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Swiss Bankers Association proposes "deposit token" as an alternative to CBDCs and stablecoins

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(Kitco News) - As the global banking system struggles to find its footing, the Swiss Bankers Association (SBA) has published a new white paper that proposes the issuance of a joint “deposit token” on a public blockchain.

The main goals of releasing a deposit token (DT) are to help support the Swiss franc (CHF) as a means of payment, bolster the technological sovereignty of the CHF economic area, and strengthen and preserve Switzerland’s standing as a hub for innovation, the white paper said.

“Deposits play a pivotal role in the implementation of the central bank’s monetary policy,” the SBA wrote. “If this is to remain the case in a tokenized financial system, a digital Swiss franc must resemble conventional deposits as much as possible, at least from an economic perspective.”

For this reason, the SBA is exploring the creation of a DT, which would be a purely digital form of the Swiss franc that can be enhanced with programmable functions and smart contract technology.

The SBA suggested that private households and companies would reap multiple benefits from the creation of a DT, including increased availability, usability, reliability and security of payments, as well as longer operating hours. One of the main use cases would be as a means of payment for buying and selling tokenized assets.

“A trusted, widely accepted means of payment that allows the cash and asset legs to be processed on the same platform without compatibility issues increases the efficiency and potential of these kinds of transactions,” the white paper said. “Trading in digital assets (in the short term); transactions in a CHF DLT-based financial ecosystem (in the medium term); and transactions executed by machines within the Internet of Things, on Web3 and in the Metaverse (in the more distant future) need this compatibility and integration.”

The reason a DT is needed is that it would enable delivery-versus-payment (DvP) functionality, which allows for simultaneous settlement (atomic settlement) and helps to minimize settlement and counterparty risks.

The ultimate goal is to have the settlement for all financial transactions – including shares, bonds, structured products and derivatives – conducted using distributed ledger technology (DLT) as a way to increase efficiency. “This could potentially result in lucrative and highly innovative technological advances for both the financial sector and the real economy,” the SBA wrote. “If the economy shifts further towards tokenization, it will be essential to have a generally accepted, efficient and trusted means of payment for settling the cash leg.”

The DT being proposed by the SBA differs from both central bank digital currencies (CBDCs) and stablecoins. The SBA stressed that the effort to create a DT as an alternative does not “in any way challenge the SNB’s sole authority to issue digital central bank money. The DT idea instead focuses on the need of many companies and households for a customized, digital Swiss franc that is issued by regulated and adequately supervised intermediaries.”

The DT would be used to help ensure stability and create a basis for widespread acceptance, which can help to improve the competitiveness of Switzerland’s financial market infrastructure and help the country preserve its economic and technological sovereignty.

The three main use cases for the DT outlined by the white paper include, “The DT as the cash leg for digital asset transactions; The DT as a vehicle for “payments of the future”; and a CHF DLT-based financial ecosystem.”

Moving forward, the SBA has proposed three possible variants of DT with different economic, legal and technical characteristics.

With a “standardized token,” any interested commercial bank would be able to issue its own DT, “which must comply with technical norms and be fully backed by secure and highly liquid reserves.”

In the “joint token” model, a special-purpose vehicle (SPV) that is co-owned by the participating commercial banks would issue a single DT that is fully or partially backed by secure and highly liquid reserves.

The third option is a “coloured token,” where each commercial bank issues its own DT and “is free to determine its technological basis and the underlying reserves.” The only common feature in this scenario is that all issuers are regulated.

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Analysis conducted by the SBA indicates that the joint token model is the most promising. “From the economic point of view, it would offer some choice in terms of backing it with reserves without requiring excessive compromises when it comes to the ability to hold value,” the SBA wrote. “This would allow a certain degree of freedom with regards to money creation, thus also reducing the pressure to charge for specific services in DT settlement. This in turn would strengthen the DT’s character as a public good.”

A joint token would also have the benefit of being able to accrue interest if held in a wallet with a bank, making it comparable to conventional deposits.

The SBA also included several principles that a DT would need to rely on in order to maximize its potential. These include no severe access restrictions, guaranteed interoperability with other platforms, the ability to be used in decentralized finance (DeFi), the ability to accrue interest, a high level of efficiency, scalability, and the ability for clients to store the DT in their own wallet or use custody services offered by banks and other providers.

The SBA has called for further discussion to iron out the details of the creation of a DT, including a determination on whether it would be considered a security under FINMA law, and is looking to launch feasibility studies to help progress the concept forward.

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