How can we build a fully transferable tokenised deposit market?

Download the book

Tokenised assets issued on to blockchain networks need cash on-chain to create liquidity and drive network effects. Stablecoins and (to a lesser extent) e-money have fulfilled this role so far. Like Stablecoins and e-money, tokenised deposits offer the benefits of instant payment, atomic settlement and programmability via smart contracts. 

But tokenised deposits have other advantages. They are a form of digital money underpinned by regulated banks. They preserve the "singleness" of money, being fungible with cash and central bank digital currencies (CBDCs), creating the prospect of a digital version of the two-tier commercial and central bank monetary system that prevails today that can scale naturally in line with the growth of token markets. 

Tokenised deposits are demonstrably non-revolutionary, being commercial bank money of the same kind as 90 per cent of the money that exists today. They can be accommodated comfortably within the current system of banking. Transactions can ultimately be settled in central bank money. They benefit from deposit insurance. Banks ought to be drawn instinctively to favour tokenised deposits as the most appealing form of digital money. 

So it is surprising that so few banks are exploring tokenised deposits actively. J.P. Morgan, which launched the JPM Coin in 2020 and proved in 2022 that a tokenised Singaporean dollar can be exchanged for a tokenised Yen asset, has few imitators. Citi has explored tokenised deposits in trade finance and two Korean banks - Hana Bank and Woori Bank - are reported to be exploring the concept. In Europe, Commerzbank has led the slow-burning Commercial Bank Money Token, seeing it as crucial to the further digitalisation of manufacturing. 

But the JPM Coin is now four years old and seeing relatively low transaction volumes (reported to be US$1 billion a day). The USDF tokenised deposit consortium of ten banks and IT vendors dates to 2021 but has yet to persuade regulators that that issuing a tokenised deposit on to a public blockchain is a good idea. Likewise, in 2023 the Swiss Bankers Association (SBA) proposed a Swiss Franc tokenised deposit issued jointly by Swiss banks, but the SBA says more work needs to be done. 

The USDF and SBA initiatives highlight the fact that the JPM Coin is intra-bank only. Money that is useful only for book transfers within a single bank cannot be transformational. Although infrastructural solutions to make tokenised deposits an inter-bank form of money - such as Partior and the Regulated Liability Network (RLN) – are emerging, progress is agonisingly slow. 

As always, banks are apt to plead the necessity of legal and regulatory certainty. It is a curious demand to make of tokenised deposits, which fit easily inside existing legal and regulatory frameworks for the simple reason that a tokenised deposit is identical to an off-chain deposit on the balance sheet of a bank. 

That does mean the value of tokenised deposits ultimately hinges on the same criterion as bank deposits - the creditworthiness of the bank – but fears of a “run” on a bank that issues a tokenised deposit that trades at a discount to the value of a tokenised deposit issued by a more creditworthy bank are probably misplaced. After all, tokenised deposits, like traditional deposits, are supported not only by deposit insurance but by the central bank as lender of last resort. When it comes to tokenised deposits, there are no valid excuses for banks not to act. 

Benefits

• Tokenised deposits are digital records of demand deposit claims against financial institutions equivalent to traditional forms of on-balance sheet commercial bank money, without a maturity date and backed by fractional reserves and industry deposit insurance schemes. 

• The advantages of tokenised deposits over traditional deposits are that they are issued as native tokens on to blockchains, which means smart contracts can be used to move them between digital wallets, with transactions settling atomically, and that they are programmable and composable. 

• The simplest use-case for tokenised deposits is round-the-clock intra-bank payments in one jurisdiction or several irrespective of the cut-off times of national payments market infrastructures (PMIs), but the service can also be extended to inter-bank payments via shared ledgers such as Partior. 

• Another obvious use-case for tokenised deposits is settlement of the cash leg of tokenised securities, funds and repo transactions, because they can offer atomic settlement on-chain in commercial bank money plus access to settlement in on-chain central bank money (CBDCs). 

• An early use-case for tokenised deposits is payments in supply chain management automation, where smart contracts initiate orders when supplies run low and make payments once the supplies arrive and are checked for quality, with all transactions verified and recorded on a blockchain. 

• Making cross-border payments faster and cheaper is a further use-case for tokenised deposits, not least because corporates prefer tokenised deposits because they are more stable and transparent and less open to adverse regulatory treatment than the Stablecoin alternatives. 

• Tokenised deposits are a strong candidate to provide portable digitally native cash on common or unified ledgers (Partior is an instance) that operate to agreed standards of governance, are open to any type of financial institution that can meet the admission criteria and host a variety of digitally native assets. 

Issues

• Not all the tokenised deposits issued so far are native to the blockchain and rely entirely on the blockchain as the ultimate record of ownership; some banks have maintained off-chain ledgers to record internal book transfers to prove the value of the concept internally. 

• To date tokenised deposits have been issued by individual banks for use between clients of the bank but multi-bank tokenised deposits, which are issued on to shared blockchain ledgers – such as the Partior network used by J.P. Morgan, DBS and Standard Chartered in Singapore - are being developed. 

• Like Partior, the Regulated Liability Network (RLN) is a model which could facilitate frictionless interoperability between tokenised deposits as digital commercial bank money and central bank digital currencies (CBDCs) as digital central bank money, potentially across borders as well as within jurisdictions. 

• Tokenised deposits must be underpinned by settlement finality in central bank money or tokenised deposits issued by different banks will fragment the singleness of money, because some issuers are more creditworthy than others and atomic settlement potentially accelerates the realisation of credit risk. 

• Making tokenised deposits useful as an inter-bank form of payment is essential to the growth of tokenised deposit markets because unless banks are willing to accept the IoUs of other banks, tokenised deposits will remain useful for intra-bank payments between the clients of individual banks only. 

Regulation

• The legal and regulatory status of tokenised deposits is uncertain, but it is a mistake to postpone innovation until legal and regulatory clarity is achieved because legal and regulatory innovation is driven by the industry identifying use-cases and persuading legislators and regulators to allow them to proceed. 

• Tokenised deposits could contribute to savings on liquidity buffers (by facilitating single pools of liquidity from which banks can make payments, settle securities and meet margin calls) and capital weightings (though capital adequacy regulations do not treat cryptocurrencies generously).