JPMorgan Chase and consultants Oliver Wyman took a look at blockchain technology in commercial banking in a report released Feb. 9. Stablecoins and central bank digital currencies (CBDCs) have dominated in the sphere so far, but the authors point out the advantages offered by deposit coins in terms of stability and reliability.
Deposit tokens are issued on a blockchain by a depository institution to represent a deposit claim. This contrasts with stablecoins, commonly issued by a non-bank private entity, and CBDCs. This difference in the issuer is a key advantage:
“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.”
The report’s authors point out that regulation contributes to trust, reduces the risk of a run on deposit tokens and assures reliability.
Stablecoins compare poorly in this regard due to the lack of standards for reserves and lack of clarity around redemption rights. In addition, there is a risk of contagion in the event of a run on a stablecoin, while deposit coins, as “extensions of traditional deposits,” might be expected to resist that stress:
“Historical analysis of traditional deposits shows that deposits have been a steady and reliable source of funding for commercial banks throughout economic cycles.”
Deposit tokens’ electronic form offers advantages over cash, such as programmability and atomic (simultaneous) settlement that may “speed up transactions and automate sophisticated payment operations,” the report argues.
While deposit token technology is relatively undeveloped, the report claims that it may still inform nascent CBDC technology 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 in-house JPM Coin in 2020. It has trialed numerous uses of the technology, including collateral settlement, repurchase agrement trades and cross-border transactions.