As blockchain technology continues to evolve, traditional financial institutions have been searching for ways to participate in the technology’s growth. In a recent joint report by JPMorgan and Oliver Wyman, the two companies have proposed a new concept that they believe will revolutionize the way value is transferred on major blockchains: deposit tokens.
What to know about deposit tokens
Deposit tokens are a new form of digital assets that operate similarly to traditional deposits held by commercial banks. However, deposit tokens exist and operate on-chain, making them different from central bank digital currencies (CBDCs).
The concept behind these tokens is that they simply represent a reorganization of the bank’s deposit liabilities on its balance sheet without altering the bank’s asset composition.
The report argues that the tokens are much safer than stablecoins for major institutions looking to transfer value across chains. This is because deposit tokens would be supported by the issuer’s regulatory framework, capital and liquidity requirements, as well as consumer protection policies.
The report suggests that the tokens would be considered a secure and “stable form of money” that can operate on a large scale.
JPMorgan and Oliver Wyman believe that stablecoins, while having proven successful in the past, would fall short of meeting the needs of regulated banking. This is why the tokens have been proposed as a safer and more reliable alternative for institutional-level participants.
DeFi and deposit tokens: A match made in heaven
In the report, JPMorgan and Oliver Wyman also explore the potential impact of the rise of decentralized finance (DeFi) protocols on deposit tokens.
The report suggests that the creation of liquidity pools for deposit tokens would result from DeFi protocols. These pools would be established by token holders who supply their deposits as liquidity on decentralized exchanges.
According to the report, if these liquidity 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.
Instead, the liquidity pools have to represent the fungibility of the deposit tokens as financial assets in order to be effective.
JPMorgan, one of the largest investment banks in the world, has been actively involved in blockchain development and implementation for at least six years.
The company is now focused on the development of its tokenization platform, Onyx, which is a permissioned interbank protocol for transferring value, settled in its USD-backed stablecoin JPM Coin.
The report by JPMorgan and Oliver Wyman highlights the bank’s commitment to the future of blockchain technology.
By proposing deposit tokens as a safer alternative to stablecoins, the two companies have laid the foundation for a new era of blockchain transactions that they believe will change the way value is transferred on major blockchains.
The rise of DeFi protocols also presents new opportunities for deposit tokens, as liquidity pools for these tokens could be established on decentralized exchanges.
JPMorgan and Oliver Wyman’s report highlights the commitment of traditional financial institutions to the future of blockchain technology and lays the foundation for a new era of blockchain transactions.