Regulators Prefer Tokenized Deposits Over Stablecoins for Stability

Global regulators are increasingly favoring tokenized bank deposits over stablecoins, according to JPMorgan. This shift is driven by the desire to maintain the stability and regulatory safeguards of traditional fiat-based banking systems while integrating digital technologies. Tokenized deposits operate on blockchain infrastructure while retaining the foundational protections of traditional deposits, such as access to central bank liquidity, capital buffers, and compliance with anti-money laundering rules. The non-transferable version of tokenized deposits, also known as non-bearer deposits, is particularly favored by regulators. These deposits are settled between accounts at full face value, minimizing the risk of price deviation and preserving uniformity across forms of money.

In contrast, stablecoins and transferable digital deposits can be subject to fluctuations in market value due to credit concerns or liquidity mismatches. Past market failures have highlighted the potential volatility of privately issued digital currencies. While stablecoins remain more widely used in crypto markets due to their ease of transfer and broad liquidity, they often keep their backing within the traditional banking system by investing in instruments like short-term government debt. This means they do not represent a true exit from the regulated financial framework.

Regulators in regions like the UK have questioned the viability of allowing commercial banks to issue stablecoins, especially under frameworks that might require them to hold central bank reserves without generating yield. Such conditions would reduce incentives for banks to issue their own stablecoins. Meanwhile, U.S. policymakers are taking a different stance. The expected passage of the GENIUS Act would allow banks to issue stablecoins directly and promote their use in domestic payments, signaling a more open approach to integrating stablecoins within the broader financial ecosystem.

JPMorgan is actively exploring tokenized solutions through JPMD, a permissioned deposit coin currently being piloted on Base. The bank is also testing stablecoins behind closed doors and has filed a trademark for the deposit token product, pointing to potential applications in settlement, programmable finance, and cross-bank transfers. This move underscores the bank's commitment to exploring innovative financial technologies while adhering to regulatory standards.

The preference for tokenized deposits over stablecoins reflects a broader trend in the financial industry towards integrating blockchain technology with traditional banking systems. This approach aims to leverage the benefits of digital currencies, such as faster transaction speeds and lower costs, while maintaining the stability and regulatory oversight of traditional financial institutions. The shift towards tokenized deposits is likely to have significant implications for the future of digital payments and the broader financial ecosystem.