In a recent revelation, analysts at JPMorgan have indicated that regulators beyond the US borders, including the Bank of England, seem to favor tokenized bank deposits over stablecoins in the unfolding landscape of digital finance.
This observation follows the statements made by Andrew Bailey, the Bank of England Governor, who expressed his preference for banks to provide tokenized deposits instead of issuing their own stablecoins. This sentiment, echoed by a team of JPMorgan analysts led by managing director Nikolaos Panigirtzoglou, suggests a wider regulatory leaning internationally.
Tokenized deposits are essentially commercial bank deposits documented on a blockchain framework. While they retain the safeguards and backing of traditional deposits like deposit insurance, capital requirements, lender of last resort support, and adherence to AML/KYC regulations, they also offer the benefits of programmability and blockchain interoperability, the analysts emphasized.
There are two types of tokenized deposits: bearer (transferable, similar to stablecoins) and non-bearer (non-transferable, settled between banks at par). The analysts believe that regulators will likely support the non-bearer variant, as it helps maintain the “singleness of money”, a fundamental principle of financial systems that ensures different forms of money are interchangeable at face value.
The analysts pointed out that bearer-style tokenized deposits and stablecoins can deviate from their peg due to market factors such as credit risk or liquidity imbalances. They cited examples of past crises involving Terra, FTX, and Silicon Valley Bank.
Despite this regulatory inclination, the analysts recognized that stablecoins still hold sway in crypto markets due to their liquidity and easy transferability — benefits that non-bearer tokenized deposits currently lack. Furthermore, they explained that money doesn’t exit the banking system when it transitions into stablecoins. Similar to money market funds, stablecoin reserves are typically reinvested into assets like Treasury bills and continue to circulate within the system.
The analysts also questioned the economic viability of commercial banks issuing their own stablecoins under certain regulatory proposals. They referred to a 2023 Bank of England document that implies banks might need to hold reserves at the central bank to back stablecoins — without earning interest on those reserves. They argued that this could make stablecoin issuance unattractive for banks, as it would limit their ability to generate yield from customer deposits.
Interestingly, JPMorgan is testing a permissioned tokenized bank deposit coin, named JPMD, on the Base Layer 2. The bank submitted a trademark application for JPMD in June, outlining multiple potential use cases.
Disclaimer: This article is intended for informational purposes only and should not be used as legal, tax, investment, financial, or other advice.
