Swiss Bankers Association proposes deposit tokens to develop digital economy

The Swiss Bankers Association released a white paper on how Swiss banks can support the development of the country’s digital economy. A Swiss franc “joint” deposit token is the solution the group settled on. 

Stablecoins have limited penetration in the Swiss financial system, even as end-to-end digitization is becoming more common in business models, and no Swiss stablecoins are accessible by the general public, the paper says.

The authors of the paper suggest a variety of stablecoins — that is, a deposit token “issued by regulated and adequately supervised intermediaries” — issued and redeemed by smart contracts and denominated in Swiss francs. The token could be designed as a ledger-based security, rather than a set of instructions, to provide it with the greatest potential.

The paper identifies three design options for a deposit token: Standardized tokens that any commercial bank can issue with a uniform standard, colored tokens that are issued by commercial banks to any standards they choose, and joint tokens that are issued by a licensed and supervised special purpose vehicle consisting of participating banks. The authors prefer the last choice.

A joint deposit token would facilitate money creation due to its flexibility, have low fees and could earn interest when held in bank accounts. It would be less liable to runs than tokens issued by individual banks. Furthermore:

“From a technical standpoint, all the economic and legal requirements that have been identified can be met. […] In principle, the DT should operate on a public blockchain with additional protocols to ensure sufficient privacy and transaction efficiency.

The token would ideally be a layer-2 solution usable in decentralized finance (DeFi) applications and capable of self-custody or bank custody.

Deposit tokens are a relative newcomer to the ranks of digital currencies. According to a recent overview in The Washington Post, they originated in Project Guardian, an initiative the Monetary Authority of Singapore launched with several financial institutions in May 2022 that sought to explore DeFi applications in wholesale funding markets.

JPMorgan, one of the participants in Project Guardian, executed the first DeFi trade on a public blockchain as part of that project. JPMorgan and project participant Oliver Wyman released a paper discussing the merits of deposit token technology in February.