Global Regulators Favor Tokenized Deposits Over Stablecoins

JPMorgan has recently highlighted a significant shift in global regulatory sentiment towards tokenized bank deposits over stablecoins. According to a report led by managing director Nikolaos Panigirtzoglou, regulators outside the US are increasingly favoring tokenized deposits as a more secure and holistic method of modernizing finance.

Bank of England Governor Andrew Bailey has expressed a preference for banks to create tokenized central bank deposits rather than new private stablecoins. This stance is part of a broader regulatory trend that JPMorgan analysts believe is gaining momentum worldwide. Tokenized deposits, which are digital representations of traditional bank deposits on a blockchain, offer the same protections as conventional deposits, including deposit insurance, compliance with know-your-customer (KYC) and anti-money laundering (AML) rules, and access to central bank emergency funding.

Tokenized deposits also incorporate several benefits of blockchain technology, such as reduced time-to-settlement, enhanced visibility, programmability, and the ability to interact with smart contracts. This makes them a more attractive option for regulators who are concerned about the stability and security of the financial system.

JPMorgan analysts have identified two types of tokenized deposits: bearer and non-bearer. Bearer tokenized deposits can be transferred and traded among parties, but their value can fluctuate based on supply and demand or the risk of the issuer. This volatility poses a threat to financial stability and undermines the principle of the "singleness of money," which ensures that all money in circulation can be exchanged for a stable quantity of goods and services.

In contrast, non-bearer tokenized deposits are non-transferable and facilitate direct settlement of transactions between banks in central bank money at a one-to-one value. This system helps maintain the integrity of the financial system and prevents value differentials between different forms of money. According to JPMorgan, non-bearer tokenized deposits offer greater certainty and interoperability within the banking sector, ensuring that funds retain their full face value during transfers.

Stablecoins, while facing increasing regulatory scrutiny, remain a significant force in the crypto economy due to their high liquidity and universal availability. They are widely used by cryptocurrency traders, decentralized exchange (DEX) traders, and for remittances worldwide. However, JPMorgan analysts note that stablecoins typically do not take money away from the banking system, as their reserves are often invested in short-term government securities, keeping the funds within traditional finance channels.

The analysts also questioned whether commercial banks would find it cost-effective to issue stablecoins. A 2023 consultation paper from the Bank of England proposed that banks issuing stablecoins would need to back them with fully reserved deposits at the central bank, which might not pay interest. This would make stablecoin issuance a less attractive business proposition for banks. In the United States, regulatory sentiment remains more favorable towards stablecoins, with the GENIUS Act allowing banks to create and incorporate stablecoins into the existing payment system.