Author: Noelle Acheson, CoinDesk; Translated by: Baishui, Golden Finance
Given that tokenized deposits and stablecoins are both on-chain fiat currencies, they may sound the same. But they are actually very different concepts, and their differences are important not only for use cases and our understanding of the potential of blockchain, but also for how regulation will develop. They also highlight in different ways that our understanding of money is changing.
Tokenized deposits, sometimes called deposit tokens, are blockchain representations of fiat bank deposits. They are issued by banks, backed by fiat deposits at those banks, and can run on private or public blockchains (although since these entities are heavily regulated, they want full control over access). In some cases, such as JPMorgan’s JPM Coin, they are used to settle trades between JPMorgan clients. In others, such as Societe Generale’s EURCV, they can be transferred to clients who do not have an account with the issuing bank, but they must be whitelisted.
Tokenized deposits improve the efficiency of fiat currencies by eliminating some steps in trading and settlement execution, while increasing transparency and flexibility for issuers.
Reserve stablecoins*, on the other hand, are blockchain tokens backed by fiat currencies. The issuer, which may or may not be a bank, promises to keep the value of the token stable relative to the chosen fiat currency by allowing redemption at any time. (*Other types of “stablecoins,” such as algorithmic stablecoins and yield stablecoins, are very different and will not be considered for now.)
This sounds like a tokenized deposit, but it’s not. Stablecoins do not represent deposits, but are pegged to the value of a fiat currency through a backing reserve: a small distinction that makes a huge difference.
The differences are operational, conceptual and legal.
They do different things
In terms of operations, the transfer of deposit tokens from one customer to another usually triggers an off-chain transfer of fiat currency from one account to another. The tokens represent bank deposits, so the fiat account balance must theoretically match the token account balance.
Stablecoins, on the other hand, do not involve adjusting fiat accounts in the background. They are freely transferred between users, and the underlying reserve account does not need to care. It only needs to be exchanged on demand, and it does not matter who exchanges it (this is a slight simplification because not everyone can exchange it, but it does not matter - those who do not exchange it can exchange stablecoins for fiat on multiple platforms).
This brings up a conceptual difference. Deposit tokens are intended to be a more liquid version of traditional deposits, not a replacement. They are not meant to replace fiat currency, just make it more efficient.
Stablecoins, however, are more of an alternative. They were originally created to avoid the need for fiat currencies when crypto exchanges could not get bank accounts. They quickly became not only a workaround, but a more efficient way (faster, cheaper) to move funds between exchanges, often preferred even when there is a fiat on-ramp.
Deposit tokens are created by banks for bank customers. They represent bank deposits.
Stablecoins were originally created for those who do not have access to bank accounts. They are an alternative to bank deposits. They represent value, not a commercial arrangement.
More importantly, stablecoins are bearer instruments: whoever holds them owns them. They are assets.
Deposit tokens are not bearer instruments. They represent assets, in this case, bank deposits.
This brings us to the possible legal evolution of these two concepts. In principle, bank deposit representatives are fine from the regulator's point of view, bank deposit substitutes are more problematic.
This is where it gets particularly interesting, and where the two concepts unexpectedly begin to merge.
This is also where it gets philosophical.
What does this mean for the future of money?
One of the fundamental principles of money is “singletonality”, meaning that a dollar is a dollar (pick one currency) no matter who holds it or how. This is one reason regulators want to control the issuance of dollars, to ensure that one of the fundamental assumptions of monetary law always holds true. In a world with multiple issuers of dollars and no central guarantor, perhaps not all dollars are created equal.
As we have seen, stablecoins do not always meet the "monopoly" requirement. One USDT or one USDC (to pick the two biggest examples) are not always equivalent to one dollar, although they tend to revert to their underlying value. Therefore, regulators cannot technically consider them to be "currency". In addition, Tether (the issuer of the largest stablecoin on the market, USDT) is not insured by the Federal Deposit Insurance Corporation (FDIC), so the collateral behind 1 USDT is different from the collateral behind 1 US dollar, which could theoretically affect the value of the currency.
So, if not “currency,” what are stablecoins? Securities, similar to tradable money market funds? This is a bit odd, since they are used as currency and certainly don’t meet the “expectation of profits” criterion of the Howey test. “Common enterprise,” another Howey criterion, where success is tied to a promoter or pool of investors, is also difficult to prove.
More importantly, stablecoins satisfy the “established” definition of money: they settle transactions, are widely accepted, serve as a unit of account for many assets, and can maintain their value over the long term.
But they break the unitarity requirement, which is a big deal for regulators who decide who can legally issue and use them.
If they are eventually classified as securities because of their lack of singularity, similar to non-yielding money market funds, then we have a convergence of previously distinct concepts that could kick off a deeper shift in the way finance works. Through stablecoins, securities could become a widely accepted alternative to money.
A dollar is not a dollar
OK, so deposit tokens can be considered money in the eyes of regulators, while stablecoins confusingly are not, right? Not so fast.
Deposit tokens may represent money, but that doesn’t mean they are legally money. First, they are subject to different types of risk. Not all bank deposits actually exist — most are loaned out or invested. So if a bank fails, a deposit token may not be as backed as one might think. The same is true for deposits, but they are usually at least partially insured. Currently, tokenized deposits are not.
Technical glitches may cause payments to be missed or even duplicated, which may cause deposit token balances to not match fiat account balances. How to resolve this issue and who decides?
In addition, some innovative banking thinkers have talked about the possibility of introducing programmability in deposit tokens to increase their efficiency and flexibility. Conditional payments are more of a wallet issue. But it is not too far-fetched to imagine that a deposit token contains a piece of code that triggers a function, such as accessing a bid or paying a dividend.
This sounds cool, but it changes the characteristics of a deposit token into something more than just a representation of money. If a token can be turned into something else, is it still money? Does it meet the “singletonality” requirement? Does it meet the established definition criteria of a medium of exchange, a store of value, and a unit of account?
I hope that the difficulties posed by the explosion of a new transfer technology within the powerful but limited scope of “old school” monetary economics will make more people aware of the need for updated definitions and concepts.
As it stands, regulators are bound by a narrow adherence to past understandings, refusing to accept that new technologies require new ways of thinking. By limiting “acceptable” uses to what we can already do, authorities are preventing real innovation from helping to consolidate and improve progress.
This reminds me of a quote from Stanford professor Paul Saffo: "We tend to use new technologies to do old tasks more efficiently. We pave the way for the cattle."
We can do better, of course, but the first step is recognizing that new flying bulls no longer need to follow the road, that existing definitions of money are unnecessarily restrictive, and that regulators that have stood in the way of progress are becoming increasingly irrelevant.