The ever-changing crypto industry places many crypto traders at crossroads. The current confusion is about which to choose between the conventional stablecoins they have grown to be used to or the new deposit tokens. Deposit tokens are a new category of assets promoted by financial institutions like JP Morgan.
This has led to crypto enthusiasts asking which is better — the new deposit tokens or stablecoins.
Keep reading this article as we share everything you should know about deposit tokens, stablecoins coins, and their advantages over each other.
Stablecoin Overview
Stablecoins are arguably the category of cryptocurrencies that keeps the whole crypto industry running. This is mostly because stablecoins are a form of native currency in the cryptocurrency industry. It is like the link that connects the crypto world with traditional or conventional financial institutions. How do you think traders convert their cryptocurrencies to their bank accounts? Stablecoins do all these things in the crypto market; hence, it's Importance.
The stablecoin market is valued at more than $128 billion, and this valuation won't be dropping any time soon. Even conventional financial institutions are now integrating stablecoin payments so that crypto traders can easily buy and sell their cryptocurrencies. Financial companies such as PayPal and Visa are part of the huge revolution involving stablecoins. But there's a threat for stablecoins, according to many experts.
According to research from JPMorgan Bank, a new class of assets called deposit tokens or tokenized cash is coming after stablecoins. JPMorgan claims that as time goes on, deposit tokens could overtake stablecoins in popularity and fit into former stablecoin use cases. But what are tokenized deposits or "deposit tokens?"
Deposit tokens are issued using blockchain technology by a depository institution to represent a deposit claim. According to many experts, deposit tokens are more useful and straightforward than stablecoins since they are more regulated. Many say that with time, the relevance of stablecoins will die out, and deposit tokens will be here to stay.
Why are Financial Institutions Becoming Wary of Stablecoins?
Before fully understanding why financial institutions are becoming wary of stablecoins, you must know how they work. Stablecoins are pegged to the value of a fiat like the US dollar, and it has a backup reserve that can either be with government bonds or gold. They are less volatile than other cryptocurrencies as they always try to maintain the $1 value.
However, stablecoins have not always been stablecoins as people would want to be. Whenever there's some crisis in the crypto market, these stablecoins tend to leave their value to the US dollar and start fluctuating heavily. The most recent reference can be traced to the Silicon Valley Bank collapse, which made USDC to depeg. Cases, where stablecoins lost their value and made investors lose money are one of the major issues the crypto asset has.
Another reason financial institutions and some crypto enthusiasts are wary of stablecoins because the crypto industry is not fully regulated. Taking the United States as a case study, the lack of regulation in the crypto industry has always pushed away prospects. Since the crypto industry is not regulated, stablecoins are not also regulated, unlike deposit tokens.
How Did Deposit Tokens Become Popular?
Deposit tokens are issued on a blockchain by a licensed depository, and they do this to represent a tokenized deposit claim. There's something that makes deposit tokens berg unique from stablecoins, and it is the backing from the government. Having amazing features such as atomic settlement, transparency, and peer-to-peer transactions, deposit tokens has all the features needed to become very popular. This form of tokenized cash is usually backed by commercial banks, which automatically makes it much more regulated than stablecoins.
However, this type of asset only became very popular in the middle of 2022 and was first developed by Singapore’s Project Guardian, which DBS Bank, JPMorgan, and SGX lead. However, more crypto-related firms started weighing the probability of integrating it into their services after the USDC depegging. The USDC depegging further made many crypto enthusiasts know that stablecoins might not be the best way of storing or keeping cryptocurrencies.
Deposit tokens were further amplified when JPMorgan made a report highlighting how to deposit tokens could grow to replace stablecoins. The report said that stablecoins do not have a legal framework or regulation, which often makes outsiders to be restrained from using them. They also pointed out the issue of fluctuations. Despite being named "stablecoins," their prices are not always stable. Deposit tokens having all these qualities above stablecoins might make it preferable.
What Advantages Do Deposit Tokens Have Over Stablecoins?
Now you know what tokenized deposits or deposit tokens are. You should be aware of how they pose strong competition to stablecoins. But what advantages do deposit tokens have over stablecoins?
The first advantage deposit tokens have over stablecoins is regulation. Deposit tokens are officially backed by commercial banks and sometimes some government establishments. Since the government controls these institutions, there's already some legal framework available for these deposit tokens to operate in. This is something that stablecoins can't boast about, as many crypto firms are still battling with agencies like the SEC. However, most people still argue that the decentralized nature of stablecoins still wins over government centralization.
Also, fluctuations with stablecoins make things difficult for those who once believed in the concept. Since people don't have to worry about depegging with deposit tokens, they tend to lean towards it more than stablecoins.
Despite the advantages deposit tokens might have at the moment, it does not clear up the reality that stablecoins are more popular than these tokens. Many crypto firms and traders alike have become so used to stablecoins that they find the whole idea of deposit tokens to be irrelevant. They see stablecoins as a safer alternative to hedging value, and in many cases, they are not wrong since they are a good number of safe stablecoins in 2023.
According to many, deposit tokens go against the entire concept of cryptocurrencies. Cryptocurrencies were created to break from the shackles of the centralized financial environment created by the government. Deposit tokens represent the whole idea of what cryptocurrencies are running away from. It is often backed by commercial banks, which the government controls.
Also, it is not like stablecoins are not transparent. Indeed, stablecoins are not regulated and sometimes fluctuate during the crypto crisis. However, it has proved over time that most stablecoins in the market are transparent. Using Tether and USDC as case studies, they often have audits that provide information about their backup reserves. This ensures that customer funds are safe in case of fluctuations or another stablecoins issue.