JPMorgan Prefers Deposit Tokens To Stablecoins For Commercial Bank Blockchains

Key Points:

• JPMorgan Chase and consultants Oliver Wyman examined the use of blockchain technology in commercial banking.
• This contrasts with CBDCs and stablecoins, which are frequently produced by private non-bank entities.
• JPMorgan Chase unveiled its internal JPM Coin and the Onyx blockchain platform. It has tested many applications of the technology, such as cross-border trades, repurchase agreement trades, and collateral settlement.

In a paper released on February 9, JPMorgan Chase and consultants Oliver Wyman examined the use of blockchain technology in commercial banking.

Although stablecoins and central bank digital currencies (CBDCs) have previously dominated the market, the authors highlight the benefits that deposit coins bring in terms of stability and dependability.

A depository institution issues deposit tokens on a blockchain to reflect a deposit claim. This contrasts with CBDCs and stablecoins, which are frequently produced by private non-bank entities. An important benefit is this distinction in 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.”

The authors of the paper emphasize that regulation increases trust, lowers the possibility of a run on deposit tokens, and ensures dependability.

Stablecoins don’t compare well in this aspect because there aren’t any requirements for reserves and there’s confusion about redemption rights. Deposit coins may be expected to withstand that stress because they are “extensions of traditional deposits,” but there is a risk of contagion in the case of a run on a stablecoin:

“Historical analysis of traditional deposits shows that deposits have been a steady and reliable source of funding for commercial banks throughout economic cycles.”

The research contends that deposit tokens’ electronic form has benefits over cash, including programmability and atomic (simultaneous) settlement, which might “speed up transactions and automate sophisticated payment procedures.”

Although the technology behind deposit tokens is still in its infancy, the research asserts that it may potentially inform CBDC development and act as “a natural bridge for the integration of CBDCs into the banking system.“

In 2020, JPMorgan Chase unveiled its internal JPM Coin and the Onyx blockchain platform. It has tested many applications of the technology, such as cross-border trades, repurchase agreement trades, and collateral settlement.

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