Stablecoins vs Tokenized Deposits: Why the Differences Matter

Tokenized deposits and stablecoins may sound like the same thing, given that they are both fiat-on-chain. But they are actually distinct concepts, and the difference matters not just for use cases and our understanding of blockchain potential, but also for how regulation can evolve.

Aren’t stablecoins and tokenized deposits the same thing? Not at all, argues Noelle Acheson. It’s not just the different functionality and treatment; it’s also the different approaches to money.

Tokenized deposits and stablecoins may sound like the same thing, given that they are both fiat-on-chain. But they are actually distinct concepts, and the difference matters not just for use cases and our understanding of blockchain potential, but also for how regulation can evolve. They also both highlight, in different ways, how our understanding of money is changing.

Noelle Acheson is the former head of research at CoinDesk and Genesis Trading, and host of the CoinDesk Markets Daily podcast. This article is excerpted from her Crypto Is Macro Now newsletter, which focuses on the overlap between the shifting crypto and macro landscapes. These opinions are hers, and nothing she writes should be taken as investment advice.

Tokenized deposits, sometimes known as deposit tokens, are blockchain representations of fiat currency bank deposits. They are issued by banks, backed by fiat deposits at those banks, and can run on either private or public blockchains (although, since these are heavily regulated entities, they’ll want complete control of access). In some cases, such as with JPMorgan’s JPM Coin, they are used to settle transactions between JPMorgan clients. In others, such as SocGen’s EURCV, they can be transferred to clients who do not have accounts at the issuer bank, but only after being whitelisted.

Tokenized deposits boost the efficiency of fiat by eliminating some steps in the execution of trade and settlement, while enhancing transparency and flexibility for their issuers.

Reserve stablecoins*, on the other hand, are blockchain tokens backed by a fiat currency. The issuer, which may or may not be a bank, promises to maintain the value of the token stable relative to the chosen fiat by allowing redemption at any time. (*Other types of “stablecoins,” such as algorithmic and yield-bearing, are different enough to be left out of this consideration for now.)

This may sound like a tokenized deposit, but it’s not. The stablecoin doesn’t represent the deposit, it is pegged to the fiat value via the backing reserves: a small distinction that makes a big difference.

The difference is operational, conceptual and legal.

They do different things

On the operational side, the transfer of a deposit token from one client to another usually triggers an off-chain transfer of fiat from one account to another. The tokens represent bank deposits, so the fiat account balances in theory have to match the token account balances.

Stablecoins, on the other hand, don’t involve adjusting fiat accounts in the background. They freely change hands between users, and the underlying reserve account doesn’t need to care. It just needs to be available for redemption on demand, it doesn’t matter by whom (this is a slight simplification as not everyone can redeem, but not a significant one – those who don’t redeem can exchange stablecoins for fiat on a number of platforms).

This leads us to the conceptual difference. Deposit tokens are designed to be a more liquid version of traditional deposits, not a substitute. They are not meant to replace fiat money, just make it more efficient.

Stablecoins, however, are more like a substitute. They were originally created as a way to avoid the need for fiat, back in the early days when crypto exchanges couldn’t get bank accounts. They rapidly became not just a workaround but a more efficient way (faster, cheaper) to move funds to and between exchanges, often preferred even when fiat onramps are available.

Deposit tokens are created by banks, for bank clients. They represent bank deposits.

Stablecoins were originally created for those who could not get bank accounts. They are a bank deposit substitute. They represent value, not a commercial arrangement.

What’s more, stablecoins are bearer instruments: whoever holds them, owns them. They are the asset.

Deposit tokens are not bearer instruments. They represent the asset, in this case, named deposits at a bank.

This brings us to the likely legal evolution of the two concepts. In principle, from the regulator’s point of view, bank deposit representations are fine, bank deposit substitutes are more problematic.

Here is where it gets particularly interesting, and where the two concepts unexpectedly start to blend.

Here is also where it gets philosophical.

What does that mean for future of money?

One of the underlying principles of money is its “singleness”, where a dollar is a dollar (to pick one currency), no matter who holds it or how. This is one of the reasons regulators want to control the issuance of dollars, to guarantee that one of the basic assumptions of monetary law will always hold. In a world with multiple dollar issuers and no central guarantor, perhaps not all dollars would be equal.

As we have seen, stablecoins don’t always fulfill “singleness.” One

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