Onyx JP Morgan Deposit Tokens

DEPOSIT
TOKENS
A foundation for stable digital money
Commercial bank money holds the
key to a safer tokenized economy
“[The increasingly important use of “[Tokenized deposits] would enable peer-

DLT] requires a new form of money — to-peer settlement and make depository
tokenised commercial bank money institutions’ money programmable and
— which will enable efficient, fully digital usable in smart contracts and other
handling of payment transactions.” blockchain applications. Despite the
novel technology, in legal and economic
GBIC, Europe needs new money — an ecosystem of
CBDC, tokenised commercial bank money and trigger terms, an on-chain tokenised bank deposit
solutions (2021)
would be identical to a traditional off-
chain deposit.
“The goal [of tokenizing deposits] is the We believe that the market will likely
additional creation of programmable move away from e-money tokens
money that could be used within the toward tokenized commercial bank
framework of smart contracts, which in deposits as the preferred form of on-
turn permits for more efficient transactions chain money. On-chain deposits, being
and refined payment controls. economically and legally equivalent to
off-chain deposits, can be expected to fall
Depending on the design and structure under and benefit from existing deposit
of the tokenised deposits, bank insurance schemes. [They] may qualify
depositors could have the fungibility as legal tender in some jurisdictions and
between deposits and digital asset are likely to function as such in practice.
tokens within the DLT based network Banks have access to the central bank
and its participating commercial banks. as lender-of-last-resort, widening the
scope of assets in which token holders’
funds can be invested while maintaining
For the purpose of the [Government
liquidity requirements.”
vouchers] pilot, DBS Bank issued digital
SGD in the form of tokenised deposits.” CEPR, E-Money tokens, tokenised money-market
shares, and tokenised bank deposits (2022)
MAS, Project Orchid (2022)
© Oliver Wyman, JPMorgan Chase & Co. 2

“We already have an efficient form “In an effort to advance industry
of digital money; we just need to adapt thinking on these issues, the Monetary
it to a new environment. Central bank Authority of Singapore launched Project
actions over the last century have resulted Guardian in May 2022. It sought to
in a well-functioning banking and payment determine whether tokenized real-world
system. Why not take advantage of that, assets and deposits could be transacted
and issue tokenized deposits? on a public blockchain leveraging DeFi
protocols, in a compliant manner that
preserves financial stability and integrity.
Commercial banks hold deposits for
customers that are fractionally backed
by reserves, avoiding locking up The Project Guardian pilot carried out
liquidity. These bank deposits support transactions involving foreign exchange
bank lending to the real economy and with tokenized deposits and separate
the transmission of monetary policy. transactions with government bonds, in
each case, on a public blockchain network,
using digital identity solutions and logic
Bank deposits have a number of other
adapted from existing DeFi protocols.”
attractive features. They are issued by
regulated institutions and are protected by Oliver Wyman Forum, Institutional DeFi:
deposit insurance (up to $250,000), which The Next Generation of Finance? (2022)
makes them extremely safe. In addition,
banks facilitate compliance with policies
meant to reduce the risk of criminal “I believe the next generation for
activities, such as money laundering.” markets, the next generation for
securities, will be the tokenisation
NY Fed Staff, The Future of Payments
Is Not Stablecoins (2022)
of securities.”
BlackRock CEO, 2022
“Banks issue stablecoins as deposits.

They are already subject to prudential
regulations and stablecoin holders are
protected by deposit insurance in the same
manner as conventional bank deposits.”
FSA (Japan), Regulatory Framework

for Crypto-assets and Stablecoins (2022)

CONTENTS
Introduction 5
Global digital money landscape 7
Evolution of digital payment systems 7
Blockchain-based deposits 7
Stablecoins 12
CBDC 13
Use cases for deposit tokens 14
Payments 14
Programmable money 16
Protocol interaction 16
Trading and settlement 17
Collateral 18
Policy considerations 19
Devaluation and run risk 19
Contagion risk 24
Credit intermediation and monetary policy 26
Economic fungibility 28
Technical interoperability 31
Conclusion 32
Endnotes 33
Authors 36

INTRODUCTION
Ongoing progress in developing blockchain technologies for commercial applications
is creating demand for blockchain native “cash equivalents” that act as liquid means
of payment and stores of value in blockchain-native environments. Stablecoins
have predominately met this demand to date. However, the foreseeable
adoption of blockchain for complex commercial transactional activity, including
institutional activity, has brought into focus the question of what form of digital
money may be needed to continue to support blockchain payments at scale.
Deposit tokens and central bank digital currencies (CBDCs) in particular have
come to the forefront in examining the optimal future state of digital money.
Deposit tokens refer to transferable tokens issued on a blockchain by a licensed

depository institution which evidence a deposit claim against the issuer.
Given that deposit tokens are commercial bank money embodied in a new
technical form, they sit comfortably as part of the banking ecosystem, subject to
regulation and supervision applicable to commercial banks today. This includes
existing bank minimum capital and liquidity requirements, and other technology
risk management regulations and supervisory expectations, that control prudential
and operational risks associated with deposit-taking and related bank activities.
Deposit tokens can support a variety of use cases as commercial bank money does
today, including domestic and cross-border payments, trading and settlement,
and provision of cash collateral. The token form enables new functionality, such
as programmability and instant, atomic settlement* to speed up transactions
and automate sophisticated payment operations. By supporting these use
cases, deposit tokens may become an important part of a broader ecosystem
of tokenized assets, which are expected to significantly impact financial services
and will likely require payment solutions provided by trusted institutions; 97%
of institutional investors surveyed agree that tokenization will revolutionize
asset management and benefit the industry. Institutions are also increasingly
comfortable using digital money, but provided it comes from a trusted player1.
*Atomic settlement
Simultaneous settlement of assets, whereby assets are linked
to ensure the transfer of an asset only occurs if the others are
simultaneously transferred (e.g., to achieve delivery versus payment
in a securities transaction or payment versus payment in a foreign
exchange transaction).

Stablecoins have been an important financial innovation in the last several years, and their
development has contributed to the growth of the digital assets ecosystem. However,
stablecoins might present challenges at scale relating to their impact on financial stability,
monetary policy, and credit intermediation, as on-chain transactional activity increases
in size and complexity. By leveraging the existing practices and regulations applied to
traditional commercial bank deposits, deposit tokens can be positioned to address certain
risks posed by stablecoins approaching systemically significant scale, preventing strain
on stablecoin issuers and instability in the space. Additionally, deposit tokens may provide
more seamless connectivity to traditional payment rails and bank services, which would be
a desirable feature for financial institutions and commercial transaction counterparties.
We believe deposit tokens will become a widely used form of money within the digital asset
ecosystem, just as commercial bank money in the form of bank deposits makes up over
90% of circulating money today2. The token form will benefit from connectivity to traditional
banking infrastructures and regulatory safeguards that already support commercial
bank deposits.
This paper focuses on deposit tokens, their use cases and benefits, and how they are
distinguished from stablecoins and CBDCs. In doing so, we intend to provide a focused
discussion of deposit tokens as a distinct type of digital money, contribute to the ongoing
policy discussions about different forms of digital money, and inform stakeholders as
industry and regulators look ahead to understand the role commercial banks will play in
the future digital money landscape.

Chapter 01
GLOBAL DIGITAL MONEY LANDSCAPE

EVOLUTION OF DIGITAL BLOCKCHAIN-BASED
PAYMENT SYSTEMS DEPOSITS
Various forms of digital money solutions Blockchain-based deposits refer to deposit

have been created to meet the demand claims against a licensed depository
for stable and liquid value on-chain, institution for stated amounts recorded
taking different forms in terms of issuers, on blockchain. They are economic
claim rights, reserve characteristics, and equivalents of existing deposits recorded
regulatory requirements. The main forms in a novel form used to pay, settle trades
of digital money and money alternatives, between digital assets, and generally
which we generally refer to as digital act as a store of value and means of
money in this paper, can be grouped as: exchange on blockchain ledgers.
• Blockchain-based deposits, i.e.,

Applying blockchain technology in this
distributed ledger-based deposits
issued by a licensed depository manner allows payments made with
institution, including deposit tokens, commercial bank money to benefit
which are forms of commercial from programmability, instant and
bank money; atomic transaction settlement, and
• Stablecoins, digital assets designed improved transparency as to the status
to maintain a stable value relative to an of transaction. These features help to
external reference asset, and serve as an address common pain points in liquidity
alternative store of value for blockchain- management and cross-border payments.
native payments and liquidity needs; and
• Central Bank Digital Currencies (CBDCs),
digital forms of national currencies issued
by central banks, which are forms of
central bank money.
There may be other candidates for

alternative digital money solutions for
various use cases that emerge as more
parties consider tokenization, such as
tokenized money market funds. This paper
does not present an exhaustive discussion
of all emerging alternatives — though we
note that comparable considerations raised
in this paper may be applied to examining
other proposed digital money alternatives.

Exhibit 1: Comparison of Blockchain-Based Deposits, Stablecoins, CBDCs
Blockchain-
Based Deposits Stablecoins CBCDs
Non-bank
Common issuer Commercial banks private entities Central banks
Examples • SGD deposit tokens • USDC by Circle • Digital Yuan
by JPMorgan1 and Coinbase (extended pilot)
• Blockchain deposit • USDT by Tether • Swedish E-Krona (pilot)
accounts on JPM • BUSD by Paxos • Digital
Coin System and Binance Euro (investigation)
Adoption • JPM Coin System is • Over US$140 billion • Over 90% of central
live with material market capitalization banks are reportedly
transaction volumes (as of November 2022) investigating CBDCs —
• Deposit token projects since 2014 when the live projects are still in
are generally in early 1st major stablecoin early pilot phases 3
pilot phases was issued 2
Backing assets • Claim on the issuer, • 1:1 assets held • Central bank
like regular deposits by issuer to meet balance sheet
redemptions, typically
held as HQLA
Regulatory oversight • Subject to similar • No regulatory • Secured and
supervision and framework in most governed directly by
oversight as markets, although national entities
other regulated regulatory frameworks
bank deposits are emerging
Risk • Subject to mandatory • No unified
management practices minimum liquidity, risk management
capital and risk framework
management • Subject to issuers´
requirements internal risk
by regulators management practices
• Subject to banks’
internal risk
management practices
Emergency protections • Strength of existing • Liquidation of

bank balance sheet reserve assets
• Access to contingency • Resolution
funding sources at under traditional
central bank bankruptcy laws
• Resolution and
recovery planning
to overcome
financial distress
1. SGD deposit tokens issued by JPMorgan in connection with MAS Project Guardian pilot transaction. SGD deposit
tokens are not a generally available live product offering
2. Figure sourced from DefiLlama as of November 2022
3. See, for instance, Federal Reserve (2022), Money Stock Measures — H.6 Release in the US, European
Central Bank (2022), Monetary developments in the euro area: September 2022 in the European Union and Monetary
Authority of Singapore (2022), Project Orchid Programmable Digital SGD page 15, in Singapore

Exhibit 2: Deposit Tokens Process
Cash (Company A)
+100
Deposit (Company B)
Deposit (Company A)
Bank
-50 Traditional banking +30
infrastructure
+50 -30
Wallet (Company A) -30 +30 Wallet (Company B)
DLT transactions
Blockchain ledger
Blockchain-based deposits come in different forms based on their usage of ledger

technologies, partnerships, and permission requirements. Blockchain deposits can be
broken down into different categories based on two main factors, (i) whether they are
account or token based, and (ii) whether they are “native” to the blockchain. For purposes
of this paper, we refer to “native” as reflecting value recorded on the blockchain directly
as the primary record. We refer to “non-native” as mirroring value for which the definitive
record exists off-chain.
Account-Based Token-Based Native Non-Native

Traditional deposits Transferable tokens Blockchain serves as Blockchain represents
held at a depository issued by a depository the primary record- the mirroring of
institution, represented institution on a keeping ledger. an off-chain record
as an account balance blockchain that evidence Blockchain record keeping ledger.
on a blockchain-based deposit claims for stated keeping treated as the Off-chain record keeping
ledger system. amounts against the prevailing source of treated as the prevailing
Depository institution issuing institution. truth over any other source of truth over any
at which the account Depository institution ledger in the event of other ledger in the event
is held is liable to the that issued the token a discrepancy. of a discrepancy.
holder of that account is liable to the holder
for the account balance. of the token for the fiat
amount of the claim
evidenced by the token.

Using the above definitions we see that there Native deposit tokens look to be the most
are four forms in which blockchain deposits promising form of tokenized deposits
can exist. Non-native deposit accounts, because firstly, they are not limited
native deposit accounts, non-native token- by off-chain reconciliation processes,
based and native token-based. We refer and, secondly, they can take advantage
to deposit tokens as “native,” token-based, of new blockchain functionality and
blockchain deposits described below. open up new use cases and options.
Exhibit 3: Distinctions of Blockchain-Based Deposits

Functionality
Non-native Native deposit Non-native Native deposit

deposit accounts accounts deposit tokens tokens
Claims on deposit Deposit accounts are Transferable tokens Tokens are native,
accounts, on a native, i.e., value is issued as claims i.e., the token itself
blockchain or transferred when against the issuing represents the deposit.
other DLT. funds move on the institution. Tokens
blockchain. are non-native, i.e.,
Value is transferred value is transferred
off-chain, on-chain off-chain and
activity is a signal for triggered by on-chain
off-chain transfers. token transfers.
A handful of banks and consortia are already There are three broad types of ledger
in the process of developing deposit tokens. designs that financial institutions can choose
Examples include the pilot issuance of to introduce blockchain-based deposits: (i)
Singaporean Dollar (SGD) deposit tokens single bank ledgers, (ii) shared ledgers, and
by JPMorgan in connection with MAS (iii) universal ledgers. The JPM Coin System
Project Guardian , and the USDF coin, which
3
is a live example of a single bank ledger for
plans to launch on a permissioned basis blockchain deposit accounts — it is operated
on a public blockchain, for transactions by JPMorgan and acts as its own ledger and
within a consortium of approved banks 4. payments rail for US$ balance transfers
among JPMorgan participating customers.
Deposit tokens can be used on
ledgers that vary in the permissibility
and interoperability they allow.

Single bank ledgers, such as the JPM Universal ledgers are public blockchains
Coin System, offer greater operational that maximize interoperability by facilitating
efficiencies relative to traditional systems by broad access by many participants, but
facilitating faster transfers with extended their permissionless nature also requires
operating hours. This can offer significant regulated financial institutions to establish
improvements when moving money across appropriate alternative controls to create a
geographies or systems even among trusted environment for funds transfers.
accounts held with one institution globally.
As financial institutions explore blockchain,
Shared ledgers bring multiple institutions they may operate multiple types of ledgers
onto the same network, allowing institutions — JPMorgan’s deposit token concept is
to seamlessly interact with a common set the next evolution of the bank’s work in
of digital assets and operational protocols, blockchain-based deposit products. It
and share in increased transparency around follows the offering of blockchain deposit
the status of transactions. However, they accounts on a single-bank ledger via the
also demand coordination and agreement JPM Coin System and its work helping to
on common standards and governance co-found the Partior5 shared ledger system.
from participants in the network.
Exhibit 4: Classification of Deposit Tokens

Single Bank Ledger Shared Ledger Universal Ledger
Description Intra-bank value Inter-bank settlement Connected regional
transfer and clearing clearing networks creating
global connectivity
Primary users Bank clients Commercial banks Global with possible

and corporates restrictions imposed by
the issuer
Examples JPM Coin System Partior JPM SGD deposit token1
1. SGD deposit tokens issued by JPMorgan in connection with MAS Project Guardian pilot transaction. SGD deposit
tokens are not a generally available live product offering
Like traditional deposits, deposit tokens In addition, token holders may benefit
are a claim against an issuing depository from deposit insurance to the extent
institution. They should therefore be the depository institution is otherwise
subject to the liquidity requirements and covered by an insurance scheme and the
risk management standards imposed on product meets scheme requirements.
deposit-taking banks today that seek to
ensure the safety and soundness of deposits
recorded using non-blockchain methods.

STABLECOINS
Stablecoins are digital assets on a block- They continue to see technical

chain that are pegged to a fiat currency*, innovations from decentralized
and backed by fiat currency, high quality finance communities, while also
liquid assets, or crypto-assets (or a drawing the attention of regulators7.
combination). Stablecoins were the first to
offer an alternative to the volatility of crypto- Stablecoins can come in different forms
assets such as Bitcoin and Ethereum. based on their reserve assets and peg
mechanisms. Three main categories of
They have since grown to a market stablecoins are: (i) fiat reserve backed,
capitalization of over US$140 billion , and6
such as USDC, BUSD and USDT described
are commonly used as a means of payment in exhibit 1; (ii) crypto reserve backed, such
or transaction settlement, as stores of value, as DAI; and (iii) algorithmic. This paper
and in decentralized finance use cases. uses “stablecoin” to reference fiat reserve
backed stablecoins, which are the largest
category at over 90% market share.
Category Market share Description Examples
93%
Fiat • Issuer holds reserve assets of equal value • USDT
reserve backed to amount of stablecoins outstanding • USDC
• Reserves can be any type of asset • BUSD
(e.g., fiat-denominated securities), typically
HQLAs for major stablecoins
5%
Crypto • Decentralized stablecoins backed by • DAI
reserve backed other cryptoassets
• Often require over-collateralization
(typically 150%) to protect against
losses due to price volatility of the
underlying crypto-assets
2%
Algorithmic • (Partially) Backed by highly volatile, non-
standard crypoto-asset collateral
Source: DefiLlama, figures from November 2022
*Fiat currency
A government-issued currency that
is not backed by any commodity.

CBDC
Central Bank digital currencies (CBDC) by late 2023 and the Chinese central bank
are a digital form of central bank money is already piloting its digital Yuan, which
directly issued by central banks. Over 90% crossed 360 million transactions in late 2022.
of the world’s central banks are exploring, An important distinction between various
and some are even issuing, CBDCs8. Most CBDC designs is to whom the central bank
projects are experimental, such as Project issues the currency. Wholesale CBDCs are
Hamilton in the US and the RBA’s CBDC issued only to financial institutions whereas
pilot in Australia. The European central bank retail CBDCs are closer to “digital cash”
is expected to decide on a possible CBDC issued to individuals and businesses.

Chapter 02
USE CASES FOR DEPOSIT TOKENS

Deposit tokens can improve a variety of traditional payments and liquidity management
related uses of commercial bank money by enabling advanced programmability
features, the ability to exchange funds with other digital assets atomically, and the
transfer of commercial bank money on shared or universal ledgers where enhanced
transparency of transactions and 24/7 transfer availability are possible. Deposit tokens
also operate as a realistic alternative to stablecoins, on both public and permissioned
blockchain environments, and can be offered organically within the regulatory and
commercial framework applicable to modern banking institutions. They are designed to
meet demand at scale for blockchain-based payment technologies by enabling faster,
cheaper, and more advanced solutions within established bank regulatory frameworks
that offer clarity to banks, as well as their customers. Notable use cases include:
Payments
Today’s operating model for funds transfers the reliance on third-party intermediaries
uses methods where the transfer of that would traditionally be required to
information and value are separated and reconcile separated value and information
intermediated by financial institutions. flows across multiple banking systems.
Often, instructions are communicated
between different bank systems to prompt By removing intermediaries from the chain,
the movement of funds sequentially, such deposit token would enable the direct,
that information precedes the transfer of peer-to-peer transfers of funds, which
funds at each intermediary. This happens via can also include bank-to-bank transfers
a network of intermediaries that connect the to benefit customers off-chain. In this peer-
institution housing the payment originator’s to-peer model, the bank's role shifts from
account details with the institution housing direct intermediation and clearing of every
the beneficiary’s information. Deposit tokens transaction, to establishing controls in the
instead embody both the information found design of the deposit token and, if relevant,
in payment instructions and the transfer in the environment it chooses
of value. As a result, when deployed on to issue deposit tokens in to create a
a shared blockchain infrastructure that trusted environment for funds transfers.
can connect payment originator and
beneficiary, deposit tokens can reduce

For example, in MAS’ Project Guardian, whereby JPMorgan issued SGD deposit tokens for
an FX pilot transaction opposite an affiliate of SBI Digital Asset Holdings (SBI) on a public
blockchain, the tokens and protocol which facilitated the transaction were designed to
restrict unknown parties from transacting with the SGD deposit tokens — both the token
smart contract and transaction protocols were programmed to only interact with certain
known blockchain addresses. The deposit token smart contract also required authorized
parties who instructed transfers to attach a “verifiable credential”, developed by JPMorgan,
that was provided by the issuer. The Project Guardian pilot demonstrated that even in
providing a tool for peer-to-peer transfers on public blockchain, banks
can implement controls within the funds transfer process. Digital identity tools, such
as the verifiable credentials developed by JPMorgan, can support these transfers
by ensuring that transactions are only executed with verified counterparties.
Additionally, as discussed throughout Deposit tokens could further support

this paper, the issuing bank, and the economic activity in the digital space,
regulatory environment it operates within including in a “Web3 economy” where
will continue to play an important role significant economic activity happens on
in the stability of value of the deposit shared ledgers, with tokenized asset transfers
token, as with any other commercial settled via deposit tokens. This digital
bank money deposited today. Replacing economy would be facilitated by direct,
today’s intermediated and sequential instant, and atomic exchanges between
model with direct funds transfers, including peers as discussed above, which are less
direct bank to bank funds transfers, will reliant on intermediaries orchestrating
be critical to addressing the pain points a separate exchange of information and
around transaction costs, trapped liquidity, value. Cross-border payments in particular
transaction turnaround time, and the lack is a space where we anticipate some of
of visibility in transactional use cases. the most pronounced benefits of merging
information and value on shared ledgers.
Banks issuing deposit tokens will also In 2020, it cost US$120 billion and on
likely create interoperability between average took 2-3 days in settlement to move
their banking systems and blockchain US$23.5 trillion across borders 9. And while
ledgers where they issue deposit tokens. we estimate that a multi-currency CBDC could
Institutional and corporate customers cut costs by 80%, down to approximately
in particular may be able to optimize US$20 billion, deposit tokens could
treasury cash management by unlock similar benefits by reducing fees,
interoperating between legacy systems settlement times, and counterparty risks,
and blockchains more seamlessly, and by enabling more direct funds transfers.
reducing the trapped liquidity needed to
accommodate multi-day settlements.

Programmable money
The programmable nature of deposit tokens as reconciliation processes, among other
enables innovative solutions to support areas. Reducing direct human involvement
existing deposit-taking activities, such as also introduces risks, such as potential for
the conditional transfer of funds based unnoticed errors due to software bugs, as
on conditions at a smart-contract* level, well as limitations. Smart contracts should
as well as related banking services, such be reviewed and audited, and anticipated
as conditional intra-day lending decisions problems should be corrected. Banking
or disbursement of interest payments. institutions today regularly develop and
employ sophisticated software in the course
A deposit token integrated into the banking of providing banking services and their
system provides new benefits when it practices are subject to technology risk
becomes programmable by automating management standards overseen by risk
manual solutions, enabling complex logic for management committees. Such expertise
transactions without manual intervention, and risk management practices include
and reducing the risk of human errors or robust development of programmability
delays. Such automation drives efficiency solutions, as with any other bank
not just in payment execution, but also in developed or bank employed software.
liquidity and collateral management, as well
Protocol interaction
Separate from the programmability of It used a modified decentralized finance*
the deposit tokens themselves, deposit (“DeFi”) protocol to execute a foreign
tokens are also better suited to interact exchange transaction involving SGD deposit
with certain smart-contract protocols dokens issued by JPMorgan and a JPY
than account-based deposits. tokenized asset issued by SBI10. The use of
protocols may be another means of
A pilot transaction conducted as part of achieving certain benefits of automation
MAS’ Project Guardian between JPMorgan and interoperability, particularly in respect
and SBI recently showcased the feasibility to multiparty transactions that require the
of using deposit tokens with smart contract application of common rules.
protocols for institutional applications.
*Smart contract
Smart contracts are programs stored on a blockchain that run when a set of
pre-determined conditions are met. Multiple smart contracts are often aggregated
into larger applications that perform complex operations to provide a certain service.
*Decentralized finance
Decentralized finance protocols are software applications, so-called “smart contracts”,
that run on decentralized blockchains where they enable financial services such as
borrowing, lending, and trading.

Trading and settlement
The trading and settlement of or simultaneously and near instantly,
tokenized assets on blockchains will removing the risk that parts of a transaction
become increasingly important as the are not settled because a counterparty
fractionalization of assets, ease of transfer fails or cannot deliver an asset. Deposit
and the potential interoperability across tokens may separately facilitate very rapid or
institutions and institutional DeFi protocols instant settlement by using more efficient
create meaningful improvements to rails even when a transaction is not subject
market efficiency. We have seen growth to conditions for atomic settlement, as
in the use and study of tokenized asset discussed in respect to payments above.
markets beyond crypto that support this Together, atomic and instant settlements
trend, ranging from traditional securities and enabled by deposit tokens using commercial
commodities to real estate and art. JPMorgan bank money can reduce counterparty risk
Onyx’s Digital Assets platform processed caused by delays between the delivery of
over US$430 billion repo transactions assets and payments that require the custody
since launching in November 2020 , Project
11
of assets and reconciliation of trades.
Guardian (described above) explored the
tokenization of bank deposits, tokenized The natural integration of deposit tokens
securities are being issued experimentally with the banking sector positions them as a
like the European Investment Bank’s €100 convenient payment or settlement tool for
million bond in 202112 , and regulatory large entities that may wish to optimize their
frameworks are being reviewed in certain liquidity with commercial bank money on-
jurisdictions to account for tokenized and off-chain, enabling users to easily swap
assets and the use of distributed ledger between non-tokenized deposits and deposit
technologies (DLT) for regulated financial tokens. This integration with the traditional
services, such as the EU’s DLT pilot regime 13
financial system will also enable deposit
which seeks to enable the use of DLT in the tokens to be used for complex, institutional
issuance, trading and settlement of digital use cases where the transaction party
assets that qualify as financial instruments. desires a high level of assurances, customer
service, and protections from the issuer,
Deposit tokens offer a blockchain-native or where the transaction itself requires
means of using commercial bank money integrations with other financial services15.
to settle transactions across these growing
tokenized asset marketplaces “atomically”14,

We recognize that integration with traditional financial services may be an unusual
factor for a technology commonly associated with a DeFi movement that aims to remove
institutional dependencies. Although DeFi is one use of blockchain with its own active set
of users, we believe that demand for centralized financial services that are able to use
blockchain will continue to thrive, whether they are used for operational efficiency and
advanced programmability, or as “trust anchors” that issue tokenized assets on-chain, which
include money-like instruments16. The importance of integrating with traditional finance
is further supported by a survey of institutional clients who report being increasingly
comfortable with digital cash on blockchains, but also cite the interoperability with
existing infrastructure and the lack of solutions from trusted players as top concerns17.
Collateral
As an alternate form of commercial bank money, deposit tokens could also serve as
a new means to provide cash collateral for both traditional and digital assets markets.
For example, deposit tokens can be used as collateral to facilitate near-instant settlement
on a blockchain for various financial instruments, including derivatives. Such collateral
structures may also enhance intraday liquidity by enabling collateral to move in real-
time and automatically as related trades are completed within a single day.

Chapter 03
POLICY CONSIDERATIONS
Given the increasing interest in digital payments and the growth trajectory of stablecoins,
public policy regarding blockchain-based forms of digital money (or money-like alternatives)
should be guided by the assumption that they might become widely used and play an
important role in the financial system in the future. Policy makers and regulators should
further consider the unique risks and benefits of each new form of digital money and
recognize the distinct characteristics of deposit tokens. The following section presents
considerations for policy formulation on new forms of digital money with a focus on deposit
tokens and comparisons to non-bank issued stablecoins where applicable.
DEVALUATION AND RUN RISK
Deposit tokens, stablecoins, and CBDCs are money issued by that institution suddenly,
associated with a stability in value created by creating a “run” on the issuer for redemptions.
different factors. CBDCs achieve their stability This, in turn, pressures the specific digital
by uniquely benefiting from confidence in money that is subject to the run, causing it to
the issuing central bank associated with a lose further value relative to its fiat peg in a
sovereign government, similar to cash today. repeating cycle. Moreover, real-time
The value of stablecoins has historically transparency of on-chain activity, such as
been rooted in market trust that the issuer redemptions, may exacerbate the perception
will be able to redeem at the stated value, of redemption risks by displaying the activity
and can rely on information about their of users who redeem in significant amounts,
reserves and liquidity offered in secondary triggering the same fear and redemption
markets. Deposit tokens derive their stable activity in others.
value in the same manner that non-tokenized
deposits do today: confidence in the issuing While such runs have not yet occurred on
bank’s creditworthiness supported by a major fiat-backed stablecoins, market stress
number of factors, including the bank’s and uncertainty have pressured the pegs
balance sheet and capital reserves, the of certain stablecoins. USDT traded down
regulatory environment in which it operates, to approximately US$0.97 on secondary
its operational history, and, in some cases, markets during the de-pegging of the UST
the availability of deposit insurance. algorithmic stablecoin in May 202218, a
de-pegging event which in itself showed how
If users cannot redeem their digital money a crisis of confidence can cause a run for
or transact with it for the stated face value, redemptions19. Such de-pegging risks are
then that digital money will decline in market typically caused by negative market sentiment
value. Like bank runs, the existence and regarding the credit worthiness of the issuer
perception of redemption risks against an if the issuer carries excessive risk on the
issuer can lead users to redeem digital balance sheet, a lack of liquidity of the issuer,
deterioration in the value
of reserve assets, or issuer solvency.

Naturally, devaluation and run risks present themselves and are managed differently for
various forms of digital money. Deposit tokens are issued by banks that are regulated with
stringent minimum liquidity, capital, and risk management requirements that evolved
over decades to create stable and reliable ecosystems. Such requirements include:
• Existing minimum liquidity requirements, such as the Liquidity Coverage Ratio, Net Stable
Funding Ratio, and multiple internal liquidity stress test and cash requirements, account for
a wide range of liability and asset structures with different liquidity and behavioral profiles
under stressed conditions.
• Minimum capital levels which are determined following risk-based, leverage-based and
stress scenario-based requirements to serve as buffer for unexpected market and bank-
specific risks. Globally systemically important banks are subject to even higher minimum
capital requirements, bringing additional safety to their activities.
• Independent risk management practices ensure prudential approaches when identifying

and managing financial and non-financial risks across all exposures.
• Other protections and contingency sources include large and diversified balance sheets
backing deposit tokens, access to central bank contingency funding (e.g., discount window
funding in the US, standing facilities in the Eurozone), and deposit insurance schemes for
deposits below certain thresholds (where applicable).
Banks must follow these minimum liquidity, capital, and risk management requirements at all
times today — their activities are monitored regularly by supervisors with strict implications in
case of a breach. Such existing practices would further extend to the offering of deposit tokens
by banks.
Exhibit 5: Top 3 US Bank Capital and Liquidity

As of Q2 2022, combined capital and liquidity requirements1 (JPMC, BOA, and WF).
13.5%
14.9% 100% 114.9% 100% 100%
12.8%
11.1% 11.5% 2.9%
10%
2.9%
2.9% 2.6%
2.6% 6.7%
2.6% 5% 5.6%
4%
8% 2%
6%
4.5%
3%
4.5%
CET 1 Tier 1 Total Tier 1 Supplementary
3
Liquidity Net stable
capital capital capital leverage leverage coverage funding
ratio ratio ratio ratio ratio ratio ratio2
Minimum requirements GSIB surcharge Stress capital buffer Bank capital3

Supplementary leverage buffer
1. Sum of bank capital and regulatory requirements

2. NSFR ratios were at least 100%
3. Data shown includes J.P. Morgan, Bank of America, and Wells Fargo
Source: JPMC, Bank of America and Wells Fargo Q2 2022 10-Q

(Exhibit 5 continued) Existing bank risk management practices
• General risk management practices such as concentration limits and diversification of

funding and lending, credit loss allowances, estimates of market risks, and management
of operational risks
• Consumer supervision and regulation set by the Consumer Financial Protection Bureau
• Stress testing to calibrate capital buffer requirements for severely adverse scenarios
• Enhanced liquidity and overall risk management precautions, including rules related to
corporate governance set by the Financial Stability Oversight Council
• Resolution and recovery plan to overcome financial distress and remain capitalized in
case of an adverse event
• Orderly liquidation authority granted to the US FDIC and Federal Reserve to adequately
impose losses on shareholders and creditors
Deposit tokens are in early stages of development, hence there is limited data available
to show their behavior. However, they are designed to be extensions of traditional
deposits on blockchain, as they represent a deposit claim against an issuing bank.
Historical analysis of traditional deposits shows that deposits have been a steady and
reliable source of funding for commercial banks throughout economic cycles, despite low
and sometimes negative interest rate environments, and in spite of innovations that
sped up payments such as real-time gross settlement and faster payment systems.
Exhibit 6: Total US and EU Bank Deposits

Bank deposits have been resilient throughout economic and technological changes
over the last 20 years. US deposits grew steadily, EU deposits slowed after the
Global Financial and Eurozone crises but kept growing in recent years1.
$ trillion and € trillion
18
16
14
12
10
8
6
4
2
0
’97 ’98 ’99 ’00 ’01 ’02 ’03 ’04 ’05 ’06 ’07 ’08 ’09 ’10 ’11 ’12 ’13 ’14 ’15 ’16 ’17 ’18 ’19 ’20 ’21
EU bank deposits US bank deposits US recessions

1. US deposits exclude large time deposits and other deposits; EU deposits include all deposits
vis-a-vis euro area MFI and non-MFI, reported by MFI and excluding ESCB in the Euro area
Source: FED, ECB

Exhibit 7: Change in US Commercial Bank Deposits
Changes in commercial bank deposits have remained relatively stable in the past
50 years despite economic events and changes in payment technology.
% change in US commercial bank deposits, 1973—2022
US Fedwire Online banking Electronic Same day ACH

launched in first introduced checks shortens settlements
1970 is the by US bank from 2-3 days to 1
first RTGS 40% of US banks
system offer internet Real-time payment
banking launched in the US
60
50
40
30
20
10
− 10
1975 1980 1985 1990 1995 2000 2005 2010 2015 2020
US payment innovations US recessions
Source: FRED
Deposit tokens may show different behavioral characteristics than traditional deposits as
they bring new features and may be adopted by a certain subset of users. For instance, the
technical features of deposit tokens such as their programmability and instant settlement
will likely increase velocity of deposit tokens compared to traditional deposits20.
However, this increased velocity does not necessarily alter liquidity demands for the issuing
banks. In a world with a rich ecosystem of use-cases for tokenized commercial bank money,
enhanced by technological efficiencies, deposit tokens may become a de-facto means
of payment, store of value, and working capital. They may fuel an on-chain economy by
frequently changing wallets with minimal redemptions back into fiat.

Similar to traditional deposits, and other Lastly, staff of the New York Federal Reserve
bank liabilities, the existing liquidity, capital, recently posited that in the US, tokenized
and risk management frameworks already deposits may be an attractive form of digital
require banks to engage in robust analysis money as they would take advantage of the
of potential deposit token redemption benefits of the existing, well-functioning
behavior under stress conditions and banking and payment systems 24.
hold prudentially safe levels of financial
resources. Additionally, banks that are Comparing these practices to stablecoins, we
assessed to be globally systemically observe that large US$-pegged stablecoin
important banks or “G-SIBS” through the issuers mostly keep short term high quality
standardized methodology of the Basel liquid collateral as reserve assets, such
Committee on Banking Supervision , are 21
as cash and short-term Treasuries. Liao25
required to maintain additional capital analyzed run risks and the redemption
in order to absorb losses. The view that behaviors of USDC and concluded that
existing bank regulations can appropriately liquidity would exceed the Basel III
encompass deposit token issuance is Liquidity Coverage Ratio requirement under
echoed in a recent MAS consultation22, different stress scenarios, based on historical
which proposed that no additional reserve data. However, it should be noted that these
backing and prudential requirements practices on reserve maintenance are self-
should be imposed on banks that issue enforced in many instances and that most
deposit tokens, arguing that existing stablecoin issuers are not subject to the same
requirements for capital, liquidity, money minimum capital, liquidity, supervision, and
laundering and terrorism financing, reporting requirements as regulated banks.
technology risk management, and other
risk factors are enough to protect banks Currently, there are no global standards on
and their customers. Additionally, the the composition of stablecoin reserves, on
Japanese legislature passed a bill to the frequency with which information about
set a legal framework for stablecoins reserves is published, or on redemption
in June 2022. Japan’s Financial Services rights for holders26. Practices therefore
Authority is considering detailed rules
23
vary by stablecoin provider and by regions
promulgated under the new stablecoin that impose varying levels of requirements,
legislation that would allow banks to issue and may not be sufficient to address a
stablecoins as deposits, noting they are stablecoin which reaches a systemically
already subject to prudential regulations important scale and has a broad geographic
and that stablecoin holders would be impact. When best practices are applied,
protected by deposit insurance in the same they will need to be maintained, particularly
manner as conventional bank deposits. during times of stress when liquidity is
most needed, or as stablecoin volumes grow.

Despite the current lack of generally stablecoin guidelines27, in Singapore
accepted regulatory standards, reserves through MAS’ recent consultation28, in
are increasingly being audited on a Japan through the proposed Stablecoin
regular but voluntary basis. Regulatory Act by the Financial Services Authority29,
standards for stablecoins are also and in Europe through ongoing work
emerging in some markets, such as on Markets in Crypto Assets (MiCA)30.
internationally through the Financial
Stability Board’s recently proposed
CONTAGION RISK
A run on stablecoin issuers or deposit Here, we note that banks have historically
tokens could disrupt traditional markets if had to evolve and adopt major new
the issuers hold insufficient cash to meet technologies safely, minimizing the novel
the demands on their liquidity, resulting in operational risks these technologies
a large-scale sale of assets to obtain cash. introduced for the institution and the
broader systems they operate in.
Global systemically important banking
institutions that issue deposit tokens should Given the radical impact of previous
be less susceptible to run-like threats technological shifts, banks are well-
that would cause such a fire sale on its equipped to continue modernizing as
assets than non-bank actors, in part due to new technologies emerge. The internet
their substantial and diversified balance and the shift to open banking are
sheets, access to central bank contingency notable and relevant examples of how
funding (e.g., discount window provided banks adapted to technologies that
by the Federal Reserve in the US), and in profoundly impacted their business
certain jurisdictions, insurance guarantee models and operations. The internet
schemes. If a deposit token issuing bank ushered in a new means of connectivity
were to face sudden and large demand and communication for the clearing
for liquidity, these buffers decrease the and settlement of payments. It resulted
likelihood that a bank would have to resort in the development of online banking
to emergency measures with knock-on and the continuous evolution of digital
market impacts to handle redemptions. payments, a trend that was accelerated
by the recent COVID-19 pandemic. More
Disruptions to the shared ledgers on recently, financial institutions have also
which digital money operates may had to adapt to new information sharing
also raise considerations for broader paradigms in connection with open
financial stability. Any digital money banking, particularly in Europe as required
issuer will need to implement controls to by PSD-2 (Payment Services Directive).
interact with blockchain environments,
including public blockchains and other
shared ledgers, to prevent risks that
emerge from the use of these new
platforms to disrupt financial systems.

Since the first wave of internet adoption, RTP is a significant infrastructure processing
and the departure away from slower and 45 million transactions in Q3 2022 31 and it
more rigid means of communication, banks is the first new core payments infrastructure
and their supervisors have developed in the US in more than 40 years. Its
increasingly sophisticated expertise on development and build were driven by the
the implications for innovation and risk banking industry through the collaborative
management of new technologies, and efforts of TCH’s 25 owner banks and it
banks have been adapting, maturing and is open to all US depository banks 32.
securing their infrastructures as digital
technologies have become synonymous Comparing these practices to non-bank
with modern banking. The adoption of stablecoins, we observe that current large
blockchain technology is a natural next US$ pegged stablecoins generally rely solely
chapter in how banks apply internet-driven on the reserve assets to accommodate
innovation to the exchange of information, run risks. At times of stress and large
including tokens, which are merely another redemptions, they will rely on liquidation
way to express information that evidences of their reserve assets as the only means
the ownership and exchange of value. to meet the requirements, potentially
putting stress on the broader markets.
Using a decentralized blockchain ledger Even though they are not yet at a scale
as a payment infrastructure may also to trigger such contagion effects, as
require industry innovation to address illustrated by Exhibit 8 below, their
challenges around protocol governance. growth may pressure the limited number
Both at the infrastructure and application of assets they currently rely on as the
layers, decentralized protocols are stablecoin scales, if stablecoin reserves
intended to integrate changes based on remain concentrated in a few select
majority consensus. Certain decisions safe assets. The European Central Bank
on public protocols that are accepted by had estimated that Libra, the now
a majority may therefore go against the discontinued stablecoin initiative of Meta,
preferences of a particular institution, could have grown to require more short-
possibly impacting other assets, protocols term government debt from A+ Euro area
and users. Here again, banks have shown countries than was available on the market33.
a track record of developing and operating
governance critical infrastructures — SWIFT, These risks may be addressed over time
for instance, a critical infrastructure for through regulation and industry practice
cross-border payments, is a cooperative that enables the diversification of stablecoin
with internal governance driven by reserves into other assets, including into
its financial institution members. bank deposits, and requiring stablecoin
issuers to hold additional capital in excess
As another example, the Real Time of the value of reserves. However, there
Payments (RTP) Network in the United may be tradeoffs as to broad diversification
States was established in 2017 by of asset reserves and the stability of such
The Clearing House (TCH), a banking reserves, which may have undesired effects.
association and payments company.

Exhibit 8: US Stablecoin Reserve Assets and Their Underlying Markets
Stablecoin HQLA demands are low relative to supply on the underlying markets, but could
become a significant share of outstanding and trading volume if they became widely adopted.
Stablecoin reserves include reserves of USDC, USDT and BUSD, US$ billion, 2022
T-bills Reverse repo Corporate bonds MMF1
78 17 12 7
Stablecoin
reserves invested
in asset
(USDC, USDT, BUSD)
Average daily
159 3,933 35 N/A
trading volume
of asset
Outstanding
3,645 175,783 10,093 4,585
volume of asset
1. Includes Government, Prime and Tax-exempt money market funds
Source: SIFMA, Investment Company Institute
CREDIT INTERMEDIATION
AND MONETARY POLICY
The impact of different forms of digital The amount of these inflows will depend on
money on credit intermediation and how digital money applications are seen as
monetary policy are key factors that require substitutes, or better alternatives, for the
careful consideration, especially as these current objectives these sources serve.
innovations reach a large scale. The impact For example, digital money applications
on credit creation depends critically on two will likely replace some portion of banknotes
factors: (i) the sources of inflow into these in circulation, especially as the economy
new forms of money and (ii) the composition becomes more digital.
of assets in which the inflows are invested. If
a form of digital money and its applications The composition of assets in which issuers
were to become widely adopted, major invest the underlying reserves is another
inflows could come from three sources: key consideration to gauge the effects of
physical currency (banknotes), commercial digital money on credit intermediation and
bank deposits, and other cash-equivalents. monetary policy.

Reserve assets can take different forms We observe a range of practices by
based on their liquidity, credit, and duration reserve-backed stablecoins, but the
profile. These range from central bank largest stablecoins have allocation to
reserves and very short-term high-quality cash-like instruments and very short-
liquid assets (e.g., Treasury bills), to longer term government bills. In this framework,
term high-quality liquid assets and longer redemption run risk is minimized at the
term bonds and loans. risk of credit disintermediation. Non-
bank issued stablecoins would result in
As extensions of traditional deposits, deposit a neutral to possibly negative effect on
tokens are not backed by specific assets, credit intermediation if they attract inflows
but are rather supported by the fractional from deposits, by moving funding from the
reserves generally maintained by a bank to private sector and consumer investment
support its liquidity needs in accordance with to only short-term government funding36.
risk management frameworks that reflect an If done on a large scale, this could increase
optimal mix of liquidity, credit, and duration borrowing costs for longer term government
characteristics between redemption risk investments and private investments in
and credit intermediation. Inflows from the general37.
conversion of non-tokenized commercial
bank deposits into deposit tokens by an Given the above, we believe deposit tokens
issuer are then simply a redistribution of offer an attractive alternative to non-bank
deposit liabilities on the bank’s balance stablecoins for use-cases that commercial
sheet, with no changes in the bank’s bank deposits fulfill today, due to their
composition of assets 34. natural integration with broader banking
and financial services. Deposit tokens would
As banks would be expected to maintain the tend to augment rather than disrupt the
same appropriate levels of liquid assets to existing payments infrastructure, and may
account for deposit liabilities, they will also complement existing faster payment and
continue to provide funding for longer term real-time gross settlement systems that
investments to the public sector, private utilize central bank money. Banks could use
sector, and consumer needs. This, in turn, these systems to settle off-chain obligations
continues to provide benefits to the wider that arise when holding tokens from other
economy by bridging the gap between issuers 38 and drive more efficient use
borrowers and savers, funding economic of dormant central bank reserves39.
growth and transmitting monetary policy.
Caramichael and Liao35 also suggest that In the context of CBDCs, the relatively faster
inflows into tokenized deposits issued by development of deposit tokens could also
banks who engage in fractional reserve help inform CBDC design choices, provide
lending would have a neutral to positive an improvement over existing payment
effect on credit provision. systems while CBDCs are developed,
and help create efficient pathways for
The impact on credit intermediation of non- interoperability with the greater digital
bank stablecoins may differ from deposit money ecosystem for future CBDCs.
tokens due to the varied reserve backing.

We separately note that digital money of currency is used to purchase goods or
that is interoperable with central bank services within a given period of time 40.
payments systems may also enhance the Inefficiencies in the existing wholesale
effects of monetary policy that seeks to payment systems that delay clearing of
introduce liquidity into the system, as central bank funds means that money
digital money can increase the velocity of is not available for a bank’s end client
money, i.e., the number of times that a unit during the interbank settlement period.
ECONOMIC FUNGIBILITY
The benefits of deposit tokens can be We believe this may be one acceptable
optimized by design choices that enhance approach with respect to banks that operate
their fungibility with other bank-issued within the same domestic clearing systems.
deposit tokens and non-tokenized forms of An alternative would be for correspondent
money. A “singleness of currency” that lets
41
banking-like networks to develop, whereby
users treat currency from different forms of banks are willing to redeem tokens of
money as equivalent is desirable for a stable another institution insofar as they accept
and widely accepted money — users should exposure against such institution as part
be able to treat physical cash, non-tokenized of a correspondent relationship.
forms of digital money, and various money-
like tokenized assets of the same currency Both systems have precedent within existing
as interchangeable assets with equal practices today, and in each case, the risks
monetary worth and different technological of being exposed to another institution can
properties. Economic fungibility is be mitigated through extensions of existing
facilitated in the current banking system risk management practices that already
by having central banks acts as trusted manage credit and operational risks in non-
settlement institutions for private blockchain interbank activity. We further
money issued by commercial banks 42. note that in cases where institutions are
seeking to settle their exposure with central
The German Banking Industry Committee bank money, wholesale CBDCs, particularly
describes one model for achieving fungibility tokenized CBDCs, can play an important
among deposit tokens in which commercial and desirable role in adoption. Such a CBDC
banks grant each other credit lines and could offer a faster, more transparent and
settle payments with central bank money43, technologically interoperable solution as
which could also create fungibility between compared to traditional off-chain operations.
the deposit tokens of one issuer with non-
tokenized deposits of another bank.

The ability for banks to settle their Stablecoins face similar fungibility questions.
deposit token exposure to other banks Their activity reflects their credit risk and
in central bank money can also help supply and demand dynamics, as evidenced
minimize divergent pricing for deposit by the different weightings of stablecoins
tokens from different institutions which in liquidity pools on decentralized finance
holders may perceive to bear different protocols. For instance, the Curve protocol
levels of credit risk. This, alongside a clear on Ethereum, a popular exchange protocol
path to interoperability with existing for stablecoin swaps, hosts a liquidity pool
payment infrastructures when redeeming which carries different amounts of USDC,
these deposit tokens, should support USDT and DAI. These uneven weightings
the singleness of the currency44. of stablecoins supplied to the liquidity pool
reflect differences in supply and demand,
Such a two-tiered system has the added driven by the popularity of each coin
benefit of preserving the important role that with other DeFi protocols, the perceived
central banks play in wholesale settlement riskiness of the stablecoin and other
today. Real time methods to settle central factors. For instance, a given stablecoin
bank funds, such as by using a blockchain- will become overweighted in the pool
based CBDC, may actually strengthen the when users supply the token in exchange
current system, as using methods that are for another stablecoin that they consider
not real-time may diminish the benefits safer. Nevertheless, large liquidity pools
realized in the availability of central bank on protocols such as Curve enable users to
funds for settlement. easily swap between stablecoins, creating
fungibility between stablecoins through
Deposit tokens will also de-facto be fungible market exchange rates. This particular
with non-tokenized deposits at the same USDC/USDT/DAI Curve liquidity pool carried
bank, as they represent a claim on the same over US$760 million in assets and traded
institution. By redeeming deposit tokens for US$60 million per day45 in October 2022.
non-tokenized deposits, the funds become
available to interact with the traditional
banking system in the ordinary course.

Exhibit 9: Weights of USDC, USDT, and DAI in the Curve Liquidity Pool
The weights of USDT, USDC, and DAI in the liquidity pool
show how supply and demand varies over time.
% Share of liquidity pool
100
80
60
40
20
0
20/09 21/01 21/05 21/09 22/01 22/05 22/09
USDT USDC DAI

Source: Dune Analytics
Like on-chain decentralized finance the extent that such liquidity pools
protocols that manage liquidity between persist because they serve a useful
different stablecoins, liquidity pools for purpose such as creating market-based
deposit tokens may appear. To the extent fungibility between deposit tokens, the
that on-chain liquidity pools for deposit tokenization process should not introduce
tokens are created by token holders who a pricing differential. Rather, the liquidity
provide their deposit tokens as liquidity on pools should reflect the fungibility of
decentralized exchange platforms, and to the deposit tokens as financial assets.

TECHNICAL INTEROPERABILITY
Achieving economic fungibility among Banks will need to become familiar with
deposit tokens and/or off-chain deposits is deposit tokens and their underlying
not meaningful without sufficient technical technology to issue or offer related services
interoperability to make actual exchange and should examine where efficient linkages
between different forms of money possible. can be created between traditional and
novel blockchain-based services.
Technical interoperability will most likely
occur between the issuing bank’s deposit Stablecoins and deposit tokens will
tokens and its non-tokenized deposits, likely face similar challenges when
as a bank would naturally integrate its operating across different blockchains
redemption process with its core banking and, stablecoins have already experienced
system. This interoperability then extends these challenges firsthand.
to cash and other payment rails available
through non-tokenized deposits. The Stablecoins are often bridged between
challenges of interoperability will be most different blockchains 46, or wrapped when the
pronounced in the exchange of tokens networks are not interoperable 47, because
with different issuers, or the redemption issuers typically do not natively support all
of tokens for non-tokenized money by the blockchains on which their products are
a bank that is not the original issuer. demanded or provide bridging protocols.
Bridging and wrapping stablecoins has
And while universal ledgers offer the typically been carried out by smart contracts
greatest degree of interoperability written by third parties, which introduces
between banking systems and the benefits additional operational and technical risk
that result from it, simpler shared ledgers due to the complexities involved48.
introduce fewer challenges to adoption
for regulated institutions and offer The success of deposit tokens will hinge on
significant upgrades over the current the network effects outside of their own
systems. The shared ledgers under ecosystems. This will require interoperability
development aim to accelerate between traditional finance systems and
the clearing and settlement of blockchains, across different chains and
payments, in an environment with with other assets on a given blockchain.
clear governance and established Responsible and informed innovation must
identity of all banks in the system. be at the core of any advancement in this
space, rooted in the high technological and
The development of industry token operational risk management standards
standards and thoughtful consideration such as those applicable to banks today.
as to the appropriate chain for issuance
and means of bridging between chains are
needed. These would foster greater technical
interoperability across different banking
systems by implementing industry-wide
standards and promoting best practices.

Chapter 04
CONCLUSION
As digital transactions grow in scale and Banks, policy makers and regulators alike
complexity, deposit tokens can become a should consider each form of digital money
strong foundation for digital money and separately for its unique risks and benefits.
an important part of a broader tokenized Deposit tokens are rooted in the existing
asset ecosystem. Their technical features, deposit-taking activities of banks and
alignment with well-established bank are not the same product as non-bank
regulatory frameworks, and their natural stablecoins or CBDCs, and the frameworks for
integration with financial services via the innovation and regulation should recognize
banking sector positions deposit tokens to be the distinctions. For deposit tokens to create
a stabilizing anchor within the digital money productive linkages between traditional
landscape, while ushering in a new era of banking systems and blockchain, they must
enhancement for commercial bank money, exist as an extension of those traditional
the world’s most used form of money. systems, both in design and in regulation.
Importantly, deposit tokens do not need to Deposit tokens are well positioned
exist at the exclusion of other innovations. to help the digital money landscape
The digital money landscape is still emerging stabilize and mature. Accordingly, they
and various types of money will compete to merit separate consideration by banks
support different use cases. Deposit tokens looking to innovate, regulators looking
can play a valuable role within the overall to establish appropriate regulation that
ecosystem. For example, deposit tokens shape this evolving space, and the broader
can have a symbiotic relationship with set of participants in the financial system
blockchain-based wholesale CBDCs, helping looking to interact with digital money.
to further the two-tier banking system in
place today and providing a natural bridge
for the integration of CBDCs into the banking
system. Deposit tokens may also help stabilize
the broader blockchain digital money space
by absorbing some of the increasing global
demands on the nascent sector and by
supporting different markets. This includes
institutional segments where there is
demand for traditional financial services that
some stablecoin issuers do not seek to offer.

ENDNOTES
1 Summerville, M. (2022), Institutional 7 See President’s Working Group (2021),
Investing 2.0 Migration to Digital Assets Report on Stablecoins, Financial Stability
Accelerates, Celent. Board (2020), FSB publishes high-
level recommendations for regulation,
2 See, for instance, Federal Reserve (2022), supervision and oversight of “Global
Money Stock Measures – H.6 Release in the stablecoin” arrangements, European
US, European Central Bank (2022), Monetary Commission (2020), Regulation of the
developments in the euro area: September European parliament and of the council on
2022 in the European Union and Monetary markets in crypto-assets, and amending
Authority of Singapore (2022), Project Directive (EU), and Monetary Authority
Orchid Programmable Digital SGD, page 15, of Singapore (2022), Proposed regulatory
in Singapore. approach for stablecoin-related activities.
3 Monetary Authority of Singapore (2022), 8 Kosse, A. and Mattei, I. (2022),

MAS partners the industry to pilot use cases Gaining momentum – Results of the
in digital assets. SGD deposit tokens are not 2021 BIS survey on central bank digital
a generally available live product offering. currencies (BIS Papers No 125), Bank for
International Settlements.
4 USDF will be a bank-minted alternative
to non-bank-issued stablecoins, minted 9 Ekberg, J., Chia, T.Y., Ho, M., and Liu, L.
exclusively by US banks and redeemable (2021), Unlocking $120 billion value in cross-
on a 1:1 basis for cash from a Consortium border payments, Oliver Wyman.
member bank. See USDF Consortium.
10 Oliver Wyman, DBS, Onyx by J.P. Morgan,
5 Partior, an independent company, is the and SBI Digital Asset Holdings (2022),
blockchain platform for payments clearing Institutional DeFi — The Next Generation
and settlement that grew from the Project of Finance?
Ubin collaboration, and founded by J.P.
Morgan, DBS and Temasek, to achieve 11 Ibid, endnote 9.
end-to-end atomic settlements in multiple
currencies, and replace the sequential 12 European Investment Bank (2021),
approach to payments settlement. EIB issues its first ever digital bond on a
public blockchain.
6 Figure sourced from DefiLlama as of
November 2022. 13 European Securities and Markets
Authority (2022), ESMA publishes report on
the DLT pilot regime.

14 Atomic settlement refers to simultaneous 22 Monetary Authority of Singapore
settlement of assets, whereby assets are (2022), Proposed regulatory approach for
linked to ensure the transfer of an asset stablecoin-related activities.
only occurs if the others are simultaneously
transferred (e.g., to achieve delivery 23 Financial Services Agency, the Japanese
versus payment in a securities transaction Government (2022), Regulatory Framework
or payment versus payment in a foreign for Crypto-assets and Stablecoins.
exchange transaction), see Bank for
International Settlements (2020), BIS 24 Garratt, R., Lee, M., Martin, A., and
Quarterly Review. Torregrossa, J. (2022), The Future of
Payments Is Not Stablecoins, Federal
15 For example, the administration of a Reserve Bank of New York Liberty
significant bond offering or syndicated loan. Street Economics.
16 The largest stablecoins, for instance, 25 Liao, G. (2022) Macroprudential

are issued and managed centrally by Considerations for Tokenized Cash.
private institutions.
26 President’s Working Group (2021), Report
17 Ibid, see endnote 1. on Stablecoins.
18 Sourced from Cryptocompare. 27 Financial Stability Board (2022), Review

of the FSB High-level Recommendations of
19 Stablecoins have also traded above the Regulation, Supervision and Oversight
peg in secondary markets during non- of “Global Stablecoin” Arrangements:
stablecoin related market stress as users Consultative report.
liquidate speculative assets for stablecoins,
as described in Caramichael, J. and Liao, G. 28 Monetary Authority of Singapore (2022),
(2022), Stablecoins: Growth Potential and Proposed regulatory measures for digital
Impact on Banking, International Finance payment token services.
Discussion Paper No. 1334.
29 Ibid, see endnote 23.
20 Long, C. (2022), Ten Stablecoin Predictions
and Their Monetary Policy Implications, 30 European Commission (2020), Regulation
CATO Institute. of the European parliament and of the
council on markets in crypto-assets, and
21 Basel Committee on Banking Supervision amending Directive.
(2021), Scope and definitions – Globally
systemically important banks, Bank for 31 The Clearing House (2022), Real-Time
International Settlements. The Basel Payments for All Financial Institutions.
Committee on Banking Supervision (BCBS)
is the primary global standard setter for the 32 The Clearing House (2017), First New Core
prudential regulation of banks and provides Payments System in the US in more than 40
a forum for regular cooperation on banking Years Initiates First Live Payments.
supervisory matters.

33 Adachi, M., Cominetta, M., Kaufmann, C., 46 Bridges are protocols that connect
and van der Kraaij, A. (2020), A regulatory separate blockchain networks. They are
and financial stability perspective on global commonly used to transfer tokens between
stablecoins, European Central Bank. layer 1, layer 2 and sidechain networks,
compatible layer 1 networks such as EVM-
34 Armas, A. and Singh, M. (2022), Digital based blockchains, and non-compatible
Money and Central Banks Balance Sheet, networks. There exist various approaches
International Monetary Fund. to bridging, some of which involve wrapping
tokens as defined in endnote 47, that
35 Ibid, endnote 19. involve different trust assumptions and
security guarantees.
36 Ibid, endnote 19.
47 Wrapping a token involves locking the
37 A similar point is argued by ibid, original token, then minting a new token on
endnote 26. the desired blockchain that is compatible
with other tokens on that blockchain. The
38 Monetary Authority of Singapore (2022), original tokens underlying the “wrapped
Project Orchid Programmable Digital SGD, version” can only be unlocked by burning an
page 34. equivalent amount of the wrapped token,
thereby promising economic fungibility
39 Ibid, endnote 20. between the two.
40 Ibid, endnote 20. 48 The four largest crypto hacks since 2021
all exploited a cross-chain bridge in some
41 Bank for International Settlements form: Ronin Network (March 2022, US$ 624
(2003), The role of central bank money in million), Poly Network (August 2021, US$
payment systems. 611 million), BNB Bridge (October 2022,
US$ 586 million) and Wormhole (February
42 As argued by Cheng, J. and Torregrossa, 2022, US$326 million), see Rekt as of
J., What is Money? A Lawyers Perspective on November 2022.
US Payment System Evolution and Dollars in
the Digital Age (2021) an ibid, endnote 24.
43 German Banking Industry Committee

(2021), Europe needs new money – an
ecosystem of CBDC, tokenised commercial
bank money and trigger solutions.
44 Ibid, endnote 41.
45 Figures from Curve Finance as of

October 2022.

AUTHORS
Oliver Wyman
Gokce Ozcan Jason Ekberg
Partner, Oliver Wyman Partner, Oliver Wyman
Gokce.Ozcan@Oliverwyman.com Jason.Ekberg@oliverwyman.com
Ugur Koyluoglu Leo Sizaret

Partner, Oliver Wyman Consultant, Oliver Wyman
Ugur.Koyluoglu@oliverwyman.com Leo.Sizaret@oliverwyman.com
James Emmet
Senior Advisor, Oliver Wyman
James.Emmet@oliverwyman.com
Onyx by J.P. Morgan

Naveen Mallela Nelli Zaltsman
Global Head of Coin Systems, Lead Product Designer for Coin Systems,
Onyx by J.P. Morgan Onyx by J.P. Morgan
Naveen.Mallela@jpmchase.com Nelli.Zaltsman@jpmchase.com
Basak Toprak Mario Tombazzi

Global Product Head of Deposit Global Business Development & Innovation,
Tokens, Onyx by J.P. Morgan Liquidity & Account Solutions at J.P. Morgan
Basak.Toprak@jpmorgan.com Mario.Tombazzi@jpmorgan.com

Oliver Wyman is a global leader in management consulting. With offices in more than 70 cities across
30 countries, Oliver Wyman combines deep industry knowledge with specialized expertise in strategy, operations,
risk management, and organization transformation. The firm has more than 6,000 professionals around the world
who work with clients to optimize their business, improve their operations and risk profile, and accelerate their
organizational performance to seize the most attractive opportunities.
Onyx by J.P. Morgan is at the forefront of a major shift in the financial services industry. We are the first global
bank to offer a blockchain-based platform for wholesale payments transactions, helping to re-architect the way
that money, information and assets are moving around the world. We work with large institutions, corporations
and fintechs who are interested in leveraging innovative technology solutions to help solve real-world business
problems at scale. We have re-architected the infrastructure of value transfer, using intelligent, real-time networks
to help unlock the potential of distributed ledger technology. Institutions around the world work with us through
secure, open collaboration platforms that integrate quickly and seamlessly across global markets.
For more information, please contact the Oliver Wyman marketing department by phone at one of the
following locations:
Americas EMEA Asia Pacific

+1 212 541 8100 +44 20 7333 8333 +65 6510 9700
Copyright ©2022 Oliver Wyman and JPMorgan Chase & Co. All rights reserved.
The information in this Report, or on which this Report is based, has been obtained from sources that Oliver Wyman and J.P. Morgan
believe to be reliable and accurate. However, such information has not been independently verified and no representation or warranty,
express or implied, is made as to the accuracy or completeness of any information obtained from third parties. The information and
conclusions are provided as at the date of this Report and are subject to change without notice, and Oliver Wyman and J.P. Morgan
undertake no obligation to update or revise any information or conclusions contained herein, whether as a result of new information,
future events, or otherwise. The information and conclusions provided in this Report take no account of any relevant persons’ individual
circumstances, should not be taken as specific advice on the merits of any investment decision, product or service and should not be
deemed to be a reasonably sufficient basis upon which to make an investment decision or undertake any product or service. This Report
is not intended to provide, and should not be relied on for, accounting, legal or tax advice or investment recommendations. Please consult
your own tax, legal, accounting or investment advisor concerning such matters. Oliver Wyman, J.P. Morgan and their respective affiliates
accept no liability for any loss arising from any action taken or refrained from as a result of information and conclusions contained in this
Report or any reports or sources of information referred to herein, or for any consequential, special or similar damages even if advised of
the possibility of such damages.
This Report has been provided solely for information purposes and does not constitute a recommendation, advice or an offer or
solicitation to buy or sell any securities or financial instruments or of any product or service. It should not be so construed, nor should it or
any part of it form the basis of, or be relied on in connection with, any contract or commitment whatsoever. Further, this Report shall not
be considered advice on the merits of acquiring or disposing of any particular investment or as an invitation or inducement to engage in
any investment activity or other product or service.
By accepting this Report, you agree to be bound by the foregoing limitations.
J.P. Morgan is a marketing name for the payments business of JPMorgan Chase Bank, N.A. and its affiliates worldwide. JPMorgan Chase
Bank, N.A., organized under the laws of USA with limited liability.

Onyx JP Morgan Deposit Tokens

Uploaded by

Copyright:

Available Formats

Onyx JP Morgan Deposit Tokens

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Onyx JP Morgan Deposit Tokens

Uploaded by

Copyright:

Available Formats

DEPOSIT

“[The increasingly important use of “[Tokenized deposits] would enable peer-

© Oliver Wyman, JPMorgan Chase & Co. 2

BlackRock CEO, 2022

“Banks issue stablecoins as deposits.

FSA (Japan), Regulatory Framework

© Oliver Wyman, JPMorgan Chase & Co. 3

Global digital money landscape 7

Evolution of digital payment systems 7

Use cases for deposit tokens 14

Trading and settlement 17

Devaluation and run risk 19

Credit intermediation and monetary policy 26

© Oliver Wyman, JPMorgan Chase & Co. 4

Deposit tokens refer to transferable tokens issued on a blockchain by a licensed

© Oliver Wyman, JPMorgan Chase & Co. 5

© Oliver Wyman, JPMorgan Chase & Co. 6

GLOBAL DIGITAL MONEY LANDSCAPE

Various forms of digital money solutions Blockchain-based deposits refer to deposit

• Blockchain-based deposits, i.e.,

There may be other candidates for

© Oliver Wyman, JPMorgan Chase & Co. 7

Emergency protections • Strength of existing • Liquidation of

© Oliver Wyman, JPMorgan Chase & Co. 8

Wallet (Company A) -30 +30 Wallet (Company B)

Blockchain-based deposits come in different forms based on their usage of ledger

Account-Based Token-Based Native Non-Native

© Oliver Wyman, JPMorgan Chase & Co. 9

Exhibit 3: Distinctions of Blockchain-Based Deposits

Non-native Native deposit Non-native Native deposit

© Oliver Wyman, JPMorgan Chase & Co. 10

Exhibit 4: Classification of Deposit Tokens

Primary users Bank clients Commercial banks Global with possible

© Oliver Wyman, JPMorgan Chase & Co. 11

Stablecoins are digital assets on a block- They continue to see technical

Category Market share Description Examples

Source: DefiLlama, figures from November 2022

© Oliver Wyman, JPMorgan Chase & Co. 12

© Oliver Wyman, JPMorgan Chase & Co. 13

USE CASES FOR DEPOSIT TOKENS

© Oliver Wyman, JPMorgan Chase & Co. 14

Additionally, as discussed throughout Deposit tokens could further support

© Oliver Wyman, JPMorgan Chase & Co. 15

© Oliver Wyman, JPMorgan Chase & Co. 16

© Oliver Wyman, JPMorgan Chase & Co. 17

© Oliver Wyman, JPMorgan Chase & Co. 18

DEVALUATION AND RUN RISK

© Oliver Wyman, JPMorgan Chase & Co. 19

• Independent risk management practices ensure prudential approaches when identifying

Exhibit 5: Top 3 US Bank Capital and Liquidity

Minimum requirements GSIB surcharge Stress capital buﬀer Bank capital3

1. Sum of bank capital and regulatory requirements

© Oliver Wyman, JPMorgan Chase & Co. 20

• General risk management practices such as concentration limits and diversification of

Exhibit 6: Total US and EU Bank Deposits

EU bank deposits US bank deposits US recessions

© Oliver Wyman, JPMorgan Chase & Co. 21

US Fedwire Online banking Electronic Same day ACH

US payment innovations US recessions

© Oliver Wyman, JPMorgan Chase & Co. 22