Why you need to pay attention to deposit tokens

When it comes to putting fiat money on-chain, most people think of stablecoins and CBDCs. But deposit tokens may prove more effective. And more transformational. 

In mid-November Fnality International announced a new $95 million funding round led by Goldman Sachs and BNP Paribas and including the likes of Euroclear, DTCC, WisdomTree and Nomura. 

This marked the latest evidence of the rise of “deposit tokens” as a viable means of representing fiat money on blockchains. Deposit tokens are worth paying attention to for anyone interested in the mainstream adoption of institutional DeFi.

What is a deposit token? 

As the name implies, deposit tokens are tokenized versions of commercial bank deposits. These can take different forms. 

Fnality, for instance, specialises in creating tokenized versions of major currencies for use in wholesale payments between banks. The tokens represent funds held by commercial banks in their central bank accounts, and can be used for high-volume transfers between participating banks over a blockchain. 

Deposit tokens can also represent commercial or even retail deposits in banks. One of the most advanced and well-known today is JP Morgan’s JPMCoin. A tokenized version of US dollars held on account by JPMorgan clients, JPMCoin allows for fast, efficient transfers within the bank. Since its launch in 2020, the coin has been used in more than USD 300 billion in transfers. While currently available to the bank’s institutional or corporate users, JPMorgan plans to extend the system to retail use.  

Other mainstream players with deposit token projects or research efforts include the Swiss Bankers Assocation, Citi, HSBC, and even the Bank for International Settlements. Sygnum is supporting the Swiss Bankers Association’s Deposit Token project, which focuses on introducing a Swiss franc-denominated deposit token.

The third way 

Why is this important? 

It has long been recognised that having fiat money on-chain is an important prerequisite to enabling mainstream institutional and retail adoption of digital assets.   

These days, when people think of fiat on-chain, they generally think of stablecoins, which are blockchain-native tokens pegged to a fiat currency; or Central Bank Digital Currencies (CBDCs), which are tokenized versions of central bank money issued directly by central banks. 

Both stablecoins and CBDCs are important, but they are not without their problems. 

With stablecoins, there is always a risk that the issuer cannot maintain the peg, particularly during times of market turmoil. This risk generally makes them unsuitable for large-scale institutional use. CBDCs have raised serious privacy, regulatory and other issues. Retail CBDCs, intended for public use, raise concerns over privacy and the potential for increased financial surveillance by central banks, which may be contentious among the general public. Meanwhile, wholesale CBDCs, which handle interbank transactions, face fewer privacy issues since they are limited to institutional use, yet they remain susceptible to cyber threats due to their centralised infrastructure. While most central banks are looking at CBDCs, no major central bank has yet issued one. 

The advantages of tokenized deposits

Deposit tokens offer an alternative that avoids these problems. Advantages include: 

  • Programmability: If issued on blockchains that support smart contracts, deposit tokens can be programmed to automate sophisticated payment operations, which can speed up transactions and make them more efficient. 
  • Instant, atomic settlement: Deposit tokens allow for instant, atomic (simultaneous) settlement, which can speed up transactions and reduce or eliminate counterparty risk. 
  • 24/7 availability: Unlike traditional banking systems, blockchain operates 24/7, allowing deposit tokens to be transferred at any time. 
  • Interoperability with existing financial systems: Deposit tokens can provide seamless connectivity to traditional payment rails and bank services, greatly simplifying and expanding the bridges between DeFi and TradFi. 
  • Regulatory safeguards: Deposit tokens are (generally) subject to the same regulations and protections as traditional bank deposits, which can contribute to trust and reliability. 
  • Variety of use cases: Like bank deposits, deposit tokens can support a variety of use cases, including domestic and cross-border payments, trading and settlement, and provision of cash collateral. 
  • Stability and reliability: Deposit tokens are issued by regulated banks, which are subject to strict capital requirements and risk management. This should make them more stable and reliable than other forms of digital money, such as stablecoins, which are often issued by non-bank entities. 
  • Integration into existing legal frameworks: Since deposit tokens are backed by commercial bank deposits, they can be more easily integrated into existing legal frameworks and deposit insurance schemes.

Facilitating adoption 

The idea of deposit tokens isn’t new. Fnality’s roots go back to 2015 and the Utility Settlement Coin (USC) project backed by a consortium of major banks including UBS, BNY Mellon and Santander. 

Eight years later, it seems like deposit tokens are coming into their own. As one of the most promising bridges between DeFi and TradFi, they can be expected to contribute greatly to adoption of blockchain technologies in the global financial system.


Disclaimer: The information in this publication pertaining to Sygnum Bank AG (“Sygnum”) is for general information purposes only, as per date of publication, and should not be considered exhaustive. This publication does not consider the financial situation of any natural or legal person, nor does it provide any tax, legal or investment advice. This publication does not constitute any advice or recommendation, an offer or invitation by or on behalf of Sygnum to purchase or sell any assets. No elements of precontractual or contractual relationship are intended. While the information is believed to be from accurate and reliable sources, Sygnum makes no representation or warranties, expressed or implied, as to the accuracy of the information. Sygnum expressly disclaims any and all liability that may be based on such information, omissions, or errors thereof. Any statements contained in this publication attributed to a third party represent Sygnum‘s interpretation of the data, information and/or opinions provided by that third party either publicly or through a subscription service, and such use and interpretation have not been reviewed by the third party. Sygnum reserves the right to amend or replace the information, in part or entirely, at any time, and without any obligation to notify the recipient of such amendment / replacement or to provide the recipient with access to the information. Simultaneously, there is no obligation of Sygnum to inform recipients of information, if before provided information later becomes outdated, inaccurate or obsolete, unless otherwise provided by applicable law. The information provided is not intended for use by or distributed to any individual or legal entity in any jurisdiction or country where such distribution, publication or use would be contrary to the law or regulatory provisions or in which Sygnum does not hold the necessary registration, approval authorisation or license. Except as otherwise provided by Sygnum, it is not allowed to modify, copy, distribute or reproduce, display, license, or otherwise use any content for commercial purposes.

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