongside central bank digital currencies.

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Blockworks | Sebastian Sinclair  | Feb 10, 2023

Bank-issued deposit tokens are much safer than stablecoins for major institutions looking to transfer value across chains, JPMorgan says.

  • Enter “deposit tokens,” a separate concept from central bank digital currencies (CBDCs). These function similarly to traditional deposits held by licensed financial institutions such as commercial banks, except they exist and operate on-chain.
  • Last November, JPMorgan traded tokenized Singaporean dollars for tokenized Japanese yen as part of Singapore’s Project Guardian, with help from DBS Bank and SBI Digital Asset. The banks used a permissioned smart contract protocol, a fork of Aave Arc, powered by Polygon for the on-chain trade.
  • Deposit tokens would be supported by the issuer’s regulatory framework, capital and liquidity requirements, contingency funding access as well as “robust” consumer protection policies.
  • From the perspective of the issuing bank, the tokens simply represent a reorganization of the bank’s deposit liabilities on its balance sheet, without altering the bank’s asset composition.

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  • Deposit tokens going DeFi:  The rise of decentralized finance (DeFi) protocols may also result in the creation of liquidity pools for deposit tokens, according to the report. These pools would be established by token holders who supply their deposits as liquidity on decentralized exchanges.
  • If the pools persist and serve a practical purpose, such as fostering market-based fungibility between deposit tokens, then tokenization should not cause a pricing disparity commonly seen in today’s stablecoin liquidity pools, the bank said.

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