Tokenized deposits are heating up | #327
Also, how stablecoins will reshape our payments system
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This week:
Tokenized deposits are heating up
How stablecoins will impact the existing payments system
Stuff happens
1. Tokenized deposits are heating up
J.P. Morgan recently unveiled JPMD, a new pilot program exploring the potential of tokenized deposits on public blockchains. The initial proof of concept is built on Base, Coinbase’s Ethereum Layer 2 chain, and is limited to institutional clients.
In its overview of the pilot, JPM acknowledges the advantages of deposit tokens versus stablecoins:
JPMD – and Deposit Tokens in general – match the novel and distinctive properties of stablecoins, most notably the ability to conduct peer-to-peer transactions with programmability. As such, Deposit Tokens and stablecoins can be applied to similar use cases. However, Deposit Tokens differ from stablecoins in key areas including, interest payouts, and deposit treatment. Clients can treat JPMD as bank deposits on their balance sheet, providing certainty around financial and accounting treatment. Additionally, JPMD is integrated with J.P. Morgan’s traditional banking systems, thereby reducing liquidity silos for clients.
And here’s PolicyPartner’s key highlights from the white paper (via Greg Kidd):
Blockchain based deposits offer a more certain regulatory environment ahead of the passage of GENIUS.
Deposit tokens are blockchain-native commercial bank money which can be used for both DeFi and everyday transactions.
Preapproved customers of the network will be able to easily shift deposits in the secondary market, as opposed to routing money or onboarding at a new bank.
Deposits are claims on the bank just as stablecoins are claims upon the corporate issuer.
Instant settlement should bring the benefits of digital dollars to institutional customers.
“Deposit Tokens offer a solution for use cases including: facilitating payment for and redemption of digital assets such as tokenized money market funds; enabling 24/7/365 cross-border payments; and serving as on-chain collateral.
JPMD... is subject to the transaction monitoring and screening requirements that apply across J.P. Morgan.
JPMD cannot be transferred on the public blockchain to non-customers.
There are no plans to offer JPMD to retail clients at this time.”
PolicyPartner believes that regulatory clarity around digital money such as the OCC’s announced changes to CIP requirements, which we reported on last week, will “reduce friction for institutional and retail use cases of tokenized deposits as the recipient of a tokenized deposit could use their existing credentials at their bank to gain access to the tokenized claim upon a deposit at the sender’s bank.”
Additionally, the narrative around deposit tokens as a compelling digital money solution will only continue to grow, particularly as an advantageous alternative to stablecoins:
“PolicyPartner believes that deposit tokens present a competing narrative to the promises of stablecoins. Deposit tokens can pay yield, settle instantly, and in theory can be FDIC insured.
…
Furthermore, as JP Morgan proves the scalability and value of deposit tokens, similar retail focused products will begin to compete with the “overcrowded” stablecoin market. With this competition in mind, a stablecoin’s ability to earn yield will be crucial in maintaining its relevance at the retail level. As JP Morgan identifies in their whitepaper, the regulatory landscape for tokenized deposits is much clearer than stablecoins.”
2. How stablecoins will impact the existing payments system
PolicyPartner also published a great report on how stablecoins will “rewire payments infrastructure” (via Greg Kidd):
This architectural shift would eliminate or at least reduce the dependence on traditional intermediaries like banks, card networks, and payment processors. Technical benefits of using the blockchain rails include settlement speed (from T+2 to instant), 24/7 operation, and lower transaction costs.
One of the prime beneficiaries will be card networks not called Visa or Mastercard:
Among card networks, we view AMEX and CapOne/Discover as best-positioned from the adoption of stablecoins by merchants given that their network operates a three-leg closed-loop system with their own banks acting as an intermediary. Given such advantageous architecture, it is no surprise that Coinbase chose AMEX as the issuer of their new One Card credit card product. Capital markets also picked up on this divergence and infrastructural advantages, with AMEX and CapOne outperforming card network peers post-passage.
PolicyPartner views full migration of a blockchain-based stack as the eventual inevitability:
In our view, a third leg of stablecoin adoption will likely be characterized by complete payment stack replacement and integration of stablecoins into supply chain payments – a configuration where a merchant receives stablecoins from users and transacts with suppliers in the same form of payment.
Which would ultimately result in a rejiggering of the existing card payments flow, “removing redundant steps from the existing payment lifecycle”:
Blockchain architecture fundamentally restructures this flow:
Single Transaction (10 seconds - 5 minutes)
Customer signs transaction with private key
Smart contract validates balance and executes transfer
Blockchain consensus confirms transaction
Merchant receives irreversible payment
Such a transaction eliminates several intermediaries and functions
Issuing bank authorization (replaced by wallet balance check)
Card network routing (direct peer-to-peer transfer)
Acquiring bank batching (real-time gross settlement)
Payment processor intermediation (smart contract execution)
Federal Reserve settlement (blockchain consensus)
3. Stuff happens
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Via Mitja Simcic—Palmer Luckey, backed by Palantir's Lonsdale, to launch crypto-focused bank
Exclusive | Ripple Seeks a U.S. Banking License, Adding to List of Crypto Companies
Crypto exchange Kraken debuts peer-to-peer payments app Krak
IMF study suggests interoperability boosts digital payments use | Biometric Update