The call to adopt deposit tokens in banking once again gains significant traction. Recently, the Swiss Bankers Association (SBA) proposed a Swiss franc “joint” deposit token to address the risks faced by the traditional banking system and to allow their more efficient function.
Switzerland has always been a hub of financial innovation, and the country’s banking system is no exception. The SBA, heavily supported by UBS, Credit Suisse, and Julius Baer, recently proposed a new type of deposit token that could help address the risks faced by traditional banking systems and unlock more potential in the way that they conduct their business.
What is a Joint Deposit Token?
Based on the SBA white paper, a joint deposit token is a stablecoin that is denominated in Swiss francs. It is issued and redeemed by smart contracts. To optimize its potential, the deposit token is engineered to be a “ledger-based security”.
Unlike traditional bank deposits, a joint deposit token would only be issued by a licensed special purpose vehicle (SPV) supervised by a collective of banks. This format aims to ensure the financial stability of the system and to protect the investors.
How It Works
The SBA identified three design options for a deposit token along the way. Without being too technical about them, these include the following:
- Standardized tokens are issued by any commercial bank that follows a unified standard.
- Colored tokens are supplied by commercial banks wherein each bank is free to decide the underlying assets and technology used for the tokens.
- Joint tokens issued by a licensed and supervised SPV.
Among the three deposit token designs, the proponents prefer the last option because of the more benefits it holds compared to the others.
Benefits of a Joint Deposit Token
A joint deposit token is the most preferred choice by the SBA. According to them, it allows a certain degree of freedom when it comes to money creation. This format also possesses lower fees as well as interest-earning potential when kept in bank accounts. Likewise, this type of token would be less liable to runs than the ones issued by individual banks.
Additionally, the authors suggest that the deposit token should operate on a public blockchain technology with extra protocols to help safeguard privacy and optimize transaction efficiency. Ideally, the token would feature a layer-2 solution capable of self-custody or bank custody and specially tailored for decentralized finance (DeFi) applications.
Deposit Tokens: A Newcomer to Digital Currencies
In May of the previous year, the concept of deposit tokens was introduced through Project Guardian. The initiative was led by the Monetary Authority of Singapore (MAS) in collaboration with various financial institutions. This aimed to explore the potentials of bonds and deposits tokenization, especially when it comes to pooling up liquidity in wholesale funding markets.
JPMorgan, one of the participants in Project Guardian, already completed the initial DeFi transaction on a public blockchain in line with the project. Subsequently, the company and project partner Oliver Wyman published a paper discussing the benefits of deposit token technology in February, which we covered in a previous article.
The Swiss Bankers Association’s proposal for a joint deposit token is an exciting development for the banking industry. This Swiss franc-based stablecoin has the potential to address many of the risks faced by traditional banking systems, enable more efficient operations, and facilitate money creation, to name a few. Furthermore, deposit tokens could be a valuable addition to the world of digital currencies, providing a stable and reliable alternative to traditional bank deposits, cash collaterals, and settlement instruments.